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 24, 1964, 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, Secreary
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Econonist
Messrs. Brill, Furth, Holland, Jones, Koch, Mann,
and Ratchford, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Messrs. Partee and Williams, Advisers, Division of
Research and Statistics, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Miss Eaton, Secretary, Office of the Secretary,
Board of Governors
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Messrs. Holmes, Eastburn, Baughman, Tow, and
Green, Vice Presidents of the Federal
Reserve Banks of New York, Philadelphia,
Chicago, Kansas City, and Dallas,
respectively
Messrs. Sternliht and Brandt, Assistant Vice
Presidents cf the Federal Reserve Banks of
New York and Atlanta, respectively
Messrs. Eisenmenger and Lynn, Directors of
Research at the Federal Reserve Banks of
Boston and San Francisco, respectively
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on March 3, 1964, were approved.
Before this meeting there had been distributed to the members of
the Committee a report from the Special Manager of the System Open Market
Account on foreign exchange market conditions and on Open Market Account
and Treasury operations in foreign currencies for the period March 3
through March 18, 1964, and a supplementary report covering the period
March 19 through March 23, 1964.
Copies of these reports have been
placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs said that the gold
stock would remain unchanged this week for the sixth week in a row.
Meanwhile, the Stabilization Fund had been acquiring gold through the
London gold market where the Russians were heavy sellers last week.
Total Russian sales last week amounted to approximately $150 million, of
which $137 million was acquired by the Pool.
Accordingly, he said, an
interim distribution of $107 million was made on March 23, of which the
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U. S. share was $67.5 million.
The Pool still held another $40 million
which would be available for distribution at the month end.
Mr. Coombs
said that unless there were some unexpected gold orders in sizable amounts,
the U. S. should be able to get through at least the next month or six
weeks without showing a reduction in the gold stock.
On the exchanges, Mr. Coombs continued, the major development
had been the appearance of a potentially dangerous speculative attack
on the lira.
Governor Carli of the Bank of Italy had spent most of the
week before last in Washington and New York in negotiating credit assist
ance.
of:
The package finally put together amounted to $1 billion, comprised
(1) the $150 million remaining under the System's swap line with
the Bank of Italy; (2) a Treasury swap of $100 million with the Bank of
Italy, plus Treasury purchases of $33 million of lire for use in retiring
the Treasury's lire bonds outstanding; (3) a Bank of England credit of
$100 million; (4) a Bundesbank credit of $150 million; and (5) medium-term
credits by the Export-Import Bank and the Commodity Credit Corporation
in the an amount of $450 million.
While this package was being negotiated, Mr.
Coombs said,
speculative pressure on the lira was building up rapidly and, on Friday of
that week, the Bank of Italy lost $60 million in defense operations while
the one-month forward lira went to a discount of nearly 10 per cent.
this atmosphere it seemed desirable to make an immediate announcement
of the program over the weekend.
The exchange market subsequently
In
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reacted very favorably.
The discount on the three-month forward lira
narrowed to 3 per cent and the Bank of Italy seemed to have taken in
some dollars during the past week.
While in Washington, Governor Carli
also negotiated an Italian drawing on the Fund in the amount of $225
million which might be employed to repay the Bank of Italy's drawings of
$150 million on the swap line with the System.
Mr. Coombs reported that the speculative drive on the lira that
occurred on March 13 had been accompanied by a heavy inflow into Germany
which the System had absorbed in part by a further drawing on the mark
swap.
Since then, the German mark market had remained in reasonable
balance.
In addition to the Bundesbank's program of dollar swaps with
German commercial banks,
which Mr.
Coombs had mentioned at the last
meeting of the Committee, the German Government had subsequently prohibitec
the payment of interest on nonresident time deposits and also had sharply
increased reserve requirements against foreign deposits.
Today, the
German Government was announcing a proposal to apply a withholding tax on
income derived from foreign investment in German securities.
Meanwhile,
the operations in the spot and forward markets in German marks apparently
had had a reassuring effect.
Mr. Coombs thought that all of these
measures in combination should have a useful effect in restraining the
short- and long-term inflows into Germany.
In the case of the Swiss franc, there still was not a sizable
outflow of funds from Zurich, mainly owing, Mr. Coombs thought, to a
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further tightening of credit lines there.
As a consequence, progress in
repaying the System's Swiss franc swap drawings remained disappointingly
slow--only $15 million had been repaid so far this month--and the System's
debtor position under the Swiss franc swap lines remained at the very
high level of $205 million.
In April, however, negotiations might be
completed for further Treasury issues of Swiss franc obligations which
might give the System an opportunity to repay as much as $75 million in
one operation.
There was also the possibility that the Swiss National
Bank might extend short-term credits to the Bank of Italy which would
open up further scope for the System to acquire Swiss francs against
dollars and reduce its swap drawings correspondingly.
Mr. Hayes remarked that in the course of the negotiations on
the Italian problem it had been suggested that the System enlarge its
swap line with the Bank of Italy.
He thought it was gratifying that
the negotiations had been completed without an increase in the line and
he found it particularly gratifying that there was some European
participation in the arrangements that had been made.
There was plenty
of money in Europe, Mr. Hayes said, and short of a real crisis it seemed
sensible for the System not to stretch its position.
Mr. Scanlon noted that in the staff paper on Italian developments
circulated under Mr. Young's memorandum of March 9, 1964, the question
of an increase in the Italian swap line had been raised.
He asked
whether the Italians themselves had pressed for such an increase.
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Mr. Young said that the matter had arisen in the course of the
discussions, but there had been no pressure.
After consideration, it
was decided that the best approach would be to elicit some funds from
Europe.
If these funds had not been available the problem would have
been more acute, and the System might have had to enlarge the swap.
If the Italians encountered additional needs it was possible that they
would still request an enlargement of the swap line, but it was not
likely that any such request wou.d be made until later this year or
until next year, if at all.
Mr. Mitchell asked how the $450 million medium-term credits
extended to the Italians by the Export-Import Bank and the CCC would be
disbursed.
Mr. Furth said that of the total $200 million credit granted by
the Export-Import Bank, $100 million had been made available more or
less as a balance of payments loan; that is, on a basis similar to that
of the Export-Import Bank loan made to the United Kingdom at the time
of the sterling difficulties in 1956.
The loan was tied to U. S. exports,
though not necessarily to additional exports.
But this point was of
little significance because Italy's imports of capital goods from the
United States were so heavy that there were always some orders that
could qualify as "additional" shipments.
The remaining $100 million
would be allocated for individual projects to be submitted at a future
date.
The CCC loan was tied to additional exports of foodstuffs.
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Mr. Mitchell commented that he thought the Italians were trying
to restrict imports, and Mr. Furth said that this objective related
primarily to consumer goods, particularly autos, but not to capital
equipment, for which their needs continued heavy.
Food imports were
involved because there had been a revolution in patterns of food con
sumption with rises in the Italian standard of living.
Mr. Robertson said that if a real need developed in Italy which
could not be met abroad, he would hope there. would be no reluctance on
the part of the Committee to permit the Italians to draw on the full swap
line, nor to increase the size of the line if necessary.
he shared this view.
Mr. Daane said
Mr. Hayes said he would feel no hesitancy about
drawings on the existing $250 million swap line if there was a real need,
but he thought that the Committee should give any proposal to increase
the size of the line close examination.
Mr. Coombs said that a sizable increase in any one swap line in
the absence of a serious emergency might create expectations of a third
Als.,
round of general increases, and might therefore be undesirable.
he thought the Committee would want to encourage European central banks
to carry part of the burden, and not leave it wholly to the U. S.
Mr. Daane commented that other European countries had reacted
quite negatively to the Italian credit assistance package because of
their feeling that Italy's program for dealing with its balance of pay
ments problem did not go far enough to be effective, and that the package
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reduced the pressure to take effective action.
Mr. Coombs added that
there also was some question of whether the Italians had been suffi
ciently active in soliciting help from others.
Mr. Ellis noted that the French were not taking part in the
program of assistance to Italy.
He asked whether there was any
possibility of improving the techniques used in negotiations of this
type in a manner that would result in French participation.
Mr. Coombs replied the Bank of Italy had not approached the Bank
of France.
Mr. Daane commented that the program had been put together
quickly, because of the rapid deterioration in the Italian position.
As a result, there was a mechanical problem in bringing many countries
in.
Chairman Martin added that the Italians had experienced a real run
on Friday, March 13.
This precipitated the closing of the package;
otherwise the arrangements might have been worked out over a period of
several weeks.
Mr. Coombs said he thought it would be desirable for the System's
swap network to be supplemented by arrangements among the European
countries themselves.
The Bank of England, he noted, had solicited help
from continental countries as well as from the U. S. when they had
encountered difficulties in the past.
The important principal, he
thought, was that European countries should rely on one another as well
as on the U. S.
3/24/64
Mr. Robertson said he also felt that this principle was important.
However, in any case of real need, he did not think the System
should
withhold assistance simply because it might disrupt its network of swap
arrangements.
To this, Mr. Coombs responded that it was most important
to hold the swap network together.
Mr. Mitchell commented that he thought the Committee had to keep
the problems of this country in mind at all times.
It was desirable to
help other countries, but he was disturbed by the fact that such aid
could contribute to gold outflow.
There were limits to the capacity of
the U. S. to assist foreign countries, particularly since it was far from
clear that the balance of payments problem had been solved.
Mr. Daane said that he appreciated the argument for symmetry with
respect to the network of swap arrangements but in a case of need he
did not think that symmetry was sacrosanct.
In any case, the Italian
drawings on the existing line probably would be repaid relatively soon
out of IMF drawings or other borrowings.
Mr. Balderston noted that the Italians had come to the assistance
of the U. S. in the past.
Chairman Martin commented that there appeared to be general
agreement that adequate credit facilities should be provided, and credit
made available as needed.
The Committee would have to give continuing
attention to the question of the methods to be employed in particular
circumstances.
recommendations.
This was a subject on which the Group of 10 might make
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3/24/64
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the Sys
tem Open Market Account transactions in
foreign currencies during the period
March 3 through March 23, 1964, were
approved, ratified, and confirmed.
Mr. Coombs recommended renewal of five swap drawings maturing
shortly:
three with the Bank for International Settlements, for $35
million, maturing March 30; $50 million, maturing March 31; and $25
million maturing April 7; one with the Swiss National Bank, for $20
million, maturing March 31; and one with the Netherlands Bank, for $25
million, maturing April 2.
Mr. Mitchell inquired whether these would be first renewals, and
Mr. Coombs replied that two of the cases involved first renewals and
three involved second renewals.
No precedent would be established by the
second renewals; last year, in fact, there had been some cases in which
three renewals of a drawing had been made.
Chairman Martin commented that the Committee's practice had been
to limit drawings to one year, but not to interpose objections to
renewals within that period.
Renewal of the five swap drawings, as
proposed by Mr. Coombs, was noted without
objection.
Mr. Coombs recommended renewal of five reciprocal currency arrange
ments, with the following banks, maturity dates, and amounts:
the Bank
of Sweden, maturing April 17, for $50 million; the Bank of Italy, maturing
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April 20,
for $250 million;
for $150 million;
the Swiss National Bank, maturing April 20,
the Bank for International Settlements, maturing
April 20, for $150 million; and the Austrian National Bank, maturing
April 24, for $50 million.
All of these arrangements had been for a
term of three months, with the exception of that with the Bank of Italy
which was for six months, and the renewals would be for corresponding
terms.
Thereupon, upon motion duly made and
seconded, renewal of the five swap arrange-
ments, as recommended by Mr. Coombs, was
approved.
Mr. Coombs noted that the Committee had authorized various types
of forward operations up to a combined total of $150 million.
One of
these types of forward operations was the purchase through spot transactions
and sales through
forward transactions of foreign currencies
purpose of restraining short-term outflows of funds
considerations.
for the
induced by arbitrage
During the past three weeks, he said, such a risk of
arbitrage had appeared in the case of Canada, where the
forward Canadian
dollar was in heavy demand as a result of a resumption of sizable Russian
wheat purchases.
such operations
While the System would have been prepared to undertake
for its
own account, the Bank of Canada, for various
technical reasons, preferred to conduct the operation
involved Bank of Canada sales of U.
with the result that a
S.
itself.
This had
dollars spot and purchases
forward
sizable although temporary reduction in the Bank
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of Canada's reserves--perhaps as much as
$75 million--had occurred.
To
smooth out this temporary distortion of their reserve position at the end
of March, the Bank of Canada had asked the System to execute a month-end
swap, i.e.,
buying Canadian dollars
forward for value on April 1.
spot on March 31 and selling them
This was the type of operation, Mr. Coombs
said, that the System would have conducted with the Market if
operating on its
own account.
He believed that
authorization granted by the Committee.
it had been
it fell within the
However, since the operation had some
unusual features, he thought he should bring it to the attention of the
Committee.
Chairman Martin asked Mr. Coombs whether he saw any dangers
this operation, and Mr. Coombs said he did not.
in
The only question in his
mind was whether the authorization in question was given a broad enough
interpretation by the Committee to cover this type of operation.
Mr. Swan asked for information on the technical reasons
the Bank of Canada had preferred to conduct
for which
the operation itself.
Mr. Coombs said that if the System had undertaken the operations, it would
have bought Canadian dollars
Canadian dollars
spot and sold them forward.
With the
so acquired, the System could have picked up a relatively
large part of the Canadian weekly bill tender, and if the operation was
sizable this might have created a money market problem for the Canadians.
On the other hand, their reserves were run down when they conducted the
operations.
Mr. Coombs
thought a
good compromise had been worked out,
3/24/64
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under which the Canadians operated during the month and the System took
over their position temporarily at month end.
Mr. Mitchell commented that the proposed operation seemed to him
to come close to endorsing an objectionable type of window dressing.
Central bank intervention in foreign exchange markets as well as in
domestic markets always had dangers, and those dangers had been the
subject of considerable discussion by the Committee when it initially
undertook foreign exchange operations.
agency such as
Superficially, at least,
an
the System that had been concerned with window dressing
activities of commercial banks might
dressing by central banks.
look silly if it endorsed window
The operations Mr. Coombs proposed did
seem to be innocuous, Mr. Mitchell said, but he felt that there was
some obligation to permit what actually was
Mr. Coombs
going on to be revealed.
said that the bulk of Canada's
forward operations
were for one month, and the contracts would mature in early April.
the reduction
Thus,
in Canadian reserves in March would be completely reversed
in early April.
He did not regard the proposed operation as window
dressing, but rather
as
correcting an abnormality.
were to the benefit of the U.
S.
The
Canadian operations
in restraining arbitrage outflows.
appeared to him that the most valid description was that this was a
smoothing operation to eliminate
a distortion.
It
3/24/64
-14Mr. Robertson commented that he would have preferred
to have had
a memorandum explaining the proposal in advance of the meeting, and he
would like
to have
an explanatory memorandum even if the Committee
approved it.
Mr. Coombs commented that no memorandum had been sent to the
Committee in advance because the question had been raised quite recently,
but he would have one prepared now.
He added that an operation identical
to this had been carried out last fall
purchases.
arbitrage
The Bank of Canada had
flows
Treasury had
from the U.
S.
at the time of the Russian wheat
intervened in the market to minimize
to Canada,
and at the month end the U.
taken over the position for a
thereafter that he had requested authority
for the purpose of restraining arbitrage
few days.
It was
S.
shortly
to engage in forward operations
flows.
Mr. Deming said he had no objection to Mr. Coombs'
suggestion.
However, he wondered why the Canadians regarded publication of figures
showing a $75
since
million reduction in reserves so seriously, particularly
they could explain the loss to the
explained it to the Committee.
were concerned because
the
public just as Mr. Coombs had
Mr. Coombs
replied that the Canadians
figures in themselves
though there might be a valid explanation for
react to the fact that there had been a
affected attitudes even
them.
Many people might
reserve loss, and not bother
to
read published explanations.
Chairman Martin suggested
that the Committee approve
the proposal
with the understanding that a memorandum concerning operations of
type would be prepared.
this
No objection to this suggestion was raised.
3/24/64
-15Before 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 March 3 through March 18, 1964, and
a supplemental report covering the period March 19 through March 23, 1964.
Copies of these reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
System open market operations were relatively modest in
size and frequency during the past three weeks. Movements in
market factors tended to be mutually offsetting to a large
extent and moderate System operations sufficed to maintain a
generally firm money market through the period. Financial
flows associated with the March tax and dividend dates were
accommodated smoothly--which has been the typical experience
with such periods in the recent past. There were day-to-day
variations against the underlying steady background, however,
in the course of which Federal funds temporarily traded as
low as 2 per cent while daily member bank borrowings ran the
gamut from $33 million to $953 million.
Marginal reserve availability averaged lower than in the
preceding several weeks, in good part reflecting retroactive
revisions in the reserve estimates. Thus on Wednesday, March 13,
it was projected that free reserves in the week ending that day
would be about $135 million. While it was anticipated that
revisions might pull the figure down to about $100 million, it
now appears that unexpected movements in market factors and
additional retroactive revisions resulted in a level as low
as $7 million. A counterpart of the lower margin of free
reserves has been the return of a larger excess of required
reserves over the Board staff reference line.
With money market conditions essentially steady and no
particular pressures arising over the tax and dividend dates,
Treasury bill rates continued to fluctuate in a comparatively
narrow range. Rates edged lower through the first several days
of the period, as the market gained confidence that England's
Bank rate increase would not be followed by an immediate discount
3/24/64
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rate increase in this country, and as the money market--despite
somewhat lower free reserve figures--tended occasionally to the
easy side of its recent range of variation. Bill rates were
largely steady after March 9, although verging slightly higher
at times as some increased firmness came into the money market
in the second half of the period.
The average issuing rates
in yesterday's bill auction--about 3.55 and 3.74 per cent for
the 3- and 6-month issues, respectively--were each about 4
basis points under the rates three weeks ago.
In contrast, the longer term securities markets generally
moved lower in price and higher in rate during the period. While
market participants in these sectors, too, expected no immediate
tightening of domestic credit conditions, many observers felt
that a change was probable some time within the next six months.
The Treasury note and bond market was affected particularly
by a desire of banks to trim their portfolios of short inter
mediate maturities, in response to current and anticipated
reserve needs.
The market has also been affected by a desire
of dealers to move into sizable short positions in the over-5
year maturity range--in part as a hedge against their long
l-to-5 year positions. Over the period, prices of issues out
to 5 years declined as much as 15/32, while most longer issues
were down 1/2 to 3/4 point.
Prices also softened in the corporate and tax exempt markets
as investors hesitated to commit funds that they thought might
be employed more profitably at a somewhat later date. In. the
case of tax exempts, there is also the question of whether com
mercial banks will remain as large buyers as they have been
in the past year or two.
Within the next day or two, the Treasury will have seen
enough of its March tax receipts to decide whether it must
borrow additional cash before mid-April, and if so, what amount
The maximum contemplated
and form that borrowing should take.
need is $1.5 billion, although the actual need could turn out
to be considerably less. Given the heavy tone in the bond
market, it is anticipated that any such borrowing would be of
short maturity, possibly in the bill area.
Following this statement, Mr. Stone noted that the Committee had
indicated at its last meeting that it wished to review its present Account
allocation procedures.
It was his understanding, he said, that the
Board's staff expected soon to complete a memorandum outlining a proposal
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3/24/64
that had been mentioned at the December 3, 1963 meeting of the Committee,
under which securities rather than gold certificates would be used in
the daily interdistrict settlement.
If the Board agreed, the proposal
would be sent for comment to the Presidents of the Reserve Banks.
He
thought it would be desirable for the Committee to defer its review of
allocation procedures until the next meeting or the one following, because
this proposal night have a considerable bearing on the matter.
Mr. Mills suggested that the members of the Committee consider
the proposal M::. Stone had mentioned very carefully, against the background
of the debate that had taken place in the Congress during the past week.
A majority of :he Joint Economic Committee, he noted, had advocated removal
of the 25 per cent gold reserve against notes and deposits.
The proposal
had been vigorously protested by other members of the Congress, most
importantly by Senator Robertson, Chairman of the Senate Banking and
Currency Committee.
The Senator had brought out in his speech to the
Congress the fact that there was a discipline to the gold reserve that
should be maintained and that there was a formula to maintain that disci
pline through a tax on deficient reserves.
The Committee should corsider
whether the proposal would run contrary to the reasoning of Senator
Robertson and others and also whether it would run contrary to the
statement the Board had made in a letter to Senator Douglas on November 5,
1963, regarding the 25 per cent gold certificate reserve requirement.
his judgment, these were considerations of great importance.
In
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3/24/64
Chairman Martin commented that he thought all members of the
Committee should be alert to the points Mr. Mills had raised, and should
study the problem carefully.
Mr. Scanlon noted that on Thursday the Account had bought securities
in the intermediate area, and asked what reasons lay behind the action.
Mr. Stone replied that the Account had been out of the coupon
market for some time--about four months--and it was important to keep the
machinery in good working order.
More generally, he thought it was the
position of the Committee that the Desk should participate in the coupon
markets in a marginal way, as it had in the past.
It was his understanding
that the Committee did not want to disengage from these markets.
There
had been a substantial availability of coupon issues in the market last
week, as there had for some weeks, and the Desk had bought about $22
million.
The size of the operation deliberately had been held down to
avoid any implication that the purpose was to assist the Treasury.
Mr. Mitchell observed that the market seemed to have come to the
conclusion that the System had retreated from operations in longer term
securities.
Mr. Stone said there were some participants in the market
who were vigorously opposed to such operations, and who would like to see
their demise.
But he did not think the market generally was of the
opinion that the System had reverted to a "bills only" policy.
However,
it had not been possible to operate in coupon issues for some time.
The Treasury's advance refunding blocked out most of January, and the
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3/24/64
February refunding was in process until the 15th of that month, or a few
days thereafter.
Then the British Bank rate was increased, and Treasury
bill rates rose.
At the time of the Committee's last meeting the 3-month
bill rate was about 10 basis points above the discount rate, and for that
reason he thought it important to supply any necessary reserves through
operations in bills.
Since the last meeting the Account had had little
occasion to supply reserves, and it took the opportunity to buy coupon
issues on Thursday.
Mr. Hayes commented that January and February was a seasonally
low period for System purchases.
For example, the System had supplied
somewhat over $1-1/2 billion in reserves during 1963, but of this total
only about $30 million were supplied in the first two months of the year.
Mr. Stone added that these were months in which the Treasury typically
was active in the market.
Mr. Mitchell said he would like to get the Desk's interpretation
of the Committee's intent on operations in ccupon issues, and asked
whether Mr. Stone felt any inhibitions about operating in such issues.
Mr. Stone replied that he did not.
As he conceived it, the Committee's
policy was that the Desk should participate in the intermediate and longer
term sector with operations of the same general character as those that
had been undertaken over the period since the Committee had authorized
such operations.
The essence of this character was that operations in
coupon issues should be marginal with respect to the total volume of
3/24/64
-20
activity in that area of the market, in order to minimize direct price
effects.
This meant confining purchases to periods when there was a
substantial volume of securities available in the market.
He had no
inhibitions abcut operations within this framework.
Mr. Mitchell then noted that the Desk operated in the bill area
with rate objectives in mind, and asked if Mr. Stone felt that the
Committee had given him authority to operate in longer term markets with
similar objectives, particularly in view of the Chairman's statement at
the previous meeting on operations in these markets.
Mr. Stcne said he did not think that the Committee intended the
Desk to attempt. to fix prices of longer term securities.
would
However, he
feel no compunction about buying coupon issues when there was a
need to supply reserves, as long as the operations were within the frame
work he had just described.
Over the next two or three weeks, for example,
the Account would have to supply a substantial volume of reserves, and
he would contemplate doing part of the job in the coupon area, insofar as
such operations would not interfere with the Treasury financing.
That
would be in keeping with his interprettion of the Committee's intent.
In effect, then, Mr. Mitchell said, the Desk would operate in
the coupon area to protect the short-term rate, but not to pull down
the longer term rate.
Mr. Stone replied that he would not want to stand
in the way of a price adjustment that reflected a reassessment of
conditions by the market and a new consensus about the outlook for
security prices.
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3/24/64
Mr. Robertson said that in his judgment it was unfortunate that
the Desk had moved out of the short-term area in the absence of any
obvious, worthwhile purpose.
He did not think any purpose had been
served by last week's operation except to show the Committee's hand.
Such operation; could confuse the market with respect to the Committee's
objectives, and could make participants wary.
They also tended to
preclude the market from giving the Committee the kinds of signals that
would be received if the market was as close to free as possible.
Although the policy of the Committee was to operate in all maturities, he
thought coupon operations should be confined to periods when they would
serve some real purpose.
Mr. Hayes said that in his judgment the quality of the signals
from the market was preserved when the Manager operated in the coupon
area with such caution and in such a small way.
He felt it was important
to let the market know that the Committee was prepared to operate in the
longer term area.
There was danger in encouraging the kind of rumor
that was going around to the effect that the System was permanently
out of the coupon area, because when operations in this area became
necessary they might tend to disrupt the market.
It was better, in his
judgment, for the market to view System operations in coupon issues as
a normal thing.
Chairman Martin remarked that there had been some discussion of
this subject at a recent Board meeting, and the suggestion had been
3/24/64
-22
made that longer term operations should be undertaken more frequently,
to prevent rumors that they had been discontinued.
He thought
Mr. Robertson's point was good that such operations should not be engaged
in for their own sake.
But a better over-all picture might result if
they were undertaken whenever an opportunity to operate marginally
presented itself, and more frequently than every three or four months.
His comment, the Chairman noted, was directed to the future and not to
the past.
Mr. Mills said he might point out that the Chairman's statement
represented the sense of the thinking of some members of the Board, but
it was not a unanimous view.
Chairman Martin added that Board members
unquestionably were divided on the subject.
Mr. Swan said he had been rather surprised that free reserves
could fall as low as they had in the past two weeks without greater effect
on the feel and tone of the market.
Was it the case that the market had
not reacted more strongly to the lower free reserve figures because they
made the same misses in their estimates as the Desk had; or had there
been some more basic change in the total picture; or, as he suspected,
did it reflect the fact that at this point the short-term area seemed more
attractive to investors than the intermediate and longer term area did,
in view of their expectations for security prices?
Mr. Stone said he thought it was true that some of the recent
demand for short-term securities involved funds that later would move
3/24/64
-23
into intermediate and longer term areas, as he had suggested in his state
ment.
In his judgment, however, the basic reason for the relative
steadiness of the money market recently was that participants had by no
means concluded from the lower free reserve figures that monetary policy
had changed--despite the fact that one journalist had made a statement to
that effect.
People in the market fully understood that free reserve
figures fluctuated, and that the center of the range recently had been
about $100 million, with the weekly figures sometimes above and sometimes
below this level.
However, given changes in the rate of reserve
utilization, it was perfectly possible to have the same tone and feel with
free reserves at $175 million at one time and at $35 million at another.
Mr. Swan asked whether the tone and feel at the present lower
level of free reserves were the same as earlier.
Mr. Stone replied that
the Desk did not have enough perspective on the matter as yet, but might
be able to tell in the next week or two whether there had been any
fundamental change.
Mr. Wayne commented that he had been on the daily call for the
past three weeks, and throughout the period he had been disturbed, and
the Account Management had been disturbed, by the misses in reserve
projections.
Journalists had to discuss something, and the only figures
that fluctuated much were those for free reserves, so they wrote about
them.
He thought the Desk and the System were in a somewhat embarrassing
position because the free reserve figures were not reliable and it was
3/24/64
-24
hard to improve them.
The Desk had to make its decisions each day on the
basis of the feel of the market that day; and then, a week later, it
discovered that the data were being revised downward.
Later revisions
in figures tended to creep into the market thinking.
He would hope that
some means for improving the figures could be found, but he personally
did not have the answer.
In response to a question from Mr. Daane, Mr. Stone said that it
obviously would be necessary to supply reserves over the coming statement
week, since the Desk's projections indicated net borrowed reserves of
$142 million.
He would expect to begin putting reserves in today or
tomorrow.
Mr. Daane said it seemed to him to be particularly important that
the Desk get a running start in supplying reserves.
This was the eve of
a Treasury refinancing, and it would be unfortunate to seem to confirm the
recent low free reserve figures with another low figure.
A figure on the
high side would be all to the good.
Mr. Wayne said that he agreed; any error this week should be on
the high rather than the low side.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities
and bankers' acceptances during the period
March 3 through March 23, 1964, were
approved, ratified, and confirmed.
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3/24/64
Chairman Martin then called for the staff economic and financial
reports, supplementing the written reports that had been distributed prior
to the meeting, copies of which have been placed in the files of the
Committee.
Mr. Brill commented on economic conditions as follows:
The silly season seems to have started for economists a
little before the rest of the country.
Clutching at tax-cut
straws is a major preoccupation of the profession these days,
with each retail trade figure scrutinized for evidence that the
increase in take-home pay is being taken to the local auto or
appliance dealer, and each announced corporate spending plan
evaluated against pretax-cut surveys.
The plain fact is that we know almost nothing yet about
the specific impact of the cut. The first week and a half of
aggregate data on post-tax cut retail sales show continued
strength--at about the February record levels--but these weekly
data have in the past been erratic, and in other years the high
level of sales might as easily have been attributed to an early
Easter. Auto sales have continued exceptionally strong, but
production has been more than adequate and dealer inventories
have been increased to desired levels. As a result, production
schedules for the balance of this month and next have been
reduced.
The latest output and employment data available predate
the tax cut. They show a small rise--half of one per cent--in
the industrial production index from January to February, con
tinued growth in employment and the labor force, and a drop of
2/10 of one per cent in the unemployment rate.
The recent upping in business capital spending plans also
antedates--even though it may have anticipated--the tax cut.
It is encouraging that businessmen plan a resumption of
increased spending after the winter plateau, but the rise now
expected in the second half of this year is neither as much nor
as rapid as was the rise from the first to the second half of
1963. Thus, all we can conclude at the moment is that the
economy was enjoying continued moderate upward momentum and that
expectations were high at the time the tax cut became effective;
and that the situation calls for more "watchful waiting."
Among the areas we are watching closely, of course, is that
of prices, and in this we have lots of company, with Administra
tion economists sharing the concern. Administration concern,
however, as evidenced in the official statements and staff
3/24/64
-26-
analyses we have seen, seems to focus too narrowly on the
dangers of cost-push inflation, particularly on the possibility
of excessive wage settlements in key industries, and gives too
little recognition to other factors which can prove just as
upsetting of price stability. Moreover, it puts perhaps too
much reliance on the excess of available production facilities
and manpower over prospective aggregate demands. Projections
of the economy for 1964, as presented in the Budget and
Economic Message, imply that the growth in activity will be
gradual and will still leave relatively large margins of
unused industrial capacity and labor by year end. Along with
rising profit margins, these would serve to limit the
likelihood of price increases.
This argument is plausible, particularly since it seems
to have worked in 1962 and 1963. Some reservations are in
order, however. The progress of the economy may not be as
smooth as projected--it rarely is--and a bunching of demand,
particularly in conjunction with rising activity abroad, could
result in price pressures for a variety of industrial materials,
such as we have already seen in the nonferrous metals area.
There are other industries, notably paper and textiles, in
which output is already high relative to capacity.
One might also legitimately express some concern over the
relatively low level of producers' stocks, which to date have
been regarded as evidence of business moderation. Caution in
inventory policy has indeed contributed to the fairly stable
expansion so far; manufacturers' inventories are unusually low
for so late a period in a cyclical expansion. A surge in final
demands, however, could easily precipitate a bunching of orders
and a "hurry up and deliver" atmosphere that has in the past
been conducive to price boosts.
On the cost side, one can hope that the recent pace of
productivity gains in manufacturing will continue, and will
offset the wage increases likely to follow robust profits
reports. Business emphasis on plant modernization will work
in this direction. Short-run developments in productivity,
however, tend to be unpredictable. Moreover, productivity
increases in manufacturing may not curb labor costs in the
trade, service, and construction areas, where wage increases
in recent years have probably been higher, proportionately,
than in manufacturing. With prices firming and consumer demands
for services strong, continued wage gains in the services and
distribution sectors could push the consumer price index up
somewhat faster than recently, triggering other wage demands.
3/24/64
-27
The future is obviously fraught with more dangers than just
that of an excessive wage settlement in the auto industry.
These potential dangers cannot be translated into present
inflation, however. Despite stirring in a few areas and the
usual "scare" stories in the press, stability in over-all price
measures is still being maintained. The industrial price
average is up only one half of one per cent from a year ago
and is no higher than the recession-trough level. Similarly,
wholesale prices of foods and foodstuffs show no net change
over the past three years. On the labor cost front, recent
wage settlements continue moderate, conforming to the pattern
of gains That has prevailed over the past several years, well
within the framework of industrial productivity increases.
The wajor trouble spot recently has been in the cyclically
volatile prices of nonferrous metals and products, which have
responded to the high level of demand here and abroad. Some
of the pressure in these markets could be offset by further
Government actions. Recent sales from the stockpile took most
of the steam out of the tin market. For lead and zinc, stock
pile holdings are very large. While these surpluses cannot be
sold without legislative authorization, import quotas could be
altered or removed by proclamation of the President after
hearings and a recommendation by the Tariff Commission. Such
hearings have been scheduled for late June.
In summary, prices and costs are still continuing the
remarkable and desirable stability that has characterized the
economic expansion to date. There is at least a fighting
chance that this stability can be maintained, if the expansion
continues orderly and if the Administration is willing to
couple hard actions, where it has the discretion, with open
mouth policy. Current data do not suggest the need for other
measures of restraint, at least not until there is more
evidence that the cost and price situation is changing.
Mr. Holand made the following statement concerning monetary and
credit developments:
As Mr. Stone has indicated, short-term financial markets
took the March tax pressures very much in stride, even though
a larger amount of corporate payments had to be accommodated.
Partly reflecting these larger flows, bank credit expanded
considerably more than usual over the first three weeks in
March. In fact, this represented the first more-than-seasonal
increase in bank reserve use in almost two months, and raised
the average annual rate of expansion since last July to 3.5 per
3/24/64
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cent in reserves required against private demand deposits and
15.5 per cent in required reserves against time deposits.
Tax and dividend date developments did not seem to suggest
that any important fraction of American businesses was beginning
to feel the pressure of needs for funds. Business loans at
city banks rose less than last year (even after allowance for
a special public utility term loan repayment this year) despite
larger corporate tax liabilities. The major asset expansion
at banks came in credit to dealers and finance companies and
in holdings of Treasury bills, as corporations made tax payments
by drawing down their holdings of these kinds of paper.
Corporations also liquidated some of their CDs, not only those
purchased from American banks but possibly also some bought
from Canadian banks. Yet, while businesses held over a third
of a billion dollars of negotiable CDs maturing at major New
York City and Chicago banks on the tax and dividend dates
alone, these banks managed to find new buyers for almost an
equivalent amount of new CDs by temporarily sweetening the
rates which they were willing to pay. The end result can be
taken as evidence that corporations as a whole are still in
a comfortable liquidity position; and the comments just made
by Mr. Brill concerning their large cash inflows, relatively
low inventories, and moderate increases in capital outlays help
to explain why.
Data from the consumer sector, however, appear to be
telling u.s a somewhat different story. Personal-type interest
bearing liquid asset holdings, while still growing, have been
increasing at a distinctly slower rate than last year. On
the other hand, we do not know how much of the recent moderate
money supply expansion has moved into consumer hands, although
there are no signs that they received a disproportionate share.
Considering that all this took place while personal income
was continuing to advance to new .ighs, the inference is that
individuals have been diverting an appreciably larger propor
tion of their resources into either less liquid financial
assets or into purchases of goods and services. But exactly
where such flows may be going is hard to divine. The stock
market has been strong, and trading volume very substantial,
but the classic signs of greater small-investor participation
are still lacking. The tax-exempt market has experienced
greater investor demand than many expected this year, but
this can be largely accounted for by a brief resurgence of
commercial bank buying. Consumer purchases of autos have been
strong for some time, and takings of furniture and appliances
have stepped up recently, but the timing and the dimensions of
3/24/64
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these changes are not such as to be attributable to reduced
liquid asset acquisitions with any degree of certainty. As
you can judge, the precise shift that has taken place in
consumer asset allocation is still unclear. Nonetheless,
whether the slackened accumulation of personal liquidity has
reflected a shift in favor of less liquid financial assets,
real investment, or consumption, its effect on the economic
environment is likely to have been salutary--and to continue
to be so, as long as the movement is a moderate one.
Bank liquidity, meanwhile, has been bolstered a bit by
some fairly aggressive banker sales of intermediate-term
Governments and purchases of bills during March. Partly,
this may be a reaction to loan-deposit ratios that have been
inching higher; partly, it may be an adjustment to previous
portfolio lengthening in January and February through takings
of tax-exempts and participations in Treasury financings;
and partly it reflects precautionary action in anticipation
of future loan demand and interest rate increases. The
dimensions of these adjustments have not been large enough to
dull significantly the responsiveness of banks to any change
in Federal Reserve policy; but they have been enough to shake
the confidence of the intermediate-term Government securities
market.
Dealers, feeling equally uneasy, have also been unloading
Governments of intermediate and longer term. The consequence
has been a back-up of yields on most Government securities
beyond the short-term maturity area to new high levels for
this expansion.
The Treasury is faced with an unerviable task in raising
about $1.5 billion cash in this market. Even if that financing,
when announced, is held to a short-term instrument, a
particularly careful "even keel" in monetary policy seems to
be called for until the next meeting of the Committee. It is
fortunate, in this context, that the circumstances of the
last few weeks seem to have conditioned the money market to
accept a slightly greater range of short-run fluctuations with
some equanimity. This is more a matter of changed attitude
than of altered experience. Three-month bill rates, for
example, have moved within a range of 7 basis points since the
British Bank rate increase; this compares with a range of
5 basis points that prevailed in each of the earlier months.
Nonetheless, market participants seem to have come to accept
the fact that there is a little wider range within which their
own pricing and trading judgments can hold sway. This, it
seems to me, is all to the good. The gain thus far, however,
3/24/64
-30-
is a modest one. As has already been discussed, the low free
reserve figures that eventuated in the past two weeks have
given rise to comment, even though money market conditions
have remained essentially stable. My own impression accords
with Mr. Swan's, that the money market has been cushioned from
the slight decrease in reserve availability because of the
inflow of money seeking to go short as an interest rate hedge.
As a result, any efforts to move marginal reserve availability
back closer to the averages of the earlier weeks this year
might have to involve slightly lower money market rates. That
might in fact be a reasonable development to allow for a time,
for it would represent a natural way for short rates to respond
to the current bank shift toward more liquid instruments.
Mr. Furth commented on the balance of payments as follows:
The United States has made unexpectedly rapid progress
towards eliminating its international deficit. In January, the
deficit was still at an annual rate of about $1-3/4 billion,
close to the level recorded in the second half of 1963. In
February, the deficit was greatly reduced. And the tentative
figures for the first three weeks of March suggest a considerable
surplus for this period, large enough to permit some hope that
the first quarter as a whole may, for the first time since
1957, show virtual equilibrium, even after adjustments for
extraordinary receipts and for seasonal factors.
Needless to say, even if the last two weeks of March do
not show renewed deterioration and the final figures confirm
the preliminary data, this would not necessarily mean that the
U. S. payments problem has been solved for good. International
conditions in the present quarter may well turn out to have
been abnormally favorable for the U. S. payments position.
First, economic expansion in many countries that are among
our best customers may have proceeded at an unsustainable pace.
The leading nations of Continental Europe are willing and able
to take effective action to correct a trade deficit--although
a curious mixture of mercantilistic and laissez-faire ideology,
coupled with institutional rigidities and reluctance or perhaps
incapacity to use the full potentialities of modern fiscal and
monetary policy instruments, makes the less apt to correct
an excessive trade surplus. Hence, France, Switzerland, and
Italy, as well as Japan, have taken anti-inflationary measures
to reduce their trade deficits. After a lag, these actions
may be expected to curb U. S. exports not only to those countries
3/24/64
-31-
themselves but also in third markets in which U. S. goods
compete with Japanese and European products. In contrast,
Germany had so far done nothing to reduce its trade surplus
except excoriate its neighbors for overimporting German goods.
Second, recent months have seen considerable flows of funds
out of countries whose currencies were under attack:
to a
modest degree out of Britain before the rise in British Bank
rate; and in far greater volume out of Italy until the recent
announcement of the stabilization credit "package."
While
there are no reports about substantial flows of funds from
those two countries to the United States, it would be sur
prising indeed if the reserve losses of those countries, which
amounced to $230 million in February and $200 million in the
first half of March, had benefitted exclusively other European
countries.
It seems reasonable to assume that some funds have
moved to the United States, including U. S. funds previously
held abroad. British and Italian reserve losses have now
apparently ceased; and this may well mean the cessation of some
reflux to the United States. Something similar happened after
the Canadian stabilization in 1962; and while U. S. money
markets have, of course, much closer relations with Canada than
with Italy or even Britain, the 1962 experience should be a
warning against complacency.
Nevertheless, the psycholog.cal consequence of a quarter
might well be even
without a substantial U. S. payments deficit
greater than its purely financial significance. The improvement
would come at a time when the discussions within the Group of
Ten on the future of the international payments system are
reaching a critical stage. The Group will soon have to decide
whether it will unambiguously endorse further organic evolution
of the present system, based on the predominant role of the
dollar as a means of international settlements and as a reserve
asset; or whether it will lean toward a replacement of that
system in accordance with one or the other of recent proposals
that: would aim either at restoring some kind of gold standard
or at creating some kind of international reserve unit; or
whether it will try to skirt these vital issues and thereby
risk contributing to continued uncertainty in the international
financial community, and in exchange and gold markets, about
the future of the payments system.
Convincing evidence of progress towards U. S. payments
equilibrium would obviously give strong support to the first
type of solution. And the recent U. S. initiative in helping
Italy to overcome its payments difficulties has apparently
already had a similar effect. A few days age, a French
-32-
3/24/64
financial newspaper, which is believed to have close relations
to some government circles, bitterly attacked that initiative,
complaining that the Italian stabilization program indicated
a "belief that the tide has turned for the dollar and that
the golden days of French finance are over;" and that it might
be regarded as "proof . . . that the European solidarity is
fiction and that in serious matters the only real power is the
United States and its currency, the dollar."
The French Covernment has denied that these views reflect
its official position. Nevertheless, the newspaper's statement
may well be close to the truth.
Chairman Martin then called for the usual go-around of comments and
views on economic conditions and monetary policy beginning with Mr. Hayes,
who commented as follows:
The business outlook seems to have strengthened further
in the past three weeks. A key factor in this improvement has
been the growing evidence, both in the new Commerce-SEC survey,
and in a number of announcements by individual companies, that
business expenditures on plant and equipment will increase
much faster this year than in 1963. It is too early, however,
to predict that this will develop into a real boom. Most
sectors of the economy look rather strong, including residential
construction. Of course the major uncertainty lies in the area
of consumer reactions to the tax cut, and the resulting impact
on spending and prices. While the major price indices continue
to show stability, there has been a new flurry of increases,
notably in metal prices, in the last couple of weeks. With
business expansion likely to accelerate in the coming months,
and with the threat of excessively generous wage settlements
facing us this summer, it behooves the System to remain very
In
much on the alert for signs of new inflationary pressures.
this connection we can welcome the President's strong plea
yesterday for wage and price restraint; but it remains to be
seen how effective this will be.
The latest balance of payments figures are decidedly
encouraging. Payments were virtually in balance in February
and were actually in surplus in early March. A remarkably
strong trade surplus seems to have been a major contributor
to the improvement of recent months--and while part of this
is attributable to temporary agricultural export gains re
flecting European crop shortages, a larger part seems due to
3/24/64
-33
the rapid rise in living standards in many industrialized
countries and our improved competitive position vis-a-vis
Europe. I also have the impression that, although bank lending
to foreigners remains relatively large, there has been a
tendency, at least early in the year, for U. S. corporations
to pull short-term investments back to this country in
response to the better yields obtainable here than some
months before. It is interesting to note that the approximate
over-all payments balance in February was achieved in spite
of a sudden but not wholly unexpected revival of long-term
foreign issues in our markets in that month to a level about
equal to the 1962 monthly average.
Despite the improvement in balance of payments statistics,
I think that caution and avoidance of overoptimism are very
much in order. If business expands as now seems likely,
imports should receive a strong stimulus. Also, the volume
of foreign security flotations is likely to be substantial,
whether or not the interest equalization tax is enacted; and
we cannot overlook the possibility that tighter credit and
higher interest rates abroad may eventually revive undesirable
developments in the area of short-term capital flows.
There have been unusually large divergencies in the
movements of such financial statistics as those on total bank
credit and money supply that have become available since our
last meeting. Careful analysis suggests to me, however, that
these divergencies can be explained in good part by questionable
seasonal adjustments, by erratic movements in Government
deposits, and by the fact that some series deal with daily
averages and others with month-end data. Allowing for such
factors, I believe that so far the underlying trends of bank
credit, loan demand, and money supply have shown no marked
change since 1963.
There appears to be some uncertainty as to the amount of
the Treasury's prospective cash borrowing early in April, and
ever as to whether it will occur at all. If it is felt that
the amount needed can be satisfied in the bill market, the
"even keel" implications of the financing would be quite limited.
In any case, however, neither domestic nor international con
siderations point to the need at this time for any change in
monetary policy. Basically it seems to me that we should
continue to accommodate moderate growth in bank reserves and
bank credit, while maintaining the present degree of firmness
in the money market. Looking a little further ahead, if
expanding business demands for credit together with the prospect
of heavier Treasury borrowing after midyear should bring
3/24/64
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pressures for accelerated credit growth, we should permit
this to be reflected in some upward movement in interest
rates.
In maintaining the status quo over the coming three
weeks we might reasonably aim at free reserves in the $0-$150
million range, which should mean borrowing of $350 to $400
million; Federal funds consistently at 3-1/2 per cent; and
a three-month bill rate moving within or close to the
3.50-3.60 range. Incidentally, I have read with interest the
Manager's memorandum commenting on the second paragraph in the
directive and the absence of serious difficulties arising
from conflicts within the directive. While I am sure we would
all like to find some currently available indicator that would
enable us to adjust operations more closely to long-run objec
tives in terms of aggregate reserves or total bank credit, I
am convinced that until better data are available we would do
well to couch the directive in roughly such terms as are now
in use. If the Committee agrees on the desirability of
maintaining policy unchanged for the next three weeks, renewal
of the present directive would seem appropriate, with some
modification of the first paragraph in recognition of the
further improvement in the balance of payments.
Mr. Ellis reported that: factory employment in New England was not
expanding, but that manufacturers' new orders were rising.
Reports in
the regional survey of manufacturers' investment plans were continuing
to be received, and the latest tabulations not only confirmed the
earlier indications of a rise in capital expenditures but showed a
larger rise than the earlier tabulations had.
The present estimate was
that New England manufacturers were reporting a year-to-year increase in
capital outlays of 37 per cent.
Because this figure was so high a
check had been made on the accuracy of the survey in previous years.
Respondents in the survey generally account for more than 30 per cent of
3/24/64
-35
the region's manufacturing employment, and over the past seven years
the estimate based on the survey had proved to be accurate within a
10 per cent margin.
At least in New England, the tax cut evidently
was having a stimulating effect on capital outlays.
Nationally, Mr. Ellis said, the expansion was continuing, and
the role of credit in this expansion was revealed in such figures as
the 7 or 8 per cent rate of growth in bank loans and investments, the
4 per cent growth rate in the money supply, and the 15 per cent rate
of increase in time deposits.
As the staff memorandum reported in
discussing the balance of payments, the latest data available indicated
that the outflow of commercial bank credit had remained heavy.
Also, for
the first two weeks of March at New York City banks the increase in
total loans and investments was unusually large, exceeding the increases
in three of the past four years by $650 million or more.
To his mind,
the fundamental question the Committee faced was how rapidly and for how
long it could continue to support the current rate of credit expansion.
His own view was that the present rate was unsustainable for the longer
run, and that the Committee should seek to curtail it.
The closeness of
the Treasury financing prospectively, and the closeness of the tax cut
retrospectively, suggested no change in policy at this meeting.
However,
he would favor resolving uncertainties on the side of less ease.
Mr. Ellis felt that the Committee should clarify its instructions
on this point.
It was the Manager's understanding that net borrowed
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3/24/64
reserves should be avoided unless the Committee shifted its policy
toward less ease.
He thought the Committee should revise its instructions
by expressing a willingness to accept an occasional negative free reserve
figure and by indicating that a figure in the range from minus $50
million to plus $200 million was consistent with its objectives.
The discussion at the last meeting, Mr. Ellis continued, indi
cated that the Committee was concerned about the narrow range of
fluctuation in the bill rate.
He had found Mr. Stone's explanation of
the lack of fluctuation to be persuasive.
At the same time, the
Committee certainly had succeeded in c.onveying to the market its disin
clination to let short rates fall below 3.5) per cent, or to let them
rise enough to threaten the Regulation Q ceilings.
He questioned whether
the Committee logically could continue to be concerned about the lack of
fluctuations in short rates,
in view of the fact that its own defensive
actions defeated the objective of wider fluctuation.
While he urged
the Committee to accept a larger range of fluctuation in
free reserves,
it wasn't his intention to argue for fewer defensive operations.
Rather, his objective was to overcome, on a gradual basis, the block
posed by market expectations associated with crossing the zero free
reserve level.
Unless this barrier was overcome, the Committee could
not have a continuous policy, but always would be faced with discon
tinuous changes.
3/24/64
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With respect to the directive, Mr. Ellis continued, a sentence in
the policy record entry for the meeting held on December 19, 1961, read: "In
the view of the majority, separation of the continuing authorizations
from the current directive would permit the Committee to frame its
current economic policy instructions to the Federal Reserve Bank of New
York in a more effective fashion."
During 1962 the Committee had changed
the first paragraph of the directive nine times.
this paragraph six times, often very slightly.
In 1963 it had revised
What interested him was that
the first paragraph of the directive had been left unchanged from July
1963 until the last meeting, except for a rearrangement of words in
October.
Obviously, there was no merit in changing the directive merely
for the sake of change, but it was doubtful that the Committee was ex
pressing its objectives carefully enough if a single paragraph could
fairly express policy objectives covering the eight-month span from
August 1963 to March 1964.
In a concluding remark, Mr. Ellis noted that the staff had circu
lated alternative proposals for wording the directive near the end ,f the
last meeting.
Except for one Reserve Bank President, none of the
participants in the ensuing discussion had seen the proposals before they
were distributed.
He would urge that proposals for alternative directive
wordings be distributed to the full Committee at the start of the
meeting, so that everyone might have an opportunity to study them and
to comment on them in the course of the go-around.
3/24/64
-38
Mr. Irons reported that conditions in the Eleventh District were
favorable.
Changes had been relatively slight recently, and for the most
part involved an edging up.
The production index for the District had
risen fractionally, in about the same manner as the national index bad.
Crude oil production and refining were up a bit, although prices were
on the weak side at the moment.
Construction contract awards continued
to advance, with the increase attributable to residential building;
nonresidential construction was slightly lower.
Nonagricultural employ
ment was moving about seasonally, and department store sales had reached
record highs.
The demand for new automobiles was strong.
Agricultural
conditions generally were good; there had been quite a bit of rain
scattered around the District.
On the whole, business conditions were
showing a moderate, slight expansion and there were no signs of surges
in the picture.
In the financial area, Mr. Irons said, bank loans and investments
and deposits had moved upward during the past three weeks, with the
increases slightly less than for the comparable period a year ago.
The
loan increase was general except for consumer loans, which were off a
little.
Increases in investments were about the same as a year earlier,
but holdings of Governments were down and those of other types of invest
ments were up.
District banks still were net buyers of Federal funds,
but their purchases were running somewhat below earlier levels.
Borrowings at the Reserve Bank had risen, but not significantly.
3/24/64
-39
Mr. Irons commented that during the past week or two he had
noticed less in the way of extremes in the attitudes of businessmen.
It seemed that the thinking of most was following a standard pattern;
conditions were considered good and further advances were anticipated.
Few expected the economy to go through the roof, and few expected a lack
of stable advance.
There was surprisingly little comment on the effects
of the tax cut; this seemed to rank much lower in the scale of things
discussed than the international situation.
It was taken for granted
that the domestic economy was going to move ahead at a reasonable,
moderate pace.
Perhaps this was complacency.
thought that there was not much to worry about.
In any case, people
With respect to the
directive, Mr. Irons said he did not advocate a change.
Mr. Swan reported that the limited information available for
February and early March suggested a continuation of the modest but
broadly-based advance in the Twelfth District.
Preliminary figures
indicated an increase in February in total employment in California,
with declines in manufacturing more than offset by gains in other
sectors.
The reduction in manufacturing employment resulted from a
further decline in defense- and space-related industries, particularly in
electrical manufacturing.
In fact, the February decline in defense
related employment was the largest for any single month since April
1963.
There also was a further drop in aircraft employment in the
State of Washington.
3/24/64
-40Mr. Swan noted that construction activity in the District
continued at the high level of the second half of 1963.
Demand for
nonferrous metals remained strong, while that: for structural steel was
fairly active because of the mild winter weather in the District.
Loans
at weekly reporting banks declined slightly in the three weeks ending
March 11, in contrast with increases for the rest of the nation.
But for
1964 to date the situation was reversed; loans rose in the District and
declined in the rest of the nation.
With respect to policy, Mr. Swan said he would not advocate any
tightening now even apart from the possibility of a Treasury financing,
which called for an even keel.
There seemed to be no indications of a
rise in the rate of expansion in business activity.
Certainly tightening
was not called for by the recent developments in the balance of payments.
The increases in bank reserves and in the money supply thus far in 1964
had been modest.
Of course, money and reserves had increased rapidly in
the latter part of 1963, but the rises had occurred without significant
pressures on prices or reductions in unutilized resources.
He agreed
that some tightening might be required before disappearance of the slack
was clearly evident in the statistics, but he did not see the need for
tightening at this point.
Mr. Swan said he would favor a continued moderate increase in the
supply of bank reserves.
Also he would like to see the free reserve
figure at or above $100 million, if possible, not only because of possible
3/24/64
-41
market reactions to lower figures but also because he believed that the
money market would have been considerably firmer recently had it not been
for the slight shift of attitude with respect to intermediate and longer
term securities.
He would resolve doubts or the side of ease.
As far as the directive was concerned, Mr. Swan said, he agreed
with Mr. Hayes that the first paragraph should be changed to reflect the
further improvement in the balance of payments.
Some reference to possible
Treasury financing also would be desirable, even though specific financing
plans had not yet been formulated.
Mr. Deming reported that the Minneapolis Bank's mid-March business
opinion survey indicated some swing toward optimism, particularly as com
pared with the January and February surveys,
Survey respondents had
been asked if they felt the tax cut would stimulate business activiry in
their local areas.
In the commercial areas, where salaries and wages
were significant, the tax cut was seen as definitely stimulative.
In
the rural areas people thought tax cut stimulation of business activity
would be slower to be realized.
With the exception of farm incomes, Ninth District current busi
ness indicators in recent weeks had moved moderately upward, Mr. Deming
said.
Retail sales were especially good in February and early March.
February and March employment increases over year-earlier figures were
gratifying.
Bank debits were up sharply, and the industrial use of
3/24/64
-42
electric power advanced substantially from January to February.
Personal incomes in the District also increesed again in February
despite declining farm incomes.
District bank deposits increased a little more than average
during the first half of March.
Loan demand seemed to be picking up
after some relative weakness earlier in the year although demand for
commercial and industrial loans continued relatively light.
Mr. Deming said that for the reasons already cited, he would
favor no change in policy and no change in the discount rate.
He would
echo the comment that changes in the first paragraph of the directive
were desirable to reflect the Treasury financing and to take account of
the change in the balance of payments situation.
It appeared from what
Mr. Furth had said that the present language with respect to an adverse
payments balance might no longer be accurate.
He would favor continuing
the phrase "maintaining about the same conditions in the money market as
have prevailed in recent weeks," but he had a little difficulty in
defining the phrase.
He thought it would be a mistake to let free
reserves become negative, and would prefer to see them somewhat higher
than they had been in the past three weeks--perhaps around $100 million.
But he was not sure this could be accomplished while maintaining the con
ditions in the money market that had prevailed in recent weeks.
hope that both objectives could be achieved.
He would
3/24/64
-43
Mr. Scanlon reported that economic expansion continued in the
Seventh District.
In manufacturing stronger demand was most evident in
steel, motor vehicles, and machinery and equipment.
A recent meeting
of business economists held at the Reserve Bank revealed widespread
optimism.
Auto and truck sales were excellent in February.
Demand for
machinery had been very good in early 1964, with orders for construction
equipment showing exceptional strength.
Shipments of farm machinery also
had increased despite reduced farm income in some sectors.
Airline
traffic in the first two months of 1964 was 20 per cent above last year,
and well above projections.
Telephones added in Illinois in January and
February numbe:ed 30 per cent more than last year, while total toll calls
were 9 per cent higher.
above budgeted levels.
A large retailer reported sales running well
Nevertheless, inventories were in good balance
and prices had changed little as suppliers were able to ship goods
promptly.
Many of the firms represented at the meeting had raised their
capital expenditure plans for 1964 and 1965.
Mr. Scanlon said that bank debits at District banks had been at
a high plateau in recent months, with the totals for January and February
almost 14 per cent above last year.
Savings deposits increased only half
as much in the first two months as in the same period last year.
When
savings were combined with individuals' holdings of time certificates,
however, the percentage increase about matched last year.
The percentage
rise in savings and loan association share accounts in February was
3/24/64
-44
slightly below the same month of last year, reflecting an improvement over
January, when the net inflow was only a fraction of the rise a year
earlier.
Thus, savings in these forms were still rising rapidly.
Steel output, now at an annual rate of about 120 million tons,
was expected to rise further in March, April, and May, Mr. Scanlon said.
In the latter part of this period auto demand was expected to decline in
preparation for early model changeovers in July.
Some steel users were
believed to be building inventories, and delivery schedules had been
stretching out in recent weeks--particularly in the case of cold-rolled
and galvanized sheet, wide plates, and wide-flange beams.
Mr. Scanlon reported that during the first three weeks of the
sign-up under the Feed Grain Program (February 10-27) farmers agreed to
divert 78 per cent more acreage than in the same period of last year.
Decisions had been influenced by dry weather, low livestock prices, and
changes in the program.
Apparently farmers would plant somewhat less
acreage in corn than last year.
On the other hand, soybean acreage was
expected to be expanded.
Commercial and industrial loans at Chicago banks increased sharply
last week, Mr. Scanlon noted, but for the six weeks ending mid-March the
increase was the smallest of any recent year.
While business loans at
Chicago banks rose somewhat more over the tax date than a year ago, the
amount of maturing tax bills was smaller.
3/24/64
-45
In preparation for the April 1 tax assessment date, Chicago banks
had acquired more than $250 million of Treasury bills in the past two
weeks--mostly with April 2 maturities.
Total bill inventories were now
a little less than last year's March peak but above most other recent
years.
The two largest banks would need about $600 million, all of which
has been arranged.
Some of the recently acquired bills were out on RP's.
About $200 million of these were April 2 bills and a substantial portion
of the remainder was represented by other April maturities so there should
be no difficulty in unwinding the transactions.
The net decline in
negotiable certificates of deposit over the mid-March tax date had amounted
to about $60 m:llion and another $50 million would mature at the end of
the month.
Mr. Scanlon said he would favor continuation of the current policy.
He would make no change in the directive other than to reflect the improve
ment in the balance of payments.
He did not favor changing the discount
rate.
Mr. Clay said that cash receipts from farm marketings in the Tenth
District were continuing the decline that began in 1963.
This reflected
a lower level of receipts from the sale of both grains and meat animals.
The current condition of the 1964 wheat crop was generally good,
but deficient moisture made the crop more dependent than usual upon
weather developments from now until harvest time.
Wheat prices were
almost certain to be significantly lower than last year.
If the pending
3/24/64
-46
legislative wheat and cotton programs were enacted, however, Government
payments in the District would be substantially higher this year than last.
Beef production continued to expand, and the volume of marketings
was likely to be higher than last year's record level.
Cattle prices so
far this year had averaged substantially lower than for the comparable
period a year ago.
Although prices were expected to show temporary
improvement, depressed prices were probable this fall unless pasture and
feed conditions became unusually favorable.
Pasture conditions were relatively poor in the District at the
present time, Mr. Clay noted.
since the first of the year.
Precipitation had been normal or better
However, it had not been sufficient to
replenish subsail moisture supplies, fill ponds, and bring stream flow
back to normal in most areas because of the extreme drought conditions
that prevailed last fall and early winter.
Mr. Clay thought that developments in the national economy appeared
to call for a monetary policy in line with the Committee's objective of
the last several months.
Over all, he said, the economic situation con
tinued to be ore of moderate expansion with ample and growing room for
further expansion.
Accordingly, reserves should be provided for continued
commercial bank credit growth in the weeks ahead.
It was too early to
observe the effects of the Federal income tax cut on economic activity,
but evidence of the hoped-for stimulus from that source should not in
3/24/64
-47
itself be a guide to lessened credit availability in any case.
The
Committee also would need to be mindful of the additional Treasury finan
cing activity which presumbaly would be anncunced shortly.
In a substantive sense, the current economic policy directive
could serve satisfactorily for the period immediately ahead.
However, in
view of the length of time and the range of developments since the current
directive was adopted in essentially its present form, a new wording of
the directive would be in order.
Alternative "B" of the directive drafts
submitted by the Committee staff at the last meeting would appear to be
a suitable choice, Mr. Clay thought.
In his opinion, the Federal Reserve
Bank discount rate should remain unchanged.
Mr. Wayne said that the Richmond Bank's latest information confirmed
a continuing upward trend in Fifth District business and a further rise
in business optimism.
Their latest survey indicated broadly based gains
in manufacturers' orders, backlogs, shipments, employment, and hours.
Recent business statistics were predominantly favorable, with construction
showing particular strength.
Contract awards reached an all-time high for
January and building permits set records for both January and February.
Textile production continued at a good pace, although markets remained
rather quiet, apparently anticipating the end of two-price cotton.
Textile
inventories had remained in balance largely because of substantial ship
ments of goods sold months ago.
Federal cigarette tax collections
decreased again in February and were about 20 per cent below a year ago.
3/24/64
-48
In March, however, some cigarette plants returned to a five-day week.
The
farm outlook remained uncertain and constituted the weakest single factor
in the District's near-term prospects.
According to preliminary figures,
net farm income in the District fell 10 per cent last year as compared
with a 3 per cent decline nationally.
There was some evidence in the District, particularly among
manufacturers, that expectations of rising prices might be accompanying
improved business sentiment, Mr. Wayne reported.
About one-fourth of all
manufacturers participating in a recent survey conducted by the Richmond
Bank's Research Department indicated that they were now paying slightly
more for raw materials, and nearly one-half reported small increases in
machinery and equipment prices.
More than one-third expected further
price rises affecting materials, equipment, and labor.
Mr. Wayne commented that the national economy, as a recent
editorial
tude."
described it, seemed to be "cruising smoothly at a lofty alti
There was, in fact, rather marked evidence that the expansion
which had persisted for more than three years was taking on new vigor.
The consumer sector remained strong, especially in automobiles, and recent
surveys reflected continuing consumer optimism.
It was true that the
ratio of consumer debt to disposable income had been high in recent months
but the tax reduction automatically made this ratio more favorable.
the ratio of
inventories to sales remained quite low.
Also,
Outlays for new
plant and equipment were substantially above year-ago levels and all
indications pointed to a continued rise for a number of months to come.
3/24/64
-49
New orders for machine tools had shown outstanding strength in recent
months.
New construction spending had been at or near record levels for
five months and housing starts pointed to a continued high level of
activity in residential construction for the near future.
On the whole,
it appeared at this stage that currently available unused capacity plus
prospective additions should provide the means to meet the growing demand
for goods.
Prospects to date seemed to add up to a solid and substantial
expansion without any obvious weaknesses or excesses.
In reviewing domestic and international developments over recent
weeks, Mr. Wayne said he still found nothing that would justify a change
in the posture of policy at this time.
The recent flurry of price activity
occasioned him some concern, but he believed it would be premature to
interpret this as part of a general movement.
In general, existing money
and credit conditions appeared to be accommodating the latest business
thrust with no significant pressure on interest rates or prices.
Recent
increases in rate structures abroad were clearly a source of concern.
Nevertheless, there was no evidence that they required any policy response
at this time.
As
a matter of fact, current reports indicated that our
external position, at least for the present, had improved significantly.
In addition, the Treasury's operations in the market over the next few
weeks suggested no action unless absolutely necessary.
Both the inter
national and the domestic situation could, of course, change quickly and
the Committee had to remain sensitive to any evidence of change.
For the
3/24/64
-50
reasons indicated, Mr. Wayne preferred to extend for a while the period of
"watchful waiting" the Committee had entered some weeks ago.
Accordingly,
he favored renewing the current directive, with such changes of wording as
might be approriate, and no change in the discount rate.
He did not share
Mr. Ellis' concern about the lack of change in the first paragraph of the
directive since last summer.
It reflected the fact that the Committee's
policy had remained unchanged over that period.
Mr. Mills said that earlier in the meeting the difficulties had
been discussed of accurately projecting movements in the supply of reserves
and also the difficulties that arose out of the interpretations placed by
the market on the published statistical record on the supply of reserves.
In his opinion those problems went back to the Committee's error in con
ducting monetary and credit policy on the basis of interest rate
considerations rather than concentrating its efforts and its actions on
insuring the economy with an adequate and appropriate credit availability.
His further comments would bear on these matters and, as it has happened,
would refute the reasoning expressed ir the statements made by Messrs.
Hayes and Ellis.
Mr. Mills then made the following statement:
In the period since the Committee's last meeting, market
forces have broken through the confines of what has been a
rigidly and artificially imposed interest rate structure.
Interest rates on longer-term U. S. Government securities have
moved up and away from the basic short-term rate fixed by the
Committee's policy directive of "no change" and, in doing so,
have demonstrated the long-run futility of any authoritarian
attempt to control natural market forces. Unforeseen aberrations
in the movements of reserves may very well have given market
3/24/64
-51
observers an impression of a stronger move toward credit re
straint than that officially intended but, even so, the weight
of evidence indicated no lessening of pressure on the credit
markets, and yields on longer-term U. S. Government securities
rose in response.
These developments have been particularly unfortunate, both
because higher interest rates are unwarranted and because they
have come at a time when the unpredictable possibility of
inflationary pressures is being actively discussed, and lead to
a conclusion that the Federal Reserve System is already moving
to counteract price and credit excesses foreseen through its
economic intelligence facilities. Such interpretations of
System policy intentions should be promptly corrected by in
creasing the supply of reserves to a level that will visually
dispel this belief at the same time that reasonable encouragement
is given to credit expansion. In any event, it should be
obvious that any overt policy actions now taken in the direction
of credit restraint will risk precipitating some of the very
difficulties sought to be avoided, by way of arousing needless
immediate concern about inflationary problems that are still
uncertain of eventuating and in so doing fostering harmful
counteroffensive measures in the financial and business
communities.
Mr. Mills added that he was distressed by the amount of time taken
at each meeting in reaching agreement about the wording of the directive,
and he could only revert to the plea he had repeatedly made that the
Committee go back to the kind of directive previously in effect, which
included continuing instructions and cntained only a single clause
expressing the Committee's policy intent.
Mr. Robertson commented as follows:
With a Treasury cash financing announcement due
momentarily, it seems clear that until our next meeting a
policy of "even keel" is called for, guarding against any
manifestations that might suggest even an ever-so-slight
tightening of policy, such as occurred--for whatever reasonsduring the past three weeks. I think this would be
appropriate even in the absence of Treasury operations, for
the economic consequences of the tax cut are still very
3/24/64
-52-
uncertain, and I would not want any shift in monetary conditions
to prejudice the economy's response in any way. As a matter
of fact, I believe we ought to be holding policy unchanged,
through the next meeting and beyond, until such time as we will
have reaped the full potential noninflationary stimulus of the
tax cut. In my judgment, a tightening of policy will be
warranted only if, as, and when we should develop a wave of
speculative ebullience and general price increases that is
plain for everyone to see. At that time, vigorous action ought
to be called for; until such time, tightening of policy in fear
of possible price increases would be premature and unwise.
I do hope that following an "even keel" policy for the
next few weeks will not cancel the salutary effects of the
somewhat wider money market fluctuation that we happened to
experience during March. I welcome the signs of somewhat more
elastic dealer expectations with respect to short-term rate
movements (even if it had to come from a temporary upward rate
bounce in response to the British Bank rate action), and I
hope we can keep the dealers from slipping back into the old
assumption that only a very narrow band of bill rate fluctuation
is "acceptable" to Federal Reserve and Treasury officials. I
would also hope that we would not look with disfavor on even
lower bill rates in the existing atmosphere.
In a concluding remark, Mr. Robertson said that if a change in the
directive was to be made, he thought the language suggested in Alternative
"B" propcsed by the staff at the last meeting was appropriate, not only to
reflect the change in the balance of payments situation but from other
points of view as well.
Mr. Shepardson said it seemed :o him that there were continuing
and expanding waves of optimism as to the business future.
This could
lead to the possibility of further inflationary pressures.
It was
difficult to justify changing policy on the basis of anticipations.
At the
same time, it was hazardous to wait until everybody could see the signs of
change, because developments then would be so far under way that drastic
3/24/64
-53
action would be required.
This posed a dilemma.
However, in the light of
the continuing uncertainty regarding price pressures, and in light of the
Treasury financing program, he thought it probably was wise to continue
existing policy at this time.
It would be appropriate to make minor changes
in the directive on the technical points that had been mentioned, but
otherwise he would advocate no change.
Mr. Mitchell said he was concerned about the problem that Mr. Mills
had noted--of the impressions the public was receiving of Committee policy.
The Committee knew from the directives on which it had agreed that it had
not changed policy.
But outsiders had the impression that the Committee
was shifting to a tighter policy because interest rates were rising, free
reserves were lower, and the money supply had ceased growing since the
first of the year.
From these and other figures the market was concluding
that the Systen: was leaning towards tightness, and that its next move
would be in the direction of further tightness.
Some members of the Committee seemed to have a rather rosy view of
the present business situation, Mr. Mitchell continued.
He would like to
call attention to the fact that the index of industrial production had
been oscillating in a narrow range for about eight months, and that
present estimates indicated that GNP would rise only $7 or $8 billion in
the current quarter, as compared with an increase of $11 billion in the
fourth quarter of 1963.
moderate or slight.
balance of payments.
As Mr. Irons had said, the rate of expansion was
There also had been a substantial improvement in the
3/24/64
-54
Given these external indications, Mr. Mitchell thought the
Committee had gotten itself into a vulnerable position with respect to its
policy.
He was not sure what could be done about this; perhaps
Mr. Holland's analysis provided the clue.
The Desk could (1) aim for free
reserves of not less than $100 million, and somewhere in the range between
$100 and $200 million; (2) not act to prevent the bill rate from dropping
below 3.50 per cent; and (3) permit the Federal funds rate to be lower
than the disccunt rate more frequently than it had been.
Such actions
would give the market signals that the System had not moved to a firmer
policy.
Mr. Daane said that in his judgment the status quo in policy
seemed to be clearly called for, not only because of the Treasury
financing but also on the basis of both domestic and international
considerations.
He did not think the Committee should leap to conclusions
about the balance of payments improvement until it had further confirmation
of the recent trend.
While he sympathized with Mr. Mitchell's preference
for somewhat higher free reserve figures, he would not like to see any
great relaxation at the moment.
The Treasury was on the eve of a cash financing, Mr. Daane noted.
The size was as yet undetermined, but it was not likely to exceed $1 billion
or $1-1/2 billion.
As the Manager had indicated, the financing probably
would involve a short maturity.
announced shortly.
Also, a one-year bill auction would be
With announcements of these offerings to be made
3/24/64
-55
between now and the next meeting, and with payment dates also likely
to occur within that period, he thought tha: the Committee could not
dismiss the iplications of Treasury financings in deciding on policy.
As one of the Board majority favoring operations outside the
bill area, Mr. Daane continued, he thought there was a real opportunity
for the Desk to take account of the availability of coupon issues and,
within the marginal concept the Manager had outlined, to supply reserves
in the period ahead by coupon purchases in some volume--not just token
amounts.
As the Chairman had noted at the last meeting, there was a
continuing need to mesh System and Treasury operations.
a tough job lay ahead for the Treasury.
As he saw it,
He thought that whenever it
was clearly consistent with the Committee's policy objectives and its
needs for supplying reserves, the Committee should endeavor to operate
in the manner most useful to all parties concerned.
Mr. Daane agreed with those who favored some change in the wording
of the directive to refer to the Treasury cash financing and also to the
balance of payments improvement, although he would be cautious about using
wording that implied that the payments problem had been solved.
Mr. Hickman observed that business generally continued to expand.
The most significant piece of business news since the last meeting was the
report of the Commerce-SEC survey of capital spending plans, which
indicated a larger gain for this year than earlier reports had indicated.
Both industrial production and retail sales showed further gains in
3/24/64
-56
February.
Nonfarm employment gained contraseasonally and the rate of
unemployment dipped slightly.
The February rise in retail sales on top
of the revision that placed January above December brought the third
successive monthly record.
Indications were that strength in sales
was being mair.tained in March.
Steel output remained at a high level; incoming orders for steel
had continued to expand in March, with a considerable share accounted for
by the usual seasonal upswing.
The outlook for steel production for the
first half had now been revised upward to about 60 million ingot tons,
which would be a new record for the period.
The current high rate of
steel production had begun to raise questions as to its sustainability.
For autos, February was a month of further increases in
seasonally adjusted sales and output.
March had
Sales during the first 20 days of
been maintained at high levels.
Output was expected to increase
less than seasonally in March because of inventory adjustments in some
of the slower noving lines.
However, in the aggregate, dealers were
currently holding one day less of inventories in relation to sales than
they did a year ago.
As for prices, Mr. Hickman
said, recent increases for certain
industrial commodities had had little effect on the over-all indexes.
Since the last meeting, price increases had been announced for aluminum
and its products, for copper, and for glass and glass containers.
The
Federal Reserve Board's special grouping of sensitive materials prices
3/24/64
-57
continued to move up slightly in February.
Moreover, several large
groups of industries in the wholesale price index showed fractional
rises for February, including chemicals, lumber and wood, pulp and
paper, metals and metals products, machinery and automotive products,
and nonmetallic mineral products.
Those increases were offset by
declines in other lines that occurred for special reasons.
For example,
a substantial decrease in fuel prices in February had been ascribed to
the mild winter, while a decrease for bottled beverages was associated
with a reduction in sugar prices.
On balance, the more systematic
tendencies within the wholesale price index appeared to be on the up
side, while fortuitous elements were prominent on the down side.
Recent economic developments in the Fourth District had continued
to be favorable, although less exuberant than earlier.
District, of course,
Parts of the
had been hard hit by the Ohio River flood, and
there was evidence of some temporary slowing down as a consequence.
However, the f.oodwalls around the major cities in the river valley
prevented any major damage to the District's economic structure.
At
the peak of the flood, 6,000 families were displaced in the five-county
area around Cincinnati.
There was heavy damage to roads, and high costs
were incurred in the subsequent cleanup as the waters receded.
The flood
probably would trigger heavy Federal and State outlays in a variety of
flood control projects along the Ohio River.
3/24/64
-58
Insofar as the next three weeks were concerned, Mr. Hickman saw
no reason for any change in current System policy.
For one thing, the
Treasury might soon be in the market to raise new cash.
The lower level
of free reserves that prevailed in the past two weeks apparently did not
cause any serious tightening in the market, since borrowings remained at
about the same average level as in February.
Over recent weeks the U. S.
international position had appeared to be relatively satisfactory, despite
the increase in the British Bank rate and the shift of funds from Italy
to Germany, and the policy directive should probably be revised to reflect
this.
Some consideration should probably also be given to a revision of
the directive to reflect an even keel position in view of the possibility
of Treasury financing in the near future.
The recent rise in bond yields and the return of the Desk to the
bond market after an absence of nearly four months appeared to have been
coincidental, on the basis of Mr. Stone's remarks.
In any event, the
timing seemed to Mr. Hickman to have been unfortunate.
Mr. Bopp reported that business in the Third District continued
at fairly satisfactory levels, but the nation, as usual, seemed to be
doing better than the District.
Labor force indications were about as
healthy as they ever got in the District; construction awards equaled
1963 totals for the same date; and department store sales were picking
up fairly well as Easter approached.
Since the Committee's last meeting,
moderate pressure on bank reserve positions had continued and some evi
dence of a pickup in business loans had appeared.
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As he saw the economy, Mr. Bopp said, there was nothing new which
might suggest a change from the present position of watchful waiting.
Business still looked good, the balance of payments continued to improve,
and prices, on the average, were steady.
With the tax cut now in effect,
it was certainly best to keep an open mind about the future.
But he
continued to feel that any departure from the present degree of ease should
not be made until there was evidence of inflationary excesses.
He would
revise the directive to reflect the balance of payments improvement and
the Treasury financing.
Mr. Bryan said that he had nothing of significance to report for
the Sixth District; activity seemed to be expanding moderately, as in the
nation.
At District banks loans, and the total of loans and investments,
were still expanding.
The most important development that he had detected
was a marked improvement in business optimism, but he was not certain how
significant this was.
present.
He thought there should be no change in policy at
It was always difficult to say what "no change" meant, but he
would like to see a free reserve figure of $100 million or more.
Mr. Bryan said that a better term for the tax cut might be "tax
reallocation."
It seemed to him that many localities were waiting to take
advantage of the tax cut of the Federal Government, and most States could
be expected to increase their taxes by at least part of the amount of the
Federal reduction.
Thus, the outcome of the Federal tax cut was apt to be
a smaller reduction in total taxes, and possibly even an increase.
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Mr. Shuford said that economic activity in the Eighth District had
continued to expand moderately in recent months.
Employment in major labor
markets had increased since last fall and there had been significant gains
in the area of durable goods manufacturing.
Spending had risen sharply
since November as measured by department store sales, but as measured by
bank debits the increase was much less pronounced.
Business loans, which
had declined from late last year through January, had shown a moderate
increase since.
Industrial use of electric power had changed little since
last summer.
The national economy continued to move along a strong upward trend,
with production, employment, and sales statistics suggesting a continued
healthy expansion.
In view of the tax reduction and of prospects for
consumer expenditures and capital investment
continue to watch price developments closely.
little real cause for concern.
the Committee needed to
So far, there seemed to be
Movements in consumer prices had beer
moderate, and wholesale prices remained stable on the average.
Mr. Shuford said the improved international situation was
encouraging.
The balance of payments deficit had declined in the second
half of 1963 and appeared to have fallen further so far this year, and the
level of interest rates seemed to be reasonably aligned with rates abroad.
While there was nothing at present in the balance of payments problem
that constituted a constraint on domestic monetary policy, the Committee
needed to continue to be alert to the problem.
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In sum, Mr. Shuford said, both the domestic economy and the
balance of paynents continued to show progress within a monetary policy
environment that had continued unchanged since the middle of last year.
In view of this, he would favor making no basic change in policy.
Recently
there had been some increases in yields on both long and intermediate-term
Governments, wiile the yield on Treasury bills had remained virtually
unchanged.
This firming was especially significant, Mr. Shuford thought,
because rates were usually weak at this time of year, and the money supply
recently had been more restricted than it was last fall.
It was Mr. Shuford's view that the Committee should avoid letting
the pendulum swing further in the direction of restraint at this time.
He thought that
on the whole the Committee's over-all monetary policy for
the last few months had been about right.
It would be desirable for
interest rates to continue at about their present levels in the near
future, especially in view of the Treasury financing.
He favored no
change in the discount rate, and he favored changes in the directive only
to reflect the balance of payments improvement and the Treasury financing.
He thought that. the Committee should continue to study the directive, as
had been suggested at the last meeting.
Mr. Balderston said that in view of the impending Treasury
financing, he favored continuing present policy.
Chairman Martin commented that he was well satisfied with the
way things were going at the moment and he saw no need for making a change
in policy.
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Noting that the Secretariat had been asked at the previous
meeting to prepare a memorandum discussing problems of the directive, the
Chairman said he gathered that more time was needed.
He asked Mr. Young
to report on the status of the study and also to present staff suggestions
for changes in the wording of the directive at this meeting.
Mr. Young said that a draft had been prepared of the memorandum
on the directive that the Committee had requested, but further work was
required to put it in a form appropriate for circulation.
It was
expected that the memorandum would be distributed to the Committee before
the next meeting, and perhaps in about 10 days.
With respect to the directive to be issued at this meeting,
Mr. Young said that the staff thought no changes were required in the
second paragraph.
In the first paragraph, the staff proposed inserting
the word "moderately" before "adverse" in the description of the balance
of payments position, to reflect the recent improvement.
It also proposed
expanding the first sentence, which read, "It is the Federal Open Market
Committee's current policy to accommodate moderate growth in bank credit"
by the addition of "money supply and the reserve base" at the end; and
deleting the final sentence, which read "In addition, it (this policy)
recognizes the increases in bank credit, money supply, and the reserve
base of recent months."
This pair of changes seemed desirable because of
the recent irregular movements in the aggregate series referred to.
Finally, a slight revision in the next to last sentence was proposed to
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3/24/64
take account of the recent increase in the Japanese discount rate.
This
involved replacing the phrase "in important European countries" with the
phrase "in important countries abroad" in referring to increases in foreign
money rates.
Mr. Young noted that several members had suggested including a
reference to the Treasury financing.
When such references had been made
in the past, he said, they usually related to financings of a larger size
than the one now in prospect, and he wondered whether any reference was in
fact required to the imminent financing.
In the ensuing discussion of the staff proposals, it was agreed
that a reference to the Treasury financing should be included in the
first paragraph, and that the statement relating to the balance of
payments position should be formulated to allow for the possibility that
final data might show that the balance was no longer adverse.
Mr. Hayes questioned the desirability of eliminating the last
sentence of the first paragraph on the ground that this sentence remained
accurate as a description of longer run trends.
Mr. Swan said he would
strongly support eliminating the sentence because of changes in the
tendencies of the data referred to since the first of the year.
Mr. Hickman
expressed a preference for focusing on longer run trends rather than
month-to-month changes, and noted that he had some reservations about the
reference to the money supply, in view of the problems of defining that
term.
3/24/64
-64Chairman Martin commented that the directive applied to a
three-week period, and he did not think it could take account of all the
cross-currents in developments over the past year.
He felt that any
directive could be read in various ways, depending on the emphasis that
was placed on individual words.
He was inclined to be sympathetic with
Mr. Mills' point that the Committee spent too much time in meetings
debating the specific language of its directive.
After further discussion, and upon
motion duly made and seconded, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed by
the Committee, to execute transactions in
the System Account in accordance with the
following current economic policy
directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in bank credit, money supply,
and the reserve base, while maintaining conditions in the
money market that would contribute to continued improvement
in the capital account of the U. 3. balance of payments.
This policy takes into consideration the fact that domestic
economic activity is expanding further, although with a
margin of underutilized resources, and 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 facts that the balance of payments
position, while improved, may still be adverse, and that the
effects of increases in money rates in important countries
abroad are as yet uncertain. In addition, it recognizes the
imminence of new cash borrowing by the Treasury.
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.
3/24/64
-65
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 felt the first paragraph of the directive had
little significance, and the heart of the directive lay in the second
paragraph.
The second paragraph directed the Manager of the Account to
maintain about the same conditions in the money market as had prevailed
in recent weeks, and in his judgment money market conditions in recent
weeks had moved toward restriction rather than expansion.
Accordingly,
he dissented from the directive.
Chairman Martin said that he did not agree that market conditions
had moved toward restriction, and Messrs. Daane, Hayes, and Hickman
associated themselves with the Chairman's view.
Mr. Mitchell said that he thought Mr. Mills had a sound point,
but he believed the Committee was struggling to develop a type of directive
that would present this kind of thing from happening.
He hoped that the
Committee would have a chance to put an improved directive into effect at
the next meeting.
Therefore, he voted to approve the directive.
Chairman Martin reported that a draft had been prepared of a
possible response to the request of the Subcommittee on Domestic Finance
of the House Banking and Currency Committee for the Open Market Committee's
minutes for the years 1960-1963, inclusive.
He thought the Committee
should dispose of this subject by the next meeting.
The gist of the
draft was that the Committee had concluded that possible market
3/24/64
-66
repercussions and other considerations made it unwise for it to release
its minutes for 1961 and later years without an appropriate lag.
did not specify any particular lag as appropriate.
It
As Mr. Hayes had
suggested at the last meeting, and as the Treasury had indicated, a
case could be made for never releasing the foreign currency discussions,
but this was projecting into the future.
The letter also noted that the
Committee was exploring means of making its records through 1960 available
to scholars and others, as had been agreed at the last meeting.
In response to a question, Chairman Martin said he thought the
position taken in the draft was quite tenable under the law, which
required that the Committee policy actions be reported to Congress but
did not require that its minutes be given to Congress.
Chairman Martin then suggested that the members study the draft
from the points of view both of the desirability of the position taken
and of the language used, and send their comments to the Secretary as
soon as possible.
He would hope that a final decision would be taken
at the next meeting of the Committee, and a response sent to the
Subcommittee promptly thereafter.
Mr. Hayes said he would like to raise a question about publication
of the Manager's Report to the Committee of Open Market Operations in 1963,
with suitable deletions of confidential material. Last year, he noted, the
report on 1962 operations had been published in the April Federal Reserve
Bulletin and reprinted in the New York Bank's Monthly Review for May.
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3/24/64
The report had met with quite a good response.
in particular,
The academic community,
had found it to be an enlightening commentary on the
conduct of System operations.
The New York Bank alone had had requests
for over one thousand reprints of the article.
This year, as the Committee knew, the second portion of the
1963 report--the detailed chronological section--was being published
as part of the Board's Annual Report.
Mr. Hayes believed there would be
an interested audience for the more analytical review given in the first
section of the report, and suggested that publication be considered in a
format similar to that adopted a year ago.
In the case of the chronolo
gical section, this would mean some duplication of the material in the
Board's Annual Report, but he believed it would be worthwhile, reaching
a somewhat different audience and providing the detailed background that
would enhance the interpretation of the more general review.
Chairman Martin suggested that the Committee members review the
material in question and be prepared at the next meeting to express their
views on Mr. Hayes' suggestion.
Mr. Mitchell commented that in reaching views on Mr.
Hayes'
proposal the members should read the first part of the Board's Annual
Report also, and Chairman Martin concurred in this suggestion.
3/24/64
-68
It was agreed that the next meeting of the Committee would be
held on Tuesday, April 14, 1964.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1964, March 23). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640324
@misc{wtfs_fomc_minutes_19640324,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640324},
note = {Retrieved via When the Fed Speaks corpus}
}