FOMC Minutes

A meeting of the Federal Open Market Committee was held in the

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

Washington on Tuesday,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

May 26,

1964,

at 9:30 a.m.

Balderston, Acting Chairman

Daane

Hickman

Mills

Mitchell

Robertson

Shepardson

Shuford

Swan

Wayne

Treiber, Alternate for Mr. Hayes

Messrs. Ellis, Bryan, Scanlon, and Deming, Alter:ate

Members of the Federal Open Market Committee

Messrs. Bopp and Clay, Presidents of the Federal

Reserve Banks of Philadelphia and Kansas City,

respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Broida, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brill, Furth, Grove, Holland, Jones,

Koch, Mann, and Ratchford, Associate

Economists

Mr. Stone, Manager, System Open Market Accout

Mr. Molony, Assistant to the 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, General Assistant, Office of the

Secretary, Board of Governors

5/26/64

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Mr. Coldwell, First Vice President of the Federal

Reserve Bank of Dallas

Messrs. Holmes, Sanford, Eastburn, Baughman, Tow,

and Green, Vice Presidents of the Federal Reserve

Banks of New York, New York, Philadelphia, Chicago,

Kansas City, and Dallas, respectively

Messrs. Fousek, Brandt, and Litterer, Assistant Vice

Presidents of the Federal Reserve Banks of New York,

Atlanta, and Minneapolis, respectively

Mr. Meek, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Arena, Financial Economist, Federal Reserve Bank

of Boston

Upon motion duly made and seconded, and by

unanimous vote, Mr. Balderston was elected Acting

Chairman for this meeting.

Upon motion duly nade and seconded, and by

unanimous vote, the minutes of the meetings of

the Federal Open Market Committee held on April 14

and May 5, 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 May 5 through May 20, 196 ,

and a supplementary report covering the

period May 21 through May 25, 1964.

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

Supplementing the written reports, Mr. Sanford said that no change

was expected in the gold stock this week for the fifteenth consecutive week.

The Stabilization Fund now held $268 million in gold.

Expected later this

week was the usual French order for 30 tons, and the Spaniards wanted to

purchase the small amount of $2 million by June 15.

With only a compara

tively small distribution from the Gold Pool for May, some reduction in the

Fund's large holdings over the next few weeks was anticipated.

5/26/64

As Mr. Coombs informed the Committee at the two previous meetings,

the heavy demand for Swiss francs during April and early in the period

just closed had led to an increase rather than a reduction in the System's

Swiss franc commitments and a rise in the Swiss National Bank's surplus

dollars.

Extensive discussions with the Swiss had been continued to find

means, along the lines indicated earlier, to reduce the System's Swiss franc

obligations (now totaling $200 million), and those of the Treasury, as well

as the Swiss National Bank's current surplus dollar holdings.

Not all of

the suggested arrangements had been completed, but Mr. Sanford could report

some progress.

The U. S. Treasury yesterday had issued to the Bank for

International Settlements a 15-month Swiss franc-denominated bond for about

$70 million equivalent and then had sold the franc proceeds to the System.

The System immediately used the Swiss francs to liquidate $70 million of its

$100 million equivalent swap drawings on the BIS.

In addition, it was hoped

that the proposed credit arrangement between the Swiss National Bank and

the Bank of Italy for $100 million wor:h of Swiss francs would be entered

into this week or next week.

In accordance with earlier plans, the Bank of

Italy would then sell the Swiss francs to the System and use the do lars

to liquidate its outstanding drawings of $100 million from the System.

The

System, on its part, would immediately use the Swiss francs to pay off its

$100 million equivalent of drawings on the Swiss National Bank.

These

transactions would still leave the System with $30 million of Swiss franc

swap drawings outstanding (on the BIS); the Treasury with $120 million of

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5/26/64

forward market commitments; and the Swiss National Bank with some $30 million

of surplus dollars on its books.

Discussions on a package to deal with

these amounts currently envisaged an additional issue by the Treasury of a

Swiss franc bond to the Swiss National Bank, an increase in the amount of

dollars the Swiss were prepared to hold outright, and possibly some sale of

gold to the Swiss; the Swiss were watching their money market closely and

considering what action was desirable and when.

The foreign exchange markets had posed no special problems during

the past three weeks and there had been no Exchange transactions for System

account except for the $70 million Swiss franc liquidation referred to before

and a sale of $500,000 worth of Belgian francs to the Treasury to cover

interest payments.

Although the New York exchange market had been quiet,

there had been some fairly sizable flows of funds on the Continent.

The

Germans had continued to lose funds as a result of the proposed 25 per cent

withholding tax on interest payments to foreigners, with the money being

pulled back from the German bond market to Switzerland and Belgium, in

particular.

Ir, addition, the Dutch money market had been extremely firm.

As a result, Dutch commercial banks had been repatriating liquid assets held

abroad as well as borrowing in the Euro-currency market.

This inflow of

funds had provided foreign exchange needed to cover the growing Dutch trade

deficit.

The Dutch money market might be expected to remain firm over the

coming months, and the Dutch anticipated that they would be in and out of

the exchange market as both buyers and sellers of dollars as these payments

ebbed and flowed.

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Meanwhile, the continued firmness ir sterling despite the unsatis

factory trade position seemed to be the result primarily of the covering

of the short pcsitions taken by many traders earlier in the year.

It was

still necessary to anticipate some possible difficulties for sterlirg later

in the summer.

In mid-May, after 2-1/2 months of no change, the British

Treasury bill rate rose almost 10 basis points.

The covered interest rate

differential in terms of Treasury bills was now just about zero, but further

increases in British rates might occur.

On the Canadian dollar market, the

forward Canadian dollar had again been in demand, and despite Bank of

Canada operations, had been at a small premium.

As a result, covered

interest rate differentials had again stood in favor of Canada, but the

reported net flow of funds from the United States (all for investment in

finance company paper) had so far remained snall.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period May 5 through

May 25, 1964, were approved, ratified, and

confirmed.

Mr. Sanford noted that two swap arrangements were scheduled to mature

in June; $100 million with the Netherlands Bank (on June 15) and $50 million

with the National Bank of Belgium (on June 22).

under the Dutch arrangement.

No drawings were outstancing

The swap line with the National Bank of

Belgium, on the other hand, was fully drawn as it had been from the beginning,

and consequently that drawing also matured next month.

He recommended the

renewal of the Dutch arrangement for another three months and of the Belgian

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5/26/64

swap arrangement and drawing for another six months.

In addition, a swap

of $13 million of sterling for Swiss francs with the BIS would mature on

June 10 and it might prove necessary to roll it over.

This would be the

fourth renewal of this swap.

Finally, the Bank of Italy's $50 million drawing on the System of

March 17,

1964, would be due for its first renewal on June 17.

Although it

was anticipated that this drawing would be paid off by then as a result

of the Bank of Italy's arrangement with the Swiss National Bank, in view of

the delays that had attended the coming into being of that arrangement, it

might be necessary to roll it over temporarily.

In response to questions by Messrs. Shepardson and Mills, Mr. Sanford

said that the sterling-Swiss franc swap for which a fourth renewal was

proposed was the only one of its kind and in his judgment was in a different

category from the dollar-franc swap drawings.

It originally had been

entered into some time ago, when the Account owned sterling but had a greater

need for Swiss francs.

The sterling could have been sold for francs, but

since this might have put some pressure

on the pound a swap seemed preferable.

There was no exchange risk, since the rates were fixed.

He thought it would

be desirable to terminate the arrangement when possible, and was hopeful

that this would be soon.

But he considered the matter much less pressing

than in the case of dollar swap drawings to which, in his judgment, the

Committee's general standards for limiting the number of renewals primarily

applied.

5/26/64

Mr. Sanford said that he considered the rule limiting renewals of

dollar swap drawings to be a good giideline, but he did not think the

Committee intended it to be absolutely rigid.

turned against the U. S.,

It was possible, if the tide

that the Committee might prefer to break the

rule rather than to reverse a particular swap drawing under severe pressure.

He thought that in any particular case the Committee would want to weih

the desirability of maintaining the rule against all other factors.

Renewals of the swap arrangements with

the Netherlands Bank and the National Bank of

Belgium, as recommended by Mr. Sanford, were

approved.

Renewals of the drawing on the swap with

the National Bank of Belgium, of the sterling

Swiss franc swap with the Bank for International

Settlements, and, if necessary, of the Bank of

Italy's drawing on the System, as recommended by

Mr. Sanford, were noted without objection.

Before this meeting there had been distributed to the members of

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

covering open market operations in U. S. Government securities and bankers'

accept nces for the period May 5 through May 20, 1964, and a supplemental

report covering the period May 21 through May 25, 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:

The money market has had a generally firm tone since the

last meeting of the Committee, with Federal funds trading at

3-1/2 per cent on every day of the period. Member bank borrow

ing from the Reserve Banks has averaged about $300 million in

5/26/64

the recent interval, almost $100 millicn higher than in the

preceding period between meetings. This somewhat firmer

tone reflects in part the unwinding of the very heavy concen

tration of reserves in the money centers in late April as a

result of Treasury redeposits of individual income tax

receipts. It may also reflect a somewhat faster pace of

bank credit expansion following the somewhat sluggish per

formance :f April.

The firming of the money market has not been accompanied

by any significant upward pressure on Treasury bill rates.

Nonbank demand for bills has continued strong even though

long-term investors who temporarily put their funds in bills

amid the uncertainties of March and early April appear to

have reverted to their normal practice of placing funds in

long-term issues. In contrast with March and early April,

when investors wanted not merely bills, but bills of short

maturity, recent demand has moved progressively toward the

longer bill maturities. This tendency has reduced the yield

differential between the 3- and 6-month bills to about 12

basis points, compared with 20-21 basis points in early April.

While the approach of the June season for tax and dividend

payments nay exert an upward influence on bill rates over the

next three weeks, the bill market has tended to get by similar

periods in the recent past without mud movement in rates.

Prices of Treasury notes and bonds moved higher during

the first part of the recent interval, continuing at an

accelerated rate the price recovery that had been in progress

since late March. Over the past week cr so the recovery

has tendec to falter. Whether this means the rally has run

its course or whether the market is simply collecting itself

for a further advance remains to be seen. It is worth noting

in this connection that the recent gairs have pushed the

prices of a number of issues to levels close to the highs

reached earlier this year. The majority of investor opinion

now seems to have swung to the view that interest rates are

not likely to push higher in the immediate future. The success

the Treasury enjoyed in its recent refunding both reflected

and reinforced that shift in the climate of opinion.

The Treasury does not definitely contemplate any new

financing between now and the end of the fiscal year, except

for the routine monthly offering of one-year bills. Should

prices of Treasury notes and bonds improve significantly

further, however, it is possible that in the second half of

June the Treasury would offer a coupon issue, most likely a

note, for cash in view of the large new money needs projected

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5/26/64

for the early part of the new fiscal year. Even so, the

Treasury would still have to issue a tax anticipation bill

to raise the bulk of its July needs, which may be as much

as $4 billion. It is also a possibility, although not a

prominent one, that the Treasury might undertake an advance

refunding in late June if the market should become particularly

strong. In late July the Treasury will, of course, have to

deal with the problem of refunding its August 15 maturities.

Mr. Mills said that he had to confess to confusion about the

technical objectives in handling the Account.

He noted that the projec

tions for the current statement week indicated positive free reserves of

$5 million.

Yesterday the Account had bought about $80 million in bills

from foreign accounts.

This purchase prevented the market from tightening,

but did not introduce reserves.

The demand for bills had been strong

yesterday, Mr. Mills noted, but the Committee's directive called for accoma

modating expansion of bank credit.

Could this be accomplished with the

minimum level of free reserves projected for the week, or was all of the

Account Management's attention focused on the interest rate structure?

Mr. Stone replied that attention recently had not focused primarily

on the rate structure.

The Account, in fact, had not conducted a single

The

operation addressed primarily to the bill rate since October 1963.

recent stability of short-term rates, in his judgment, was due to a

complex of factors, including structural changes in the market.

Mr. Mills commented that reserves had been injected or withdrawn

periodically in conjunction with tightness or ease in the market.

In his

opinion this was bound, indirectly at least, to influence interest rates.

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5/26/64

Mr. Stone replied that he had no doubt that the operations of the

Account had influenced interest rates.

He considered this to be part of

the package of objectives the Committee had in mind in giving the Account

Management its instructions.

With respect to yesterday's purchase of

$80 million of bills from foreign accounts, Mr. Stone said, the foreign

accounts had directed the sale of these bills with the expectation of

making payments to others in the amount of the proceeds.

If the bills

had been sold on the market member bank reserves would have been reduced

by $80 million and, when the proceeds were paid out, those reserves would

have been returned to the market.

By buying the bills the Account

Management prevented the reduction of reserves, so the net effect of the

bill sale to the System plus disbursement of the proceeds was to raise

reserves by $80 million.

Thus, at the conclusion of the operation yesterday,

the free reserve estimate for the week was raised to $36 million.

In

approaching operations yesterday, the Account Management had in mind the

fact that it was going to have to supply a substantial amount of reserves

over the next few days.

The question was whether to wait until Thursday,

or to do it Wednesday or today.

The decision would depend on the market

circumstances that developed.

Mr. Mills then asked what level or movement in free reserves

Mr. Stone would consider necessary to accommodate an appropriate expansion

of bank credit.

It seemed to him that actions usually were taken to prevent

negative free reserves but not necessarily to produce the level of positive

free reserves that would accommodate expansion of bank credit in accordance

with the Committee's directive.

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5/26/64

Mr. Stone said the operational paragraph of the Committee's

directive was written in terms of maintaining about the same conditions

in the money market as in recent weeks.. He interpreted this to relate to

free reserves as well as to other measures of market conditions.

He

thought it was the wish of the Committee that free reserves should fall

somewwhere in the broad range between zero and $200 million.

He did not

think the Committee wanted to see net borrowed reserves appear, and

certainly not for two or three weeks in a row.

He did not think it de

sirable to give the market the idea that the Committee had changed policy

when it had no:.

He regarded a free reserve figure in the zero to $200

million range as consistent with the Committee's intent, provided that the

Federal funds rate typically was around the discount rate, and that

borrowings were somewhere in the neighborhood of $200 or $300 million.

These were the conditions the Committee had indicated it would like

to see, Mr. Stone continued.

He interpreted it to be the expectation of

the Committee that if these conditions were achieved, its intent with

respect to the rate of bank credit expansion over the period also was likely

to be realized.

Mr. Robertson commented that the way Mr. Stone stated his interpre

tation of the instructions was what gave rise to doubts in his and Mr. Mills'

minds.

Mr. Stone had said it was his understanding that operations should

be conducted with a view to maintaining about the same conditions in the

money market as had prevailed in recent weeks.

But he had left out the

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5/26/64

rest of the sentence in the second paragraph of the directive, which was

"while accommodating moderate expansion in aggregate bank reserves."

Mr. Robertson thought there was a feeling that Mr. Stone gave too much

weight to the first half of the sentence.

lie hoped there was no intent

to respond to one part of the instructions to the exclusion of the other.

Mr. Stone remarked that whether maintaining about the same conditions

in the money market would result in moderate reserve

on the vigor with which the economy utilized reserves.

over which he had no day-to-day control.

expansion depended

This was something

If bank credit demand became

sluggish, as it had at times in the past, accommodating moderate reserve

expansion would mean easier money market conditions.

Mr. Robertson asked if Mr. Stone's operations would be different

at all if the order of the two clauses in the second paragraph were reversed.

Mr. Stone replied that they would, if this change were accompanied by a

discussicn indicating that the Committee warted emphasis placed on

moderate reserve expansion.

having

Then the Accourt Management would have to

operate in terms of some aggregate reserve variable and let the chips fall

where they might with respect to money market conditions.

Most of :he time,

he thought, the two instructions were compatible, although not necessarily

from day to day.

There had been short periods when they were not compatible.

Mr. Robertson said he thought that as Mr. Stone construed the

Committee's intent money market conditions were the primary factor and the

rate of reserve growth was secondary, and Mr. Stone affirmed this statement.

5/26/64

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Mr. Daane commented that the desired rate of reserve growth

responsive to the strength of credit demand would be automatically

accommodated if money market conditions, including the free reserves

variable, were held within some fairly narrow range.

Mr. Robertson said

this would be true if everything worked perfectly, but this would not

necessarily be the case, and in fact had not been during the past weeks.

As a result, the Manager had to exercise his discretion in deciding which

part of the instructions he was to follow.

Mr. Mills commented that there was a distinction between supplying

reserves and expanding bank credit.

To supply reserves did not necessarily

mean that bank credit would expand; the reserves had to be employed by the

banking system.

reserves

His impression from reading the figures was that total

had not risen more than fractionally.

support supplied had not been very great.

a considecable expansion in bank credit

In other words, the reserve

Nevertheless, it had encouragec

over a long period.

Mr. Balderston said that he had been impressed by the figures on

nonborrowed reserves shown in table C-1 of the staff reserve memorandum.

In the year ending with April, nonborrowed reserves had been increased by

about $625 million.

Member banks were, of course, left with whatever leeway

they wished to exercise with respect to these reserves.

But, in a sense,

this was a test of what the Desk had achieved in a year's time, despite

the day-to-day and week-to-week difficulties it encountered.

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5/26/64

Mr. Stone said there was no question in his mind that frequently

there was incompatibility on a week-to-week basis between the instruction;

relating to morey market conditions and to reserves.

He thought it impor

tant, in assessing the latter, to focus on trends rather than very short-run

fluctuations.

And he considered it the Committee's position to employ money

market conditions for operations on a short-run basis, recognizing that i:

met every three weeks and could assess developments with respect to the

various reserve aggregates at those intervals.

Mr. Swan said it seemed to him that at present, even in terms of

money market variables, conditions were a bit tighter than was consistent

with the directive.

seemed a little

low.

Free reserves at $36 mi lion for the current week

Why wait until Thursday to begin providing the reserves

that would be needed?

Mr. Stone replied that the preliminary reserve figures were hazard

ous; the money market itself was a much better indicator today of what the

final figures would show than the present estimates were.

Mr. Mitchell noted that Mr.

Stone had said he would not like to see

negative reserves appear for two or three weeks in a row, but he had not

seemed to be diturbed at the thought of their appearing for one week.

He asked whether Mr. Stone thought negative reserves for a single week

could have a significant impact on the market.

Mr. Stone responded that he had not meant to imply that he would

be unconcerned about even one week; he had tried to avoid a negative figure

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5/26/64

because it would, indeed, have some impact or the market.

He thought the

impact would be temporary if free reserves became positive again in the

following week.

But if negative reserves appeared for two or three weeks

in a row that definitely would be read by the market as a signal that the

Committee had changed policy.

In short, Mr. Mitchell said, if a negative free reserve figure was

published for one week, it would raise a question in everybody's mind.

Mr. Stone agreed, and added that while the Desk tried to avoid negative

figures there was an unavoidable risk that they would eventuate if the

Committee set a target under which free reserves would at times be below

$100 million as well as above.

Revisions in weekly average figures on a

single day had been as large as $85 million.

The risk of negative figures

could be avoided, of course, by raising the target to $200 million or above.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

open market transactions in Government

securities and bankers' acceptances dur

ing the period May 5 through May 25, 1964,

were approved, ratified, and confirmed.

The staff economic and financial review at this meeting was in the

form of a visual-auditory presentation, for which Messrs. Garfield and

Hersey of the Board's staff joined the meeting.

Copies of the text of

the presentation and of the accompanying charts have been placed in the

files of the Committee.

The introductory portion of the review, presented by Mr. Brill,

was as follows:

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In the chart show this morning, we're departing from

earlier practices in several respects, and I'd like to say

a few words to put these changes in perspective.

Formerly, the chart show presentation took the place of

both the written staff review, distributed in advance of

Committee meetings, and the oral staff interpretations pre

sented at the meetings. It has become increasingly evident

that within the necessary time constraint of a half-hour or so,

we cannot adequately review all elements of the economy :hat

should be brought to Committee attention and also study in

depth specific elements of special interest to the Committee.

To try to meet both objectives, therefore, we're experimenting

with a new procedure whereby the comprenensive staff review is

distributed as usual to the Committee in advance of the meeting,

and the chart show is devoted to a more intensive analysis of a

limited number of economic problens.

This morning our explorations carry into three subjects

suggested by Committee discussion in recent meetings. The first

is that of capacity utilization and prizes--the relatiorships

that obtained in earlier cycles, and the current situation and

trends. Next we turn to a key problem in the financial scenebank credit expansion, its sources, its composition, its relation

to total credit flows and its repercussions on bank liquidity.

Turning to the international scene, we will review development

in interest rates here and abroad and their relation to interna

tional capital flows. Concluding, we will draw on these special

studies as well as the comprehensive staff review already

distributed to appraise the balance of economic forces a-d its

implication for policy.

The concluding portion of the review, presented by Mr. Koch: was

as follows:

Our conclusion this morning is based not only on the

selected elements in the economic situation as discussed

earlier bu: also on the entire situation as analyzed in the

staff report distributed to you last week.

As the report indicated, some of the economic news that

has become available since our last meeting suggests a pick

up in the pace of the expansion. The 7 per cent rise in new

orders for durable manufacturers in April, although covering

only one month, was impressive, as was the rise in employment.

5/26/64

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Our index of industrial production rose a full point last

month, following three months of smaller gains. Thus,

activity in the business sector seems to be catching up to

the air of optimism that has prevailed there for some time.

Two features of the situation at the end of the first

quarter favorable to expansion were the scheduled further

rise in plant and equipment expenditures and a low inventory

sales ratio. Additions to stocks at both producers and dis

tributors were small in the first quarter, although dealer

stocks of autos rose.

Despite the rise in business activity this spring, the

industrial commodity price average has remained stable, while

prices of foods and foodstuffs are down a little in recent

weeks. Regarding the recent rise in capacity utilization

and its possible upward pressure on prices, we noted earlier

that the situation appears rather different today from what

it was in the expansion of the middle 19 50's. This is cue

to a number of reasons, including a greater apparent business

awareness of the threat of longer run competition, both from

substitute products and from abroad. Recent price develop

ments seem to bear this out.

At this point further expansion

in activity and general price stability appear compatible,

assuming that inflationary developments abroad are held in

check. Testing of markets will no doubt continue, however,

and a close watch will need to be kept on price and cost

changes.

Very recent data on the consumer sector are also

stronger.

Preliminary figures indicate that the rate of

retail sales in the first half of May may have approached

the February high. The latest Census Quarterly Survey of

Consumer Buying Intentions, conducted in mid-April, suggests

that buying of durable goods will rise further in the months

ahead.

In the financial area, the pace of expansion of bank

credit, the money supply, and other forms of liquidity seem

to have slackened somewhat thus far this year compared with

last year. Banks continue to sell Government securities and

to moderate their acquisitions of municipals in order to meet

sizable loan demands. As a result, their liquidity positions

have been reduced further. Revised seasonal adjustment

factors for our money supply series suggest that the recent

annual rate of increase has been less than we had thought

earlier, 2.9 per cent for the first four months of the year,

as compared with 3.3 per cent in the same months of 1963.

5/26/64

-18-

Earlier in the presentation, we also analyzed several

longer run aspects of the financial situation that are of

particular relevance to monetary policy formulation. We

concluded, first, that the private economy's liquidity,

although it has risen contracyclically, does not look

excessive when related to either private expenditures or

to private debt; second, that the rise in liquidity has

consisted mainly of near moneys rather than money itself

and we can influence the rate of conversion of near moneys

into money; third, that the large current share of total

credit flows provided by commercial banks reflects essen

tially the structural shift in the savings flow and is not

in and of itself a cause of inflation; and, finally, that

the reduced current liquidity of banks as well as other

financial institutions means that expansion of their

lending and investing activities would likely be curbed

promptly by lessened availability of bank reserves and

the accompanying rise in interest rates.

Finally, on the international front, the table on the

screen compares the annual rate of deficit in the balance

of payments in the last 10 months to the average of 1959

and 1960, a period selected because in early 1960 European

demand was, in a cyclical phase similar co early 1964. It

shows clearly that the major factor of long-run improvement

has been trade. Nevertheless, our presentation this morning

indicated that the rise in short-term interest rates and

rates paid on time deposits since last summer has reduced

and at times actually reversed outflows of money market funds

into Euro-dollars.

It also showed that capital movements are influenced by

a wide ran.,e of forces and conditions other than interest

rates. Among these, the size and capacity of our financial

markets and the general availability of credit here have been

among the more important. Some modest reduction in credit

availability might contribute to an increased reluctance

on the part of banks to make marginal loans to overseas

borrowers.

Domestic considerations, however, do not suggest the

need for credit curtailment. Economic expansion still appears

to be balanced in character and not so rapid as to be unsus

tainable. There is little evidence in financial or nonfinan

cial markets of a rebirth of inflationary expectations. There

is still a way to go in achieving more satisfactory use of

resources, and the current posture of policy can contribute

to this objective.

5/26/64

-19

At the conclusion of the presentation Mr. Daane commented that

he thought the new technique of focusing on special areas was much more

productive than

the earlier, broader-ranging chart shows.

Mr. Hickman agreed, and added that he thought the particular

areas that had been selected were those that warranted examination most.

He congratulated the staff on both the choice of subject matter and the

presentation itself.

Mr. Balderston then called for the usual go-around of comments

and views on economic conditions and monetary policy beginning with

Mr. Treiber, who presented the following statement:

Business expansion continues its orderly advance.

In general, the outlook appears to be one of quickening

tempo throughout the economy. April was marked by a good

increase in industrial production and in new orders for

manufacturers' durable goods. Manufacturers' inventories

have rema:.ned steady while sales have risen. For business

as a whole, the ratio of inventory to sales is lower than

at any time since 1955.

Residential construction activity continues at a good

level. So far, consumer buying, as reflected in retail

sales, continues to show no discernible reaction to the

tax cut. Apparently many consumers have been taking ad

vantage of the tax cut to reduce their debt. This develop

ment lays a good basis for further expansion later.

The price picture continues about unchanged. While

wholesale prices declined 0.1 points in April, industrial

wholesale prices rose 0.1 points. Raw industrial prices

have declined after substantial rises. Of the specific

price announcements in the last few weeks, there have

been more reductions than increases. Members of the National

Association of Purchasing Agents expect a buyers' market

over the rest of the year.

Total employment rose substantially in April but the

increase in the civilian labor force was slightly larger.

The over-all unemployment rate remained unchanged, as did

5/26/64

-20-

the unemployment rate for married men. The long-term unemploy

ment rate, i.e., unemployment for 15 or more weeks, declined.

Bank credit showed little change in April following a

substantial advance in March. Bank credit growth may have

slowed down somewhat this year; but as yet the evidence is

inconclusive. Current loan forecasts of the major New York

City banks indicate a moderate loan demand. But bank loan

deposit ratios have risen further, and the banks could find

themselves under pressure if loan demand should become

vigorous as the economy gains further momentum.

So far this year our balance of payments experience has

been quite encouraging. The good record is due, in part, to

such transitory factors as large grain exports to the Soviet

Bloc, unusually low imports, and small sales of foreign

securities in our capital market. For the remainder of the

year the outlook is not as good. We cannot expect such good

results in a number of areas. We are likely to have a sub

stantial deficit during the remainder of the year. I believe

we will have to keep the balance of payments in the forefront

of our policy considerations over the remainder of the year.

Britain's trade deficit rose sharply in April. Since

the last meeting of the Committee, rates on British Treasury

bills have risen somewhat. Continuing inflationary pressures

on the European Continent could very well lead to higher in

terest rates there. If later there is a further increase in

interest rates abroad, present United States short-term in

terest rates might well be inadequate to protect Lhe United

State against an adverse movement of funds.

The recently declared opposition of the AFL-CIO executive

council to the Administration's guideposts for noninflationary

wage settlements does not augur well for wage contract ne

gotiations this summer. There could be strikes, delays, and

inflationacy wage settlements. A .age-price push would undo

the gains experienced in our cost picture in receipt years, with

deleterious effects at home and abroad.

The present situation calls for a high degree of alertness.

I am not persuaded, however, that it calls for d major change

in policy at this time.

Within the present directive I would hope to see the

Federal funds rate consistently at the discount rate, free

reserves between zero and $100 million, the rate on three-month

Treasury bills above the discount rate as well as below, and

some increase in member bank borrowing. I see no reason to

change the language of the directive except to delete the

reference to the Treasury refunding.

5/26/64

-21

Mr. Shuford said he would like to join with the others who had

expressed appreciation for the revised form of the chart presentation.

He thought it had been excellent.

Mr. Shuford then noted that national economic activity continued

to expand, as the presentation had indicatec.

The latest data showed

significant rises in employment and industrial production, and construction

outlays continued at a high level.

There had been impressive gains in

new and unfilled orders of durable goods manufacturers.

and instalment credit continued to rise in April.

Personal income

Retail sales had been

high for the past three months, up at a 9.6 per cent annual rate from

the previous three months.

It seemed that the national economy was strong

and that the expansion might be accelerating.

In the Eighth District, Mr. Shuford said, economic activity had

not been as strong as in the nation.

weeks suggested continued hesitation.

Data received in the last three

Industrial use of electric power

in the major metropolitan areas had drifted down for the last several mon:hs.

Si ce the last meeting of the Committee, Mr. Shuford continued,

there appeared to have been some contraction in the money supply, a develop

ment which he considered appropriate.

Over the past year growth had been

at the relatively rapid rate of 4 per cent.

In light of the current rate

of economic expansion and the prospects for acceleration,continued rapid

increase in the money supply could contribute to an unsustainably high

-22

5/26/64

rate of expansion.

He would prefer a more moderate rate of increase

in bank reserves and money even though this meant a little less ease in

the money market.

Mr. Shuford did not favor an overt change in policy at this time.

However, if strong credit demands should work in the direction of less

ease, he was inclined to think that this should not be offset.

His

thinking ran :.n terms somewhat like those outlined by Mr. Treiber.

He

suggested that it would be appropriate for the three-month Treasury bill

rate to fluctuate in the range of 3.50 to 3.60 per cent, and for free

reserves to be held in or close to the $50 to $100 million range.

would not recommend a change in the discount rate.

He

With respect to the

directive, he shared Mr. Treiber's view that the one adopted at the last

meeting remained appropriate except for deleting the reference to the

Treasury refunding.

However, he had no objection to the proposal that had

been submitted to the Committee by the staff.

Mr. Bryan reported that recent statistics seemed to indicate that

activity 'n the Sixth District was going along about as in the nation.

There were the usual number of series in which the District was doing

less well than the

nation

and in which it was doing better, but he could

not read any particular significance into the recent District data.

It seemed to Mr. Bryan that national developments were proceeding

in surprisingly good fashion.

He saw no evidences of an uncontrolled

boom, and certainly none of recessionary tendencies.

Accordingly, he

-23

5/26/64

advocated no change in policy.

In terms of free reserves, he favored a

central target of about $100 million, in full recognition of the cir

cumstances that required that the Manager have some leeway in that figure.

With regard to some of the preceding discussion, Mr. Bryan remarked,

he appreciated fully the psychological jar that might come from a negative

free reserve figure.

However, he felt that the longer the period that

reserves remained positive the greater woul

negative.

be the jar when they became

He did not know how long the Committee could go without a

negative free reserve figure, but if it was much longer he suspected that

the economy would get a considerable jolt from the appearance

of such a

figure despite the fact that expansion easily could proceed with constant,

moderately negative free reserves.

Over the past year, total reserves

had increased by more than 3 per cent, although the movement had not been

steady.

For the time being, and in terms of a lorger run than three week:,,

he favored aiming for expansion in total reserves at an annual rate of

about 3 to 3-1/2 per cent.

He did not favor a change in the discount rate

at this time.

Mr. Bopp reported that economic conditions continued to improve in

the Third District.

Unemployment claims had declined seasonally to a

level lower than in recent years.

Help-wanted indexes had risen both in

Philadelphia and in the United States, and department store sales again

had gained over last year but still did not match the nation.

Busines

loan

at weekly reporting banks had increased slightly

during the past three weeks, but by more than in the same period last

-24-

5/26/64

year.

The basic reserve position of reserve city banks stood now at

about the same

level it had been for the past six weeks, and activity

at the discount window had been light.

Perhaps he was overlooking something, Mr. Bopp said, but it

seemed to him that determination of policy in the present environment

came down to a few clear issues.

problems:

The Committee was concerned with three

unceremployment of resources, the balance of payments, and

inflation.

Only the first of these was a matter of current urgency.

This was not to say that the Committee could ignore the other two.

The

balance of payments remained a problem and could become an acute one

at any time.

Some prices had been going up and perhaps enough more would

follow to qualify as an inflationary movement.

But at the moment

neither the balance of payments nor prices seemed to him to justify a

move toward restraint.

In this situation, he agreed with Chairman Martin that the

Federal Reserve should not "take the lead toward higher interest rates."

He would continue to use monetary policy to stimulate economic activity.

He would make no change in the directive (except for deleting the

reference to Treasury refunding) or the discount rate.

5/26/64

-25

Mr. Hickman said that the keynote of economic news for April, as

the chart show had indicated, was the sharp spurt in productive activity.

Of major importance was the snapback of new orders for durable goods after

two months of decline.

at a very high level.

Retail sales remained about the same as in Marcn

The evidence continued to suggest balanced, orderly

growth at a sustainable rate for the economy as a whole.

An important question at this time was whether there would be suf

ficient strength from other sectors of the economy to offset the expected

leveling in production of autos and steel.

advanced more than seasonally in April.

Both auto sales and auto output

On the basis of fragmentary data

for May, however, both were expected to decline somewhat from recent high

levels.

Steel production, seasonally adjusted, increased from March to

April and was possibly increasing slightly further in May.

All reporting

steel producers in the Fourth District expected new orders to be less in

May than in April on a seasonally adjusted basis.

Regardless of the strength in aggregate demand over the near future,

and recent near-record increases in employment, Mr. Hickman continued, be

could not expect that the large number of young and relatively unskilled

entrants into the labor force this spring would find jobs easily.

There

were increasing instances of shortages of skilled workers along with a

surplus in the unskilled group.

This was clearly reflected in the per

centages of unemployment in the various labor market categories.

April

unemployment among teenagers was an uncomfortably large 16.2 per cent,

5/26/64

-26

while for married men (as distinct from adult men discussed in the chart

show) it stood at a record low of 2.9 per cent.

Recently, there had

been repeated reports of serious shortages of skilled labor in the

machinery industry.

In view of the expected large demand for capital

goods, this could create a bottleneck and lead to higher prices for

machinery and machine tools.

These structural problems in unemployment

were not susceptible of easy solution by monetary means.

The various measures of bank reserves in recent weeks appeared

to Mr. Hickman to have been quite consistert with the Committee's directive

and intent.

Free reserves had averaged lower over the past three weeks

than in most recent months, while borrowings had been somewhat higher.

On the other hand, intermediate- and long-term yields had moved slightly

lower, partly because of expectational factors and partly because of

strong nonbank demand.

Although these drifts in yields might seem minor in themselves,

and not wholly undesirable from the standpoint of the domestic situation,

Mr. Hickman continued to be bothered by their possible adverse implica

tions for the U. S. balance of payments.

With inflationary pressures

persisting abroad, certainly no movement toward lower yields could be

expected there.

Under these circumstances, he thought the Committee

should consider the desirability of some firming of rates here.

could be done under the terms of the present directive.

This

He would delete

the reference to the Treasury refunding, but he had rather mixed feelings

5/26/64

-27

about the other revisions suggested in the staff's draft.

In particular,

the reference to the recent quickening of business orders was based on only

one month's showing of a very volatile series.

Also, he was not sure in

what sense manpower was "underutilized" in view of the fact that unemploy

ment among married males was now at a record low.

Mr. Daane said that at the recent American Bankers Association

meeting in Vienna he had found a perceptible change in attitudes with re

spect to the U. S. balance of payments performance.

In his judgment there

was, perhaps, too much confidence expressed that the U. S. was beyond the

problem and that there was no longer any need to be concerned with

Europeans were concerned with their own inflationary problems.

it.

The

To Mr. Daane

this underscored the need Mr. Treiber had mentioned for the Committee to

keep the balance of payments in the forefront of its considerations.

He

thought the Committee could not put the problem aside at this moment even

though the first quarter figures were so much better.

A slippage could

have a very adverse effect, and he did not think there was anything in the

recent improvement to indicate that it was p:rmanent.

In the light

this, and in light of the attitudes he had found abroad,

f

Mr. Daane thougt

it behooved the Committee to keep the balance of payments problem in mind.

Having said that, Mr. Daane remarked, he would add that in his

judgment the recent quickening of domestic economic activity was what the

Committee had wanted and what it would like to see continue.

nothing in the domestic area to justify a change in policy.

He saw

He would make

-28

5/26/64

no apology for maintaining policy unchanged because he thought that

current policy was contributing to the Committee's goals.

Operationally,

he would not go along with suggestions that it was desirable to try to

push interest rates up or free reserves down.

On the contrary, Mr. Daane

thought that the Committee had been living a little too dangerously with

respect to free reserve figures.

He would give the Manager the latitude

suggested by the range of zero to $200 million, but he would prefer to

have any errors on the higher side rather than have the Manager skate

too close to zero and run the risk of showing negative free reserves.

Mr. Daane said that he would not change the directive in the

manner sugges:ed by the staff because he thought it implied too much in

the reference to "recent quickening."

He would stay with the present

directive, except for deletion of the Treasury financing reference.

He

would not charge the discount rate.

Mr. Mitchell commented that he agreed with Mr. Daane that the

Manager was causing the Committee to live too dangerously.

He would be

prepared to rise the free reserve target to $250 or $300 million if this

was necessary to avoid the risk of ending us with a negative figure.

He

would rather postpone having net borrowed reserves until the Committee

wanted to give the market a jolt, rather than produce a negative figure

inadvertently and have to operate to raise it in the following week.

Mr. Mitchell thought that the differences in view among Committee

members were quite small, but nevertheless significant.

Most seemed to

5/26/64

-29

feel that over this long period of economic expansion the Committee had

maintained a policy of moderate ease.

In his judgment, however, there

had been a gradual move from ease to tightness.

quite taut at present.

Banks were extremely illiquid, and the turnover

in deposits was high and continuing to rise.

symptomatic of

To him conditions appeared

These circumstances were

greater tightness and tensicn than many thought existed.

Small probings toward greater firmness in monetary policy could cause

difficulty, and could contribute to thwarting the national objectives o,

increasing activity and reducing unemployment.

He thought the Committee

was doing about the right thing but that it -was cutting matters a little

too finely.

Mr. Mitchell said he was prepared to accept either the existing

directive or the staff draft.

In the latter, he agreed with Mr. Hickman

that it might be desirable to omit the reference to business orders,

since the rise was a one-month development.

He would substitute the word

"apparent" for "recent" in referring to the quickening of the expansion.

In general, he thought it desirable to revise the directive frequently,

and he was satisfied with the staff draft even though its tone seemed to

suggest something to some people that it did not suggest to him.

Mr. Shepardson said that he, too, had found the new type of chart

show much more helpful to him than earlier ones.

With respect to

economic developments, all the information before the Committee seemed

indicative of a gradual and sustainable expansion in business.

The Com

mittee certainly was concerned with the problem of unemployment, but this

5/26/64

-30

problem had different segments and in his judgment the segment that

appeared to be most serious was not susceptible to relief by monetary

policy.

He thought the Committee had been providing the opportunity for

expansion of business.

If there was to be healthy and sustainable

expansion, it had to come out of a growth in business itself;

the Com

mittee's obligation was to accommodate this growth and not to over

stimulate the economy.

It seemed to Mr. Shepardson that the Committee had been following

an appropriate policy as measured by the amount of expansion in reserves.

He was please

that, if anything, there had been a little less reserve

expansion in the recent period.

This, he thought, was well within the

scope of the guidelines that have been given the Manager.

He favored

continuation of the present policy as reflected in the indicators of

recent weeks.

On the directive, Mr. Shepardson thought there was some

advantage in the draft proposed by the staff.

He agreed with Mr. Mitchell

on the desirability of changing the word "recent" before "quickening" to

"apparent."

Governor Robertson made the following statement:

At each of the Committee meetings since the enactment of

the tax cut, discussion here has suggested the need for a

policy of "watchful waiting," pending clarification of the

resulting stimulus to business activity. There has been con

cern about a possible boom in business capital spending, a

sharp upsurge in credit demands, and the triggering of a

wage-price spiral. But in the weeks that have followed, the

facts as they have come in describe a continued relatively

gradual business and credit expansion. The very latest

5/26/64

-31-

statistics suggest a slight quickening in the rate of

business advance, but this seems no more than what might

have beer expected--or even hoped for--if the economy is

to make some steady headway in employing its idle re

sources. Meanwhile, a remarkable restraint has charac

terized business price and inventory policies. No spurt

of inflationary ebullience has developed. Signs of

improving employment are appearing, without yet any sign

of approaching bottlenecks that could create distortions

in the growth of output.

It seems clear that we are moving upward in a gradual

advance n activity that is not threatening to get out of

hand, and to my mind this justifies a positive policy of con

tinuing to provide a generally stimulative monetary environ

ment. Economic developments calling for a less stimulative

policy may well develop at a later date, but that is no reason

to tighten credit at this juncture.

There may be some thought that the recent substantial

flow of bank credit to foreign customers represents a develop

ment to waich monetary policy should attend. I could not

disagree nore. General monetary policy needs to be adapted to

general credit conditions, and, in general, credit conditions

in this country do not call for restraint. Foreign loans by

big domestic banks are a very narrow and special kind of

credit outlet, It sometimes seems hard to distinguish the

portions of such credit that finance part of our heartening

trade surplus and the portions that have an unrequited adverse

effect upon our balance of paymerts.

It strikes me as rather

ironic that sizable amounts of this foreign lending are being

made by some of the same big bankers who have been bemoaning

the "payments problem."

It might not be amiss to seek an

appropriate way of reminding some of the most aggressive foreign

bank lenders of this seeming iron , and also of the desirability

of prudent limitations on their exposure to foreign currency

hazards, and of the wisdom of avoiding pyramided credit ex

tensions not closely related to the financing of our interna

tional trade.

As for the directive to the Desk, I would be agreeable to

continuing the present language unchanged, aside from dropping

the reference to Treasury financing. And I would hope the

Manager could implement this by achieving both objectives

mentioned in the final paragraph, namely relatively the same

money market conditions and some moderate expansion in aggre

(As a practical matter, if we start to

gate bank reserves.

experience a persisting shortfall in aggregate reserve expansion,

then I should like to see the Desk allow a little compensating ease

in the money market in order to cushion the reserve contraction.)

5/26/64

-32

Mr. Robertson added that he had no objection to the staff draft,

with the substitution of the word "apparent" as suggested by Mr. Mitchell.

He also agreed with Mr. Mitchell that it was desirable to revise the

directive frequently.

Mr. Mills said he was in agreement with the position taken by

Mr. Mitchell, although he would not be quite as free and liberal as

Mr. Mitchell would in raising the level of free reserves.

On the other

hand, Mr. Mills said, he thought the Committee should guard against

allowing the level of free reserves to move down to or touch the zero level.

Mr. Mills added that he would be prepared to accept either the

existing directive or the proposed revision with the substitution of the

word "apparent" for "recent."

However, he did not think the Committee's

problem ended with considering the wording of the directive if in the

course of its implementation by the Management of the System Open Market

Account it

was subject to another interpretation.

The matter had ccme

up often, but he thought there were good reasons to believe that the

Committee had been trapped into specifying objectives in terms of magnitudes,

particularly in terms of some specified general level of interest rates

or volume of free reserves.

He thought the conduct of operations by the

System Open Market Account had been handicapped in that regard.

The way

to break free from these shackles was to move toward allowing the market

as such to give direction to the System's policy rather than for the System

to give a positive direction to the market as to what its specific intentions

were. The mechanics of the shift toward a more flexible policy would be

5/26/64

-33

to not offset fully the fluctuations that occurred in the vault cash

factor and the float factor.

If, as it originally did, the Committee

allowed such changes to pass by with less notice the result would be a

more responsive market, and one that would give more leads to System

policy.

Care would have to be taken to avoid negative free reserves,

but he had no concern in that regard.

By and large, Mr. Mills said, he would accept the directive and

he would hope that the Committee could move toward more flexibility in its

policy actions, becoming more responsive to the market and permitting

the market to move more slowly to its (the Committee's) ideas rather than

forcing its views on the market.

Mr. Wayne reported that the trend of Fifth District business

continued upward, and improvement seemed more broadly based as a result

of recent developments.

The District's prircipal manufacturing industries

had continued to increase production.

Textile producers had all the current

business they could handle and, although few chose to talk about it,

there

was considerable evidence that most of the prices were now reflecting

some of the recent 6.5-cent-a-pound cotton cost reduction.

Retail trade

showed noticeable improvement in the first half of May, according to retail

store executives polled in the recent survey of the Richmond Bank and as

reflected in its department store series.

The latest statistics on

building permits and contract awards indicated substantial new additions

to the already large volume of District construction projects.

In line

5/26/64

-34

with expectations, first quarter cash receipts of District farmers were

1 per cent belcw last year's level.

In the latest three weeks, loan

demand, especially in the business sector, appeared to have been somewhat

stronger in the District than in the nation as a whole.

For the country as a whole, most of the available information

indicated that the economy was moving forward with considerable strength

and with no notable signs of inflationary pressure.

The large increase

in employment and the substantial rise in industrial production last

month were solid contributions to the general improvement.

Weekly data

through mid-May suggested some gains in retail trade, although it remained

to be seen how substantial these were.

The corporate profits picture

remained favorable, supporting general expectations of rising investment

outlays in the months ahead.

Continuing strength in new orders for durabl:

goods and in manufacturers' backlogs also made for an encouraging prospect.

The one doubtful element in the current situation was the highly volatile

housing starts series.

Expenditures for new construction, however, were

apparently holding firm at their peak level.

over-all

As Mr. Wayne saw it, the

oicture was one of strength at a high level of activity.

In the policy area, Mr. Wayne said he found himself in almost

complete agreement with Mr. Daane.

He was convinced that the Committee's

moderate course over the past several weeks had been the correct one.

The money market had shown encouraging stability in the face of shifts in

expectational patterns, and business expansion was apparently proceeding

5/26/64

-35

without undue inflationary pressure.

The balance of payments problem

continued of diminished urgency, although preliminary April figures were

a reminder that this problem was still with the Committee.

On the whole,

Mr. Wayne felt that the Committee's policy of moderation had paid off

thus far and he saw nothing in either the domestic or the international

situation that indicated a need for any change at this time.

leave the discount rate unchanged.

He would

With respect to the directive, he

could accept either the old one, deleting the reference to Treasury

refunding, or the staff draft.

Mr. Clay said that thus far in 1964 bank credit in Tenth District

weekly report..ng banks had expanded slightly more than last year.

This

was the net result of a much larger increase in loan volume and a nuch

larger decrease in security holdings.

Both real estate and consumer loans

had expanded somewhat more than a year ago, and loans to nonbank financial

institutions had shown marked strength relative to 1963.

Business loan

volume, however, had shown pronounced weakness this year, although there

had been a marked increase in business loans during the first half of May.

The loan categories most important in explaining the recent improvement

in business loans were durable goods manufacturing, retail trade, and the

transportation, communication, and other public utilities group.

The

growth in loans to retail trade was especially striking, and came on the

heels of laggard growth in retail trade loans during the previous 4 months.

Holdings of U. S. Government securities by District weekly

reporting banks had been sharply reduced in recent months.

This Government

-36

5/26/64

security liquidation was a continuation of a pattern dating back to the

middle of 1963.

Part of the pressure on the security portfolios of

District banks appeared to stem from the lethargic pace of deposit growth,

principally I.P.C. demand deposits.

a different picture.

The time deposit component presented

Since year end, these deposits had grown more than

in the comparable period last year.

This represented an extension of

the accelerated growth of time deposits during the last half of 1963.

Mr. Clay remarked that in analyzing the performance of the

national economy and in determining the appropriate public policy pre

scription, it was necessary to distinguish the yardstick that was being

applied.

The achievements of this business upswing were notable indeed

in terms of the degree of expansion, the length of its life span, and

the stability of prices.

Another yardstick had been and continued to

be this accomplishment weighed against the economy's resources and its

potential for growth in an orderly and sustainable manner.

It was from

this latter viewpoint that a continuation of the Federal Reserve System's

current nonetary policy had to receive its justification.

The pattern of bank credit expansion during this upswing had

differed markedly from that of other periods in that it had not shown

the typical reduction in the rate of credit expansion as the upswing

progressed.

It was also true, however, that the economy's resources and

productivity continued to grow, that a substantial unemployment problem

persisted, and that the likelihood of price inflation did not appear

5/26/64

-37

imminent.

Recent economic developments exhibited considerable unevenness,

but there was evidence of some acceleration in certain important sectors.

It had to be recognized that commonly accepted projections for the year

end level of economic activity implicitly involved a significant accel

eration in the over-all pace of economic activity.

Mr. Clay expressed the view that for the period immediately ahead

it would be appropriate to continue monetary policy essentially unchanged.

The staff draft suggested for the current economic policy directive appeared

to be quite satisfactory, although he also would be satisfied with renewal

of the old directive.

He concluded by observing that the Federal Reserve

Bank discount rate should remain unchanged.

Mr. Scanlon reported that businessmen in the Seventh District

continued to be optimistic.

Total department store sales for the last

four weeks were 11 per cent over last year's volume.

He saw little

evidence of any tendency for prices to rise at the wholesale level.

Even

capital goods firms with rising backlogs indicated that prices had been

raised only slightly since last fall.

Leaders in the machine tool industry,

however, were encouraging one another to raise prices.

In this industry

production would increase more rapidly were it not for shortages of trained

labor.

Mr. Scanlon said that demand for credit by both businesses and

consumers at District banks appeared to have strengthened in recent weeks.

Business loans of District weekly reporting member banks were 9 per cent

5/26/64

-38

above the level of a year ago in mid-May.

the rise had been 10 per cent.

than those for the nation.

In the previous twelve months

These increases were slightly greater

The large Chicago banks had continued to show

fairly comfortable reserve positions, with deposit gains in the past

three weeks more than covering loan expansion and with a very small net

position in the Federal funds market.

They had continued to increase

their outstanding CDs.

Although turnover of negotiable time certificates had been very

heavy in recent months, Mr. Scanlon said, there was less concern at

banks that reductions in outstandings might become serious.

large

In part this

reflected the easing of bill rates, plus the experience that, despite a

high withdrawal rate in April, outstanding negotiable CDs rose sharply.

In addition, a general confidence had developed that the ceiling rate on

time accounts would be raised if the differential over bills declined

appreciably at some time in the future.

With the pace of economic activity apparently accelerating,

Mr. Scanlon continued, and in view of prospective rate increases abroad,

it might be appropriate to permit short-term rates to move slightly higher

in response to seasonal pressures in the months ahead.

His own judgment,

however, was that the Committee should continue the current policy during

the next three weeks.

Therefore, he would renew the current directive,

deleting the reference to Treasury financing, and he would not favor

changing the discount rate at this time.

He shared Mr. Mitchell's view

with respect to the directive prepared by the staff and could accept it

with the word change that had been suggested.

5/26/64

-39

Mr. Deming reported that the Ninth District economy was going

along in good form.

Recent rains had helped crop prospects and had

generated some optimism.

There had been a slight quickening in the pace

of bank credit expansion in early May, although it was not up to last

year's rate.

The expansion was stronger at country banks than at city

banks.

As he had mentioned before, the Minneapolis Bank did a survey of

some of the large industrial concerns headquartered in the District with

operations both within the District and beyond, and in some cases inter

national.

These firms were asked about prospects, in terms of output,

employment, prices, and profits, for the next three months relative to

the past three months.

Responses in the mcst recent survey, taken last

week, indicated general optimism which seemed to have taken on some of the

air of exuberance.

and profits.

This was true with respect to output, employment:,

In connection with prices, one or two of the firms said

their prices would go up over the next three months and one or two said

they would go down, but most indicated that their prices would stay about

the same,

With respect to policy, Mr. Deming said he was in substantial

agreement with Mr. Daane; he would favor continuing policy as it was.

He had no strong preference as between the existing directive or the staff dr

with the proposed change in wording.

Mr. Swan said that following the first quarter, in which there had

been some modest gains in business activity, the Twelfth District appeared

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to have marked time in April and early May.

Total employment in the

Pacific Coast area was about the same in April as in March; a decline

in the Pacific Northwest was offset by an ircrease in California.

unemployment rate also was unchanged.

The

April saw another decline in

defense and space-related employment and present indications pointed to

further reductions at least through July.

Housing starts were up in

April but construction employment declined in several States.

In the

lumber industry orders were down in early May from a year ago and there

had been some slight weakening of prices.

On the other hand, Mr. Swan said, bank loan demand in the District

in recent weeks appeared stronger than a year ago.

This was particularly

true of business loans, and the increases were widely distributed among

the various loan categories.

The large banks were still net sellers of

Federal funds :.n the four weeks ending May 20, but member bank borrowings

from the Reserve Bank ranged from 10 to 15 per cent of the national total,

considerably more than the District's share in previous months.

On policy, Mr. Swan said that he saw no basis for tightening in

either the domestic or international picture.

It seemed to him that the

signs of an increase in the pace of expansion--in industrial production, in

new orders if they had in fact risen, and in the firmer tone of the labor

market--should be welcomed, particularly since they had been accompanied

by little change in commodity prices and by few indications of unsustainable

developments.

He noted that the upward courses in bank reserves, bank

credit, the money supply, and time deposits all had been moderate in recent

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months.

In general, he favored no change in policy.

In this connection,

he observed that apparently there had been a somewhat firmer money market

in the past three weeks than previously, with the Federal funds rate

constantly at 3-1/2 per cent, free reserves down slightly, and borrowings

up.

Bearing this in mind, he favored no further tightening, however slight.

With respect to the directive, Mr. Swan expressed a strong pref

erence

for the draft proposed by the staff.

It seemed to him that the

first paragraph of the directive should reflect the current situation,

and that there had been enough change in the general picture since the

last meeting to warrant revision of this paragraph.

He agreed with the

language change suggested by Mr. Mitchell.

Mr. Coldwell reported that conditions in the Eleventh District

were almost unchanged recently, with production, income, and sales at

record or near-record levels.

There were some problem areas, such as

cattle, where prices were down sharply and marketings were rising with

dry conditions and cost of feed, and the petroleum industry, where drillirg

activity was srill declining.

The major integrated oil companies were

all right financially but the independent companies were having a difficult

time.

Crude oil prices were weakening and stocks were high.

Loan demand

was quite good at District banks and the large banks were working every

penny, to the point of scheduled deficit positions.

They were making

continual Federal funds purchases and were borrowing from the Dallas Bank

more than occasionally.

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Mr. Ellis said that business in New England continued to be good

but it was not spectacular.

Manufacturers' new orders were rising, but

with output level from month to month manufacturing employment was rela

tively stable.

There seemed to be less concern than earlier about

unemployment, and unemployment insurance claims continued below year-ago

levels.

Nonresidential building was running 24 per cent ahead of 1963,

and residential building showed a gain of 36 per cent.

Real estate loans

of weekly reporting banks were 19 per cent ahead of last year as the

banks sought cutlets for the continued rapid inflow of time and savings

deposits.

The rate of growth of CDs in a year's time exceeded the national

rate by a substantial margin.

District banks had drastically decreased

their loans tc brokers and dealers over the year.

Thus, while business

in the District was notspectacular, its effect on District banks was

nearly so.

Turning to monetary policy, Mr. Ellis said that for some months

the Committee had been in a posture of "wait and see," wating to see how

the economy would respond to the tax cut.

The evidence as to the reaction

of business was beginning to be clearly established; the expectations of

a rise in capital outlays had been confirmed by the substantial increase

in new and unfilled orders in April.

Consumers were responding somewhat

more slowly.

In this situation, Mr. Ellis thought it appropriate that policy

should continue in a posture of watchful waiting.

His uneasiness stemmed

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from the feeling that it would be better if the Committee were watching

more as a neutral, from the sidelines, rather than as a participant.

Unfortunately from his viewpoint, it was clear that a move to neutrality

now would be viewed as an aggressive move.

Such aggression did not seem

appropriate to the Federal Reserve, especially in view of the market's

reaction to the Chairman's recent statement before the Advertising Counc.l.

Mr. Ellis therefore fell back on Mr. Iron's suggestion of three weeks

ago that the Committee instruct the Manager to resolve doubts on the side

of less ease while maintaining a posture of watchful waiting.

Mr. Ellis said that he had found the discussion about the direc

tive this morring highly interesting.

It was a useful illustration of

the continuing need for the Committee to give more attention to its

directive and to assume more responsibility for judgments that now

left to the Account Manager.

were

His personal view was that the Manager had

been doing very well in implementing policy.

He noted that Mr. Stone hac

described the free reserve target in terms cf a zero to $200 million

range.

He had thought the target range was $50 to $150 million, but he

was delighted to accept the Manager's version of a range from zero upward.

Along with that he would suggest fluctuation in the bill rate from 3.44 to

3.60 per cent, the range that had prevailed over the last six months.

Referring to Mr. Bryan's comments, Mr. Ellis said that the

Committee seemed to be caught between the alternative of giving the market

an occasional psychological jar with a negative free reserve figure, or

5/26/64

-44

avoiding this and setting up the chance to really jolt the market when

it wanted to change policy.

He would prefer the occasional jar, and

have the market come to recognize that a single low free reserve figure

should not be taken as signifying a change in policy.

The Committee

could then move in gradual steps rather than in jolts.

In concluding, Mr. Ellis said he thought the directive shculd

reflect recent developments.

Accordingly, he favored the draft proposed

by the staff with the substitution proposed by Mr. Mitchell of "apparent"

for "recent."

Mr. Balderston commented that he also would like to express his

appreciation for the new form of the chart presentation given to the

Committee this morning.

He was especially nappy about the strength and

balance of the economy in May, as recorded in the presentation.

He was

not suggesting that May would prove to have been the high point of the

expansion, but he thought it might be a point to which the Committee would

look back in the future as reflecting the kinds of economic conditions

that it desired and that it had hoped for before the tax reduction.

Mr. Balderston said that the consensus of the Committee clearly

favored a continuation of the policy of recent weeks.

Parenthetically,

he noted that he was among those who had been pleased with the implementation

of policy since the last meeting.

After a discussion of the specific language of the directive to

be adopted, Mr. Balderston suggested that a vote be taken on the staff

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5/26/64

draft with the substitution of the word "apparent" for the word "recent"

before "quickening."

Messrs. Daane, Hickman, and Mills each indicated

that he had certain reservations about the proposed directive but did not

consider them sufficiently serious to warrant dissenting.

Thereupon, upon notion duly made and

seconded, and by unanimous vote, 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 the reserve base, bank

credit, and the money supply for the purpose of facilitating

continued expansion of the economy, while fostering improve

ment in the capital account of U. S. international payments,

and seeking to avoid the emergence of inflationary pressures.

With the recent Federal income tax reduction, continued

strength reported in consumer buying plans, and anticipated

increases in business capital expenditures as immediate

background, this policy takes into account the indications

in most recent data on production, business orders, and

employment of some apparent quickening in the pace of

domestic expansion. It also gives con.ideration to the con

tinued relative stability in average commodity prices; the

persistent underutilization of manpower and other resources;

the country's improved, though still adverse, international

payments position this year; and the interest rate advances

over past months in important markets abroad.

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.

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

held on Wednesday, June 17, 1964, at 9:30 a.m.

Thereupon the meeting adjourned.

Secretary