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
ii Washington on Wednesday, June 17, 1964, at 9:30 a.m.
PRESENT :
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
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. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Brill, Furth, Garvy, Holland, and
Mann, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General As.sistant, Office of the
Secretary, Board of Governors
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6/17/64
Messrs. Eastburn, Black, Baughman, Tow,
and Green, Vice Presidents of the Federal
Reserve Banks of Philadelphia, Richmond,
Chicago, Kansas City, and Dallas, respectively
Messrs. Sternlight, Brandt, and Bowsher,
Assistant Vice Presidents of the Federal
Reserve Banks of New York, Atlanta, and St.
Louis, respectively
Messrs. Eisenmenger and Lynn, Directors of
Research at the Federal Reserve Banks of
Boston and San Francisco, respectively
Mr. Kareken, Economic Consultant, Federal Reserve
Bank of Minneapolis
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
May 26, 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 26 through June 10, 1964, and a supplementary report covering the
period June 11 through June 16, 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 again this week for the eighteenth
week in a row.
The Stabilization Fund had on hand $231 million with
prospective sales of roughly $66 million between now and the end of
the month, suggesting a month end balance of $165 million.
This total
might be increased by $15 million or so, representing the U. S. share
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of the Gold Pool intake during June.
On the London gold market demand
had been relatively light in recent weeks, but on the other hand the
Russians had remained out of the market.
Mr. Coombs reported that the exchange markets continued to be
characterized by cross-currents.
On the one hand, there was gratifying
evidence of a strengthening of confidence in the dollar in most exchange
markets, partly reflecting the favorable trend in the country's balance
of payments since last summer, the improved gold position of the United
States, and the emergence of both inflationary and balance of payments
problems in a number of European countries.
On the other hand, the
strenuous efforts of certain European central banks to counter such
inflationary pressures by credit restraint continued to induce a repa
triation of dollar investments by foreign commercial banks in an effort
to escape the liquidity squeeze on their positions.
Mr. Coombs thought
it likely that these exchange market pressures on the dollar would be
further intensified by seasonal factors, such as tourist spending,
durin- the summer months.
Switzerland remained one of the major trouble spots, Mr. Coombs
commented.
The U. S. still owed $130 million of Swiss francs under swap
arrangements with the Swiss National Bank and the Bank for International
Settlements.
However, he thought that after repeated delays the $100
million swap deal between the Bank of Italy and the Swiss National Bank,
which would indirectly enable the System to pay off $100 million of its
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6/17/64
Swiss franc debt, was now close to completion.
He had talked with both
the Swiss and the U. S. Treasury with respect to settlement of the
ramaining $30 million and he was hopeful that this remaining debt would
be settled on or before June 30 by a Swiss purchase of gold from the
U. S. Treasury.
Meanwhile, however, the Swiss National Bank had continued to
take in dollars as the Swiss commercial banks repatriated overseas
investments in order to strengthen their liquidity positions, as well
as to prepare for their end of June window dressing date.
As of
yesterday (June 16), Mr. Coombs said, the Swiss National Bank was
carrying $130 million over and above its traditional ceiling of $175
million.
He thought it would be inappropriate to draw upon the swap
lines to mop up part or all of these surplus dollar balances, since
the credit squeeze which produced them might continue for a good many
months to come.
In these circumstances, Mr. Coombs thought it would
be far better to work out some sort of a combined approach in which
the Swiss might undertake to lift somewhat the ceiling on their dollar
holdinge, and to take a few more medium-term Swiss franc bonds, while
the U. S. Treasury might sell the Swiss another $25 million or so of
gold.
If, on the other hand, as a result of the British election or
other developments, there should be speculative inflows into Switzerland,
Mr. Coombs thought that they might appropriately be dealt with by Federal
Reserve or other central bank credit operations.
If the bulk of such an
6/17/64
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inflow were to come from London, Mr. Coomb: said, he would be hopeful
that the Bank of England and the Swiss National Bank would themselves
absorb a goodly part of the pressure through a bilateral credit such
as that arranged during the sterling crisis of 1961.
The second trouble spot was the German mark situation, Mr.
Coombs continued.
During the late spring months, the mark had held
relatively steady as the very sizable German trade surplus was more or
less offset by capital outflows caused by announcement of a proposed
withholding tax on nonresident income from German securities.
During
the past ten days or so, however, strong buying pressure on the mark
had developed and since June 4th the Bundesbank had been forced to take
in a total of $265 million.
This change seemed
to be largely attrib
utable to a tailing off of capital outflows plus some temporary
tightening of the German market and window dressing for June 30.
There also had been some evidence of speculation arising out of reports
that high-ranking German financial officials; were inclined to favor a
widening of the margins on the mark.
however,
The Account had so far refrained,
from drawing on the swap to deal w.th the situation,
partly
because the German trade surplus might well run on for a good many
months to come and should,
therefore,
be dealt with by medium-term
credit arrangements, such an additional issues of D-mark bonds.
an additional issue was, in
fact, already planned in
million equivalent value July 1.
Mr.
Such
the amount of $200
Coombs thought that a resumption
of forward operations in German marks for Treasury account also would
6/17/64
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be helpful, and the Account had so recommended to the Bundesbank.
The
Bundesbank had agreed to such a resumption of forward operations as
soon as the forward premium reached 1 per cent, but was reluctant to
operate below that level for fear of undercutting its special investment
swap arrangements with the German commercial banks, which carried a rate
of 1/2 per cent.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
Open Market Account transactions in foreign
currencies during the period May 26 through
June 16, 1964, were approved, ratified, and
confirmed.
Mr. Coombs noted that two swap drawings in Swiss francs would
mature on Jun
30:
one for $30 million on the Bank for International
Settlements, and one for $20 million on the Swiss National Bank.
As he
had mentioned, he was hopeful that both drawings would be liquidated by
June 30 but, in the event that further delays materialized, he requested
the Committee's approval of renewal in each case for another three months.
Both drawings initially had been made on December 31, 1963, and this would
be the second renewal in each case.
Renewals of the drawings on the swap
arrangements with the Bank for International
Settlements and the Swiss National Bank, if
they should prove necessary, were noted with
out objection.
Mr. Coombs then observed that the $50 million standby swap
arrangement with the Bank of Sweden would mature on July 17, and he
recommended its renewal, with an extension of term from three to six
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months.
He .ad reason to believe that the Bank of Sweden would be
agreeable to such an extension.
More generally, Mr. Coombs said, as he had indicated in his
memorandum on this subject to the Committee dated June 12, 1964, he
thought it would be desirable to lengthen the terms of the standby
swap arrangements whenever possible.
(Note:
A copy of the memorandum
referred to has been placed in the files of the Committee.)
He believed
this would give the System's swap network a more solid appearance.
If
the Committee approved he would plan to negotiate extensions of the
terms of other arrangements as they approached maturity.
In response to Mr. Wayne's question concerning the attitude of
the French to such extensions of term, Mr. Coombs said the fact that
several of the swap arrangements already had terms of six and twelve
months would leave the French little oasis on which to protest in this
case.
He would plan to approach the French concerning an extension of
the term of the arrangement with them relatively late, after the terms
of most or all
other arrangements had been extended.
He thought they
probably would agree at that time.
Mr. Scanlon asked whether any other central banks might view a
term extension unfavorably, and if so whether the Account would press
the matter.
Mr. Coombs replied that he thought a majority of central
banks were clearly favorable, and that the others probably would go along
when he negotiated with them at a later date.
But in his judgment it
would be a mistake to press the matter if there was any resistance.
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Mr. Mills commented that there was rising discussion of growing
confidence in the dollar, and he asked whether the time was not approaching
when requests for extension of the terms of swap arrangements should come
as proposals from the other parties to the arrangements rather than from
the System.
The United States ccnstantly seemed to lead from weakness
rather than from strength, and it appeared to him that under present
circumstances it would be reasonable to let suggestions for extension
come from other countries.
Mr. Coombs replied that in each of the four arrangements whose
terms presently were greater than three months the initiative had come
from the other party.
Moreover, in the current discussions among the
Group of Ten several European countries had raised the question of
making such longer terms more general.
There seemed to be real advantages;
to accelerating the process at this time.
He did not think that in past
negotiations the other countries involved had thought the United States
was leading from weakness.
The dollar held so central a place in the
international payments system that other countries expected the United
States to feel a deep sense of responsibility for the whole system.
Mr. Swan asked what advantage there was in having the arrangements
variously on six, nine, and twelve month terms, rather than employing six
month terms on a uniform basis.
Mr. Coombs commented that to set all
terms at six months would mean cutting back the two that now were at
twelve months.
In his judgment, the fewest problems would be posed if
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term extensions were negotiated on a gradual basis; he would expect
all of them to be at twelve months in due course.
Mr. Mitchell asked whether Mr. Coombs felt the System made any
sort of moral commitment to accommodate the needs of the other country
when it entered into a swap arrangement.
In his judgment, arrangements
with terms up to twelve months made sense in the case of major countries,
but he wondered whether there was any advantage to longer-term swap
arrangements with smaller nations of only peripheral importance in
connection with U. S. trade and payments.
It was possible, he thought,
that the System might find itself in an awkward position if it had a
twelve-month swap arrangement with a country of the latter type which
began encountering serious payments difficulties.
Mr. Coombs commented that the System could decline to agree to
a proposal for a drawing under a standby swap arrangement, and it might
want to do so if the other country was in a particularly bad situation,
but he thought it was desirable in genera
of any doubt.
to give the country the benefit
There also was no commitment to renew standby arrangements
when they matured.
However, they always had been renewed in the past,
and a failure to renew in a particular case would risk giving the
impression that the network was beginning to erode.
Because of the
expectation that maturing arrangements would be renewed, the proposal
to lengthen their terms really had few substantive implications.
The
advantage was that longer term agreements would give an appearance of
6/17/64
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greater solidity to the network which, he
thought, was of particular
importance now in light of the discussions under way on the
future of
the international payments system.
Mr. Mitchell commented that he thought the mistake had been made
when the network originally was extended to include some of the countries
of peripheral importance.
Mr. Hayes observed that most of the smaller
countries in the network--such as Austria and Sweden--were
solid condition.
Mr. Furth added
in pretty
that the support given by some of
these smaller countries in various international meetings to the U. S.
position stressing the viability of the present payments system was
perhaps attributable in part
to the fact that the System had entered
into swap arrangements with their central banks.
Renewal of the swap arrangement with
the Bank of Sweden, with extension of term
from three to six months, as recommended
by Mr. Coombs, was approved.
Chairman Martin suggested that the Committee
authorize negotiation
of extensions to a period not to exceed twelve months of the terms of
maturing swap arrangements, and no objections were made.
Mr. Coombs
then noted that the Committee had received his
memorandum dated June 11,
1964, concerning the request of the National
Bank of Belgium to increase the
rate of interest applicable
to funds
drawn and invested under the swap arrangement with that Bank from 2-3/4
per cent
to 3-1/2 per cent.
(Note:
A
copy of this memorandum has been
6/17/64
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placed in the files of the Committee.)
He recommended approval of
the Belgian request, which, he said, would be acceptable to the U. S.
Treasury.
An increase in this rate of interest,
as recommended by Mr. Coombs, was approved.
Chairman Martin then invited Mr. Hayes to bring the Committee
up to date on the negotiations among the Group of Ten Deputies with
respect to statistical reporting arrangements.
He noted that Mr. Daane,
who presently was attending the meetings in Paris, would be able to
make a fuller report on this subject at the Committee's meeting of
July 7.
But since the matter was likely to be discussed in Basle on
July 6, it was desirable for members to have an opportunity to make
any comments they had today.
Mr. Hayes said that, as the Committee probably knew, the Group
of Ten study group had put out a Deputies' report covering a number of
subjects.
Among other things, an effort had been made to systematize
reporting on methods of financing imbalances in international payments.
In dealing with this subject, the report referred at several points to
swaps and similar short-term arrangements, although it did not devote
a great deal of space to them.
The American position consistently had
been that it was necessary to proceed carefully with respect to reports
on these operations: because of their highly sensitive character, it
was important to preserve their confidentiality.
The Americans also
had noted that by the very nature of these operations, it was essential
6/17/64
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to be able to work things out promptly, and any arrangements that
required multilateral surveillance would be unfortunate.
The Deputies
agreed with the American view that central bank credit operations were
specially sensitive, and excluded them from the regular reporting
system.
Their report included the following statement, which the
American representatives at the meeting felt was a desirable resolution
of this questi.on:
It is important that the effectiveness of central bank
operations should be preserved. Hence, with respect to use
of swap arrangements and other official short-term bilateral
credit between central banks, the Governors of the central
banks of the group may wish to consider together whether
information should continue to be provided orally. The
present practice of reporting has been generally successful
in avoiding premature disclosures and unfortunate market
reactions.
Mr. Hayes said we had taken the position, which he thought the
Treasury would support, that the following principles should be adhered
to:
First, confidentiality should be preserved with respect to these
operations, with disclosure only by mutual consent of the parties con
cerned.
Since situations might arise in which one party to a transaction
would be reluctant to disclose certain operations to all governments,
both should have the right to object.
Second, to the extent possible,
reporting should be kept on an informal and oral basis, as in the past;
information on delicate situations should not be put in a mimeographed
report.
lag.
Of course, the data could be published after a suitable time
6/17/64
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With respect to transmitting information to Working Party 3,
this seemed unobjectionable in principle since the System did disclose
information on its own use of swap credits to central banks, so that
the information presumably was available to government representatives
on WP-3.
Here also, reports preferably should be oral and informal,
and they would best be made by the borrowing country.
The same general
rules would apply to disclosure of new credits and of new swap arrange
ments,
The System, of course, did publi.h information promptly on new
swap arrangements, and others might be encouraged to do so, although a
rigid rule on the matter probably would be inadvisable.
Before this meeting there had been distributed to the members
of th, 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 May 26 through June 10, 1964,
and a supplementary report covering the period June 11 through
June 16, 1964.
Copies of these reports have been placed in the files
of the Comm.ttee.
In supplementation of the written reports, Mr. Stone commented
as follows:
During the recent period the money market again displayed
its capacity for the smooth handling of large flows of funds,
accommodating without difficulty the cash sale of $1 billion of
new Treasury bills, and the flows associated with the June 10
dividend date and the June 15 quarterly corporate tax date. The
net result of these factors, together with a tendency for
marginal reserve availability to average somewhat below the level
6/17/64
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of the preceding few weeks, was a slightly firmer cast to the
money market. Dealer financing needs were enlarged and in turn
the dealers relied more heavily on financing from the money
market banks--particularly as corporations pulled money back
from the dealers to pay dividends and taxes. Indicators of
market tone remained within the range of variation established
during recent months, however. Thus, average member bank bor
rowing, perhaps the best single indicator of market tone under
present conditions, remained in the general area of $200-$300
million.
Similarly, Treasury bill rates continued to move rather
narrowly over the period. Indeed, the three-month bill rate
varied only between 3.46 and 3.48 per cent through most of the
period, while the six-month bill ranged from 3.57 to 3.60 per
cent. This stability was maintained despite the increased
supplies of bills that came into the market toward mid-June
with the approach of the dividend and tax dates. At least in
part, the stability reflected a willingness of dealers to hold
larger positions in the expectation that no significant change
in interest rates is on the immediate horizon. Yesterday, the
three-month bill that had been auctioned on Monday at an average
issuing rate a little under 3.50 per cent edged up to a bid
quotation of 3.51 per cent in the market--the first time
since ea:ly April that the market rate on this maturity has
exceeded the discount rate.
Prices of Treasury notes and bonds tended slightly higher
during the recent period, but the rise lacked vigor and trading
activity was generally light. The prevalent attitude seems to
be that prices and rates are not likely to move much in either
direction over the immediate future. I should mention that
dealers have continued to make fairly good progress in distri
buting their holdings of the Treasury's recently issued 4-1/4
per cent bond; although some of these bonds were sold on
switches out of other intermediate issues, dealer holdings
in the 5-to-10 year maturity area were reduced by nearly $100
million in the past three weeks.
The markets in corporate and municipal securities were
mixed during the past few weeks. Underwriters generally
exhibited a good interest in bidding for new issues, but
investor receptions frequently were unenthusiastic. In a
number of cases syndicates were terminated with appreciable
balances still unsold. The ensuing upward yield adjustments
were generally small, and did not suffice in all cases to
complete the distribution of new issues. A noteworthy excep
tion was the quick sellout of $150 million General Motors
Acceptances Corporation debentures at a 4.64 per cent yield.
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6/17/64
In the meantime, some attention is being paid in both
the Treasury and other securities markets to possible Treasury
financing just ahead. The most widely held view in the market
seems to be that the Treasury is likely to raise around $3
billion in July through the sale of a tax anticipation bill
maturing next March. Receipts are running above expectations,
however, and expenditures are thus far falling short of earlier
forecasts, so that current indications are that the Treasury
may not need nearly as much as $3 billion in July, and indeed
it is possible that its needs will be under $1 billion. If
this should be the case, the Treasury would probably have an
opportunity to undertake some financing designed to achieve
some lengthening of the debt structure. This might take the
form of a cash sale of a moderate-sized issue in the note or
short bord area, or it could take the form of an advance
refunding operation that would perhaps be open to holders of
the August 1964 maturities as well. Announcement of any new
borrowing plans, however, would be contingent not only on the
outcome of the Treasury's cash position but also upon Con
gressional action in regard to the debt ceiling. The legal
ceiling drops sharply at the end of this month, and the
Treasury would not be able to announce any new financing
plans until a new ceiling is enacted. The upshot is that
considerable uncertainty clouds the current Treasury financing
scene. The calendar seems to be clear at least until near
the end cf June, but the Treasury may well be in the market
from that point through the first part of July and again in
August--with the particular types of operations still to be
decided upon.
Thereupon, upon motion duly made and
seconded, with Mr. Mills dissenting, the
open market transactions in Government
securities and bankers' acceptances during
the period May 26 through June 16, 1964,
were approved, ratified, and confirmed.
Mr. Mills dissented from this action because he thought the
operations of the Account Management since the preceding meeting had
been at fault, in a manner that he described in the course of his
statement later in the meeting.
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6/17/64
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. Noyes presented a statement on economic conditions as follows:
In preparing for this meeting I had occasion to refer
back several times to the minutes of the meetings of the
Committee just after the turn of the year--and to review both
my own remarks and those of others at that time. This is
always a potentially embarrassing exercise, but on this
occasion the reaction is more philosophical. The striking
thing is that at that time we all thought, for one reason or
another, that we would be able to see the economic future
more clearly by June. June is now upon us and we have most
of the statistics for May at hand, yet the future still seems
as uncertain to me, at least, as it did four or five months
ago. I am unable to persuade myself that the danger of an
inflationary surge is behind us, but I find it equally dif
ficult to develop evidence that such a surge is either
underway or in immediate prospect.
In most respects the economy is moving forward along
a path very close to one that observers agreed would be
desirable, but few thought would be realized in all its
aspects. Some doubted that we would get the amount of
economic expansion which has materialized, while others felt
we might get it, but that it would almost certainly be accom
panied by upward pressures on both the prices of goods and
services and on interest rates.
You will recall that the staff made some projections
shortly after the first of the year of the quarterly pattern
of GNP, the major indexes of business activity, and the flows
of funds in the economy which would be consistent with the
end-of-year aggregates used in the President's Budget and
Economic messages. The figures for the first quarter were
generally not too far from the projected pattern and early
estimates for the second quarter also are surprisingly close,
with deviations generally on the favorable side. Specifically,
the original projection for second quarter GNP was $618 billion
and the staff is now estimating it will be around $620 billion.
The quarterly average for the production index in the projection
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worked out to 130.2, which will be right on the nose if we get
another 0.7 point increase in June. Unemployment is a little
lower than expected, even if we assume that all of the improve
ment from April to May will not be maintained in June.
Price behavior is, in manyways, the biggest surprise
of all. While various models were constructed on the assump
tion of price stability, I doubt that even the people who made
the assumption had much confidence in it.
I am certain that
no one even imagined in January that the lead sentence of the
June 15 release of the BLS on wholesale prices would read,
"Primary market prices moved 0.2 per cent lower in May,
continuing a down trend which has prevailed since the beginning
of the year." Very few would have guessed that the upcreep
in the consumer price index would be less in the first four
months of 1964 than it was in 1962 or 1963. I had to pinch
myself to be sure I wasn't dreaming when I found a widely read
economic columnist reporting, in Monday night's paper, that
price weakness was a major threat to continuing prosperity.
These isolated observations--chosen intentionally to
highlight the difference between what has happened to prices
and what was generally expected 5 months ago--probably exag
gerate the degree of price stability we have achieved. There
have been upward pressures in some important markets--notably
those for nonferrous metals, where the most recent development
is a 2 per cent increase in the price of aluminum ingots.
Nevertheless it is hard not to be impressed, and a little
puzzled, by the remarkable continuation of price stability.
To summarize, and point up some of the most recent data,
the figures for industrial production, announced yesterday,
showed April revised up 0.4 to 129.6, and a further gain in
May of 0,7, bringing the index for last month to 130.3.
Unemployment in May dropped to a surprising, and probably
unsustainable, low of 5.1 per cent.
Retail sales rose 1-1/2 per cent in May from an April
level that also was revised upward.
Wholesale prices declined in May to 100.1 per cent of
the 1957-59 average, which is also just 1/10 of 1 per cent
above the year ago level.
Capital spending plans, as reported to Commerce-SEC,
have been revised upward to show a 12 per cent year-to-year
increase, but a good share of the increase is accounted for
half than
by the fact that we are doing more in the first
Hence the new survey does not imply as much of a
expected.
half to the second as the earlier
change from the first
estimates.
6/17/64
-18I have searched for something less trite than "just too
good to be true" to say in conclusion, but that phrase fits
domestic economic developments so perfectly I am unable to
avoid it.
Mr. Holland made the following statement concerning financial
developments:
A kind of stubborn stability has characterized interest
rates and debt market conditions since about mid-May. Markets
have given little ground in the face of a succession of
potentially unsettling influences, ranging as widely as the
stream of stronger business news, indications of less favorable
balance of payments developments, inve:tor resistance to aggres
sively priced new offerings in the capital market, the onset
of June tax and dividend date pressures, and the publication
of two weeks of relatively low free reserve figures.
In part,
this market stability has seemed to draw strength from renewed
investor confidence that no change in monetary policy was in
the offing. But there has also been an apparent close balance
of supplies and demands for funds in the credit markets generally.
As Mr. Stone has indicated, the money market itself moved
up to and through the tax and dividend period fairly smoothly.
From mid-May up until the tax-date week itself, borrowing at
the discount windows by reserve city banks actually was smaller
this year than last. But out in the country member banks,
signs of somewhat greater reserve pressures have been prevalent,
and this has been a factor in the lower aggregate free reserve
figures of recent weeks. Over the past two months, more
country banks have been borrowing from the Reserve Banks; they
have been borrowing greater aggregate dollar amounts; and their
excess reserves have moved erratically around a lower level
than earlier. Deposit reports from these banks suggest that
a stronger than seasonal local credit and deposit expansion
may be an inportant factor in this country bank experience.
There is one tax date development that may help to clarify
According to first reports, tax date borrowing
a recent trend.
by both financial and nonfinancial corporations at the big New
York City banks appears a good deal larger than expected, and
considerably stronger relative to previous years than was
Coming as this does on the
true over the March tax date.
heels of a moderately strengthened business loan demand over
the last nine weeks, it may signify emerging corporate needs
for a little more bank assistance in covering operating and
capital outlays.
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Other types of credit demands associated with purchases
of goods and services have shown little change in their rate
of advance since the date of the tax cut. To accommodate such
loan expansion, along with temporary fluctuations in securities
loans, banks as a whole have further reduced the relative
importance of their investment portfolios, slowing their pur
chases of municipals and selling Governments on balance. These
reduced bank takings of securities have been matched by the
securities purchases of nonbank investors, who are channeling
more of their financial investment through market instruments,
and less through deposit-type intermediaries. The result has
been to reduce the degree of intermediation in recent financial
flows, without thus far any major impact on interest rates.
Total bank credit figures have fluctuated sharply over
this period, chiefly reflecting temporary bulges'associated
with changes in the timing, form, and amount of Treasury
financings and tax receipts. Cutting through these month-to
month swings, the average rate of growth in total bank credit
over the first five months of 1964 amounted to about a 6-3/4
per cent annual rate, roughly matching the rate of expansion
in gross national product. The bulk of this bank credit
advance was associated with the growth in time deposits, as
money supply expanded at only a 2 per cent annual rate over
this period. Figures for the first part of June suggest an
increase in bank credit and money supply through the tax date,
with prospects for some subsequent fal:back in these aggregates
through the remainder of the month.
One cannot look very far ahead, however, without taking
explicit account of the potential impact of Treasury finance.
Government financial operations will bulk large in future
banking developments, and the possible scope of such opera
tions is sharply different from the expectations of a few
months or even a few weeks ago. As our staff sees it, the
Treasury's operating balance at the end of June could now
approach $10 billion, largely because of the continuation
of a less than expected rate of expenditure. This provides
a cash cu;hion large enough to cover more than a third of
the Government's entire second-half cash need, now estimated
by our staff at $11 billion, more than half of which is
concentrated in July.
While this expected July-December cash deficit is $1 to
$2 billion larger than in the two preceding years, the snap
back to a cash surplus in the succeeding January-June period
is even sharper, bringing the projected full-year cash deficit
to be financed to below $4 billion for fiscal 1965, significantly
-20-
6/17/64
smaller than for fiscal 1964, and a shade below fiscal 1963.
The consequence is to give a rare degree of flexibility to
the Treasury debt managers, once the debt ceiling question
is settled. If the market is not upset in the next few weeks,
and the Treasury opts for one of the major debt lengthening
alternatives outlined by Mr. Stone, the results from a central
bank point of view should include a darpening influence on
intermediate and longer term credit markets this summer,
followed by a substantially lighter burden of Government
financing to coincide with the seasonal rise in private credit
demands this fall.
Some intervening downward pressure on bill
rates might result, but given the level of bank borrowings
implicit in current free reserve levels, three-month bill
yields should not be able to be depressed very far below the
discount rate.
And, looking at the broader picture, the
resultant better phasing of public and private borrowing
pressures could prove to be a salutary influence on future
financial and economic developments.
Mr. Furth presented the following statement on the balance of
payments.
The U. S. payments balance in recent weeks has been less
unfavorable than in April but less favorable than during the
first
quarter.
According to the so-called flash report, the payments
deficit anounted in the month of May to $107 million, as
compared with $475 million for April; and the latest tenta
tive weekly figures suggest that it continued at about the
same rate during the first ten days of June. Since May is
considered to be a seasonally favorable month, the seasonally
adjusted annual rate of the deficit for the past six weeks
was perhaps in the neighborhood of $2 billion, slightly
higher than the rates for the first
four months of the year
and for the second half of 1963.
This result is particularly disappointing because the
financial character of the deficit has changed for the worse.
Taking the ten-month period from July 1963 through April 1964,
the conventionally calculated deficit of $1.6 billion was
covered by "special" receipts of $760 million, an increase
in liabilities to nonofficial foreigners of $1,020 million,
and a decline in the U. S. net position in the IMF of $200
million. U. S. gold and foreign exchange reserves actually
6/17/64
-21-
rose $40 nillion, and liabilities to foreign monetary authorities
declined by $320 million. Moreover, U. S. bank-reported short
term claims on foreigners rose by $930 million. Both on the
"official settlement" basis and on the "total net liquidity"
basis, the deficit was fully offset by the "special" foreign
debt prepayments. Counting these prepayments as the receipts
which they certainly are from the point of view of liquidity
analysis, the U. S. payments position in that ten-month period
was actually in balance.
In contrast, the figures for the six weeks from April 30
to June 10 suggest that U. S. reserves diminished by $160 mil
lion and liabilities to foreign authorities rose $300 million.
The conventionally calculated deficit was reduced to tolerable
dimensions because foreign private dollar holdings declined by
$340 million. The tentative figures probably exaggerate the
shift since (in contrast to the final data) they include interna
tional organizations among foreign authorities, and some part
of the change may reflect seasonal movements, and another
part of the reversal of previous dollar "swaps" between the
German Federal Bank and German commercial banks. Nevertheless
it seems certain that on an "official settlement" and perhaps
also on a "total net liquidity" basis the deficit rate was
very much higher than during the preceding ten months. Since
I consider both of these bases more meaningful standards for
measuring a country's international payments position than the
conventional method, I am afraid that the U. S. payments
position may once again have becone a problem.
Unfortunately, the available data do not permit any
reliable analysis of the causes of the deterioration. Three
obvious possibilities may be considered:
First, the trade surplus may have been further reduced in
May and June, reflecting both the upswing of the U.S. economy
and the import-restricting impact of European actions.
Secord, the uncertainty effect of the proposed interest
equalization tax may already have worn off, especially as to
Canadian borrowers; and perhaps more important, U. S. enter
prises appear eager to make full use of opportunities to
acquire cheaply industrial participations in European countries
that suffer from a dearth of capital thanks to the credit
restrictions imposed by their monetary authorities.
And third, renewed uncertainty created by rumors of
revaluations and devaluations of European currencies may
again have led to flows of "hot money" not only in recorded
but even more so in unrecorded transactions, involving in
particular a shift of foreign dollar holdings from private
into official hands.
6/17/64
-22-
In contrast to this disappointing turn of most recent
events, the favorable results of the first quarter have been
reflected in the attitude of the two leading international
monetary institutions,
the BIS and the IMF.
The Annual Report
of the BIS gives the United States, for the first time in
some years, a virtually clean bill of health, only mildly
expressing hope that the United States would not prevent
interest rates from rising if this proved necessary, and
advocating some further reduction in government expenditures
abroad. Similarly, the IMF draft of its report on the recent
consultation with the United States expresses the conviction
that the U.
S.
payments problem "has turned the corner."
Moreover, the draft of the IMF Annual Report comes out
strongly on the side of the United States in the current
controversy on the working of the reserve currency system
and the reform of the international payments mechanism.
It unequivocally endorses the continued use of reserve
currencies as international means of payments and reserve
assets, and comes to the conclusion that the international
liquidity problem can be fully solved by the modest increase
in IMF resources advocated by the United States.
In view
of the reported close personal relations between the Managing
Director of the IMF and the head of the country that so far
has most strenuously opposed the U. S. position in the Group
of Ten, the IMF report may perhaps foreshadow a successful
completion of the current negotiations of that Group.
As you know, the System recently has conducted a survey
of bank lending to foreigners.
Not unexpectedly, it appears
that ten or twelve very large banks account for the great
bulk of both outstanding claims on foreigners and recent
increases in such claims, particularly in the long-term
sector.
But as usual, these conclusions need some refinement
and qualifications; if the Committee so desires, the staff
will shortly distribute a more detailed statistical and
analytical presentation of the results.
There was general agreement that the
staff should distribute
the more detailed presentation to which Mr. Furth referred in his
concluding comment.
Chairman Martin then called for the usual go-around
and views on economic conditions
Mr. Hayes, who presented
the
of comments
and monetary policy, beginning with
following statement:
6/17/64
-23-
As we look over the whole economic and financial scene
today, I think we cannot help being impressed by the solidity
of the situation and the cheerfulness of the outlook, espe
cially as compared with a year ago, or in fact with any other
recent period. Most business indices are at all-time highs,
and we have even seen at last some progress with that slippery
problem, unemployment. I hope this progress will prove lasting.
There is no doubt that confidence abroad in the dollar is
stronger than it has been for several years. Yet as soon
as we look behind this happy set of circumstances we cannot
avoid a feeling of uneasiness over possible trouble aheadpossibly in the way of renewed inflationary pressures at home,
and probably in the way of an adverse movement in our balance
of payments that could cause great disillusionment abroad
and could seriously jeopardize the dollar's new-found strength.
Our policy decisions rarely seem easy but today they seem
especially puzzling.
Most of the major statistical data that have become
available in the last few weeks tend co confirm the bright
business outlook, without, however, any clear signs of an
accelerated advance that would turn into an authentic boom.
Such data include the new Commerce-SEC survey of capital
spending plans, record retail sales in May, and the decline
in the unemployment rate to close to 1 per cent. Price indices
continue to show the same degree of stability as in recent
years, and recent specific price announcements, as well as the
latest purchasing agents report, suggest that upward pressures
have eased slightly. On the other hand, there is a danger
that the coming major wage settlements may turn out to be
excessive in comparison with over-all productivity gains.
Recent banking statistics suggest that lessened monetary
ease has begun to exert a moderating influence on credit
rowth this year--a development which I would consider all to
the good -while a similar dampening in growth rates this year
is indicated with respect to bank reserves, money supply, and
.ime deposits. On the other hand, total bank loans have been
growing at a relatively fast pace, and there are some tentative
signs that demand for business loans and for total nonsecurity
loans may be accelerating after they lagged earlier in the
year. These various developments have put increased pressure
on bank liquidity, as evidenced by a continuing updrift in
It is important to recognize, however,
loan-deposit ratios.
that none of these credit trends is yet very pronounced;
the impression of a change in pace based on observations of
five or six months could easily be reversed by data for a few
6/17/64
-24-
additional months. One major uncertainty concerns the extent
to which growing business investment will be taken care of by
corporate cash flows and the extent tc which an increase in
such requirements will bring growing demand for bank credit.
While there is no doubt that balance of payments develop
ments during the first five months have been encouraging,
especially as they point to a considerable degree of long
term improvement, the outlook is clouded by at least two very
sobering considerations. In the first place, a declining
tendency in the trade surplus, a substantial increase in new
foreign security issues in the last couple of months, and the
pronounced tendency toward higher interest rates in Europe
point to the possibility of a widening deficit over the
remainder of the year. Secondly, we cannot look with compla
cency o. a deficit for the year in the range of $1.5 to $2
billion---for, in this seventh year of major deficits, the
possibilities for orderly financing of such a sizable gap
are becoming ever more difficult, and our bargaining position
in international financial matters has been demonstrably
weekened as our cumulative deficit has grown. We cannot
afford to let this situation continue for long without taking
decisive steps to check it.
These considerations, plus the ever present possibility
that further business expansion could produce stronger infla
tionary pressures, and the inevitabilicy of some lag between
any action we might take and any substantial effects on the
economy, suggest that the System should, at the very least,
be poised for action as developments unfold. Unfortunately,
we are entering a period when Treasury financing operations
are likely to complicate our policy decisions, but at the mo
ment the schedule of such operations is. still quite uncertain.
There is a free period for the next ten days or so, but by
the end of this month the Treasury may be announcing some
financing plans that would call for maintenance of an "even
keel" through much of July. By late July, the Treasury
would presumably be announcing the terms of its August re
funding--or whatever remained of that refunding, in the
event that part of the August maturities were pre-refunded
in July.
I am inclined to think that the balance of payments
outlook would justify our taking a clear step toward less
credit ease at this time. On the other hand, I frankly admit
the difficulty of obtaining much public support for such a
move in the virtual absence of immediate inflationary
developments here in this country and against the background
6/17/64
-25
of the favorable first quarter balance of payments. Also the
imminence of Treasury financing is an important inhibiting
factor. Thus, I am led to the reluctant conclusion that we
should stay our hand, insofar as an immediate policy move is
concerned.
It would, of course, be much more satisfactory
if we could take advantage, for international purposes, of
a natural tendency for interest rates to harden as domestic
credit demands increase. Hopefully this may occur. I think
I would confine changes in the directive to some recognition
in the first paragraph of the further improvement in the
business outlook, an improved unemployment situation, and
the growing doubt on the international payments position for
the remainder of the year. The staff's draft directive seems
to cover these points admirably.
It would seem, however, that there is some room for
keeping a firmer rein on the money market, or in other words
"resolving doubts on the side of less ease," while still
working within the terms of the current directive. In
particular, I would hope that the Committee might overcome
its apparent reluctance to see net borrowed reserves appear
occasionally in our weekly reports. While I would not aim
deliberately at net borrowed reserves, I would think in
terms of a target of zero to $100 million, with occasional
swings outside of this area on both sides. As long as the
current prejudice against ever showing a negative reserve
figure prevails, the Desk will inevitably be forced to avoid
the lower part of our target range, with a resulting tendency
toward too much ease. Over the last year or so we have
succeeded in persuading the market that substantial week-to
week swings in the free reserve figure do not ordinarily
point to a change in monetary policy. I would hope that
similarly we might "educate" the markec to the view that
an occasional lapse below zero is likewise without policy
significance. Since our next policy move might well be
in the direction of less rather than greater ease, more
widely fluctuating reserve figures now would minimize expec
tational reactions to such a move if and when it comes.
In light of rate trends abroad, I think we should
continue to keep the bill rate under close surveillance,
and it would certainly be desirable to see it move five
or ten points higher if this can be accomplished without
an excessively tight money market. It is clearly too soon
to be thinking of a discount rate change.
-26
6/17/64
I might take this occasion to invite your attention once
again to the pressing need for some liberalization in maximum
rates of interest under Regulation Q. For many months now
the market rate on longer terms of certificates of deposit
has been at or near the 4 per cent liit; and the 3-1/2 per
cent savings deposit maximum (except as to long-term deposits)
is working a real hardship on New York commercial banks who
are competing with the prevailing 4-1/4 per cent rate offered
by mutual savings banks.
Mr. Ellis reported that "steady progress" described the course
of the New England economy in the recent period.
rose more than seasonally in April.
Manufacturing output
Seasorally adjusted factory
employment also rose a bit in that month, contrary to recent history.
Unemployment had dropped sharply, as evidenced by data on unemploy
ment compensation claims, and income had been rising steadily.
Mary
farmers had concluded that potatoes would
never again reach $5 a
barrel and had sold their stored supply.
Recently, with the supply
running short, those farmers who still had potatoes got $6 or more
per barrel,
and some of the District
had written off.
However,
banks had collected
loans they
many farmers had now increased their
planting; and might be expected to show less of a profit.
Recent trends at District banks were continuing, Mr. Ellis
said.
Real estate loans were rising rapidly, loans to brokers and
dealers were contracting sharply, and there was continued rapid
growth in time and savings deposits.
Several mutual savings banks
had announced higher rates on 90-day savings deposits.
6/17/64
-27
Mr. Ellis said that the principal theme he detected in the
national
indicators was of a strengthening economy in a balanced
expansion, without widespread price advance.
As Mr. Noyes had
noted, this had been the immediate objective of monetary policy,
so the Committee's policy must have been appropriate to the economy.
The question the Committee must resolve now was how long this policy
would remain appropriate.
In reaching such a judgment, the Committee
should take into account that bank loans, especially business loans,
had expanded more rapidly in May than in either the first four
months of the year or the comparable period of last year.
The
initiative fcr credit creation seemed to be shifting to business;
there had been slackened growth in bank holdings of municipals and
a cut-back in their holdings of Governments.
Mr.
Ellis commented that like Mr.
Noyes he,
too,
occasionally
looked back in the minutes of the Comnittee to check on the positions
he had taken earlier.
He found that for some time he had been ad
vocating an occasional negative reserve pos.tion.
But since net
borrowed reserves had been avoided for so lcng, their appearance
now undoubtedly would be regarded by the market as an intentional,
aggressive move by the Committee, and not as an accident.
This would
be particularly likely at the present time, given the May declines
in total reserves and the money supply.
It seemed that the Committee
could not now do what he had been urging earlier.
The possible
-28
6/17/64
Treasury financing also was a consideration at present.
On that
note, Mr. Ellis said, he would endorse both paragraphs of the draft
directive prepared by the staff.
Mr. Irons reported that conditions in the Eleventh District
had shown moderate expansion during the past several weeks and he
thought the indications were for further improvement in coming months.
In spite of the
high level of activity in many economic sectors of
the District, there were no serious indications of unsustainable or
excessive expansion.
Also, Mr. Irons noted, there were some areas of weakness in
the District economy.
Inventories of crude oil were excessive and
allowables were being reduced, and some petroleum product prices
were not strong.
There was some softness ir agricultural prices,
including cattle prices.
On the other hand, department store sales
were at an all time high, construction activity continued to break
records, employment and industrial production were edging up, and
unemploynent was not as high as it had been.
In the financial area, Mr. Irons said, loans in all catego
ries, investmerts, and time and savings deposits at District banks
all were up in the recent period, but demand deposits had declined.
While loan demand was satisfactory enough, the banks would prefer
to see it stronger.
District banks had been buying Federal funds
on balance, and borrowings at the Dallas Bank had been gyrating,
6/17/64
-29
depending upon whether some of the large banks came in for a few
days or not.
A somewhat larger number of banks, particularly
smaller ones, were coming to the discount window.
It was his
expectation that even without much tightening of credit there might
be more active discounting, and more problems in administering the
discount window.
Banks were less liquid than a year ago, and an
increasing number of relatively small country banks were running
reserve deficiencies.
Upon checking, these were found to be putting
more of their funds into the Federal funds market and keeping more
fully invested in general.
For a long time the excess reserves of
the District's country banks had ranged from about 12 to 14 per cent
of requirements,
but these percentages had now dropped down to a
6 - 8 per cent range.
Mr.
Irons said that in his judgment neither domestic nor
foreign conditons warranted a change in policy at this time.
domestic situation was strong but it was not running away.
The
The
foreign situation appeared less favorable in the past few weeks
than earlier, but he had some reservations regarding the quality
of the preliminary data that were gathered, and thought it would
be well to wait until more reliable figures were available.
The
fact that the Treasury was in the picture was another reason why
it was not desirable to change policy.
-30
6/17/64
Mr. Irons thought recent policy had been quite satisfactory.
There might have been a slight firming during the past few weeks,
and if so that was agreeable with him.
He hoped emphasis would be
placed on money market conditions--on tone and feel--and that there
would not be so much emphasis on free reserve figures.
It was
unfortunate that the Committee had built a halo around free reserves,
but this probably was not the time to change the whole concept.
Free reserves might be somewhere around $100 million, but he would
not be worried if the figure dropped lower.
He hoped that some way
might be found to discourage the market from thinking that an
occasional net borrowed reserve figure would necessarily indicate
a change in policy.
Mr. Irons favored a Federal funds rate at or about the dis
count rate, the bill rate within 5 to 7 basis points of the discount
rate, and member bank borrowings in the $200-$300 million range.
Mr. Irons did not think it practical to change policy, and he would
not change the discount rate at this time.
He was willing to renew
the directive now in effect, but he also found the staff draft
acceptable.
Mr. Swan reported that the economic situation in the Twelfth
District continued to be satisfactory.
Of course, employment in
defense activities continued to decline, but there had been some
gain, primarily of a seasonal nature, in total employment in California,
-31
6/17/64
Washington, and Utah in April and May.
At the same time, however,
the labor force increased more than seasonally; therefore, in con
trast to the country as a whole, there was a slight increase in
unemployment.
Lumber production was still somewhat constrained by
high inventories.
The nonferrous metals situation was quite strong,
and the demanc' for petroleum had outrun the District's production.
The San Francisco Bank had held a business outlook conference
early in June, Mr. Swan said, which was attended by executives from
a variety of industries throughout the District.
They discussed
their particular industries rather than the over-all outlook, but
the sum of their views followed quite closely the standard assessment
of prospects for the country as a whole.
They foresaw a continued
rise in consumer buying and reasonable stability in prices.
They
mentioned a widespread tendency for consumers to upgrade purchases
in all lines.
Wage increases in the District were being accompanied by
further increases in productivity, and inventory changes were expected
to continue to be closely related to changes, in sales rather than to
anticipated price increases.
They foresaw a leveling off in residen
tial construction, but a continuing and perhaps protracted rise in
plant and equipment
spending.
Even in the defense area, the expecta
tion was that there would not be precipitous declines in employment.
The continuation of some special problems in California agriculture
-32
6/17/64
was anticipated--including rising unit labor costs, loss of prime
land to urban encroachment, and rather heavy credit needs to finance
purchases of equipment, expecially by
fruit and vegetable growers,
as mechanization was extended.
Bank loan demand continued to be quite satisfactory in the
Twelfth District, as elsewhere, Mr. Swan said.
City banks had been
under considerable pressure in the latter part of May but in the two
weeks ending June 10 they were in a much easier position.
The net
inflow of funds to savings and loan associations in the first four
months of this year was 30 per cent less than in the same period
in 1963.
Mr. Swan said he could see no basis for any change in policy
at this time, in view of the nature of the business advance and in
light of the very moderate growth over the first five months of 1964
in reserves, bank credit, and in money supply, and the actual declines
in some cases in May.
Granting that the international situation was
uncertain at this point and perhaps less favorable than earlier, he
did not think it provided a basis for a less easy policy as yet.
With respect to the question of market reactions to free
reserve figures, Mr. Swan noted that there had been some sizable
fluctuations over the past few weeks.
It seemed to him that the
figure had come rather close to being negative when it dipped to
$32 million, and perhaps that accomplished whatever might have been
6/17/64
-33
expected from a negative figure.
He would like to see free reserves
stay around $100 million, and, if possible, member bank borrowing
between $200-$300 million.
Mr. Swan said he was quite willing to accept the draft
directive prepared by the staff.
He thought the proposed changes in
language from the previous directive recognized significant changes;
that had occurred in the national situation during the last three
weeks.
However, he questioned the desirability of applying the word
"deterioration" to the balance of payments, in view of developments
in May and early June relative to April.
He would rather say "less
favorable" in describing the payments situation.
Mr. Deming said he had little new to report for the Ninth
District.
Conditions were going along much like those of the nation.
The severe floods in Montana last week had caused fairly serious
damage and might have some impact on agriculture in the State.
As a
result of the general rains, however, crop prospects for the District
as a whole now were good; until a short time ago, there had been
concern about dryness.
Mr. Deming observed that Mr. Holland's description of the
national banking situation applied to the Ninth District also.
As
Mr. Irons had noted for the Eleventh District, country banks were
borrowing at the discount window more often.
The loan-deposit ratio
for District country banks had reached the highest point in four years,
6/17/64
-34
and they evidently were in a tighter position than had been thought.
City banks did not seem to be in a tight position.
Mr. Deming favored no change in policy during the coming
period.
Like Mr. Noyes, he found it difficult to uncover anything
very wrong with the national economic picture and liked to think that
monetary policy had contributed to this result.
Mr. Scanlon commented that business trends in the Seventh
District continued generally favorable.
District producers of capital
goods reported that orders for machinery and equipment were continuing
to rise and that the current estimate of a 12 per cent rise in plant
and equipment expenditures this year might be too low.
Demand for
farm machinery was continuing at a rate 5 to 10 per cent above last
year, but analysts for various firms differed as to whether this
pace would continue in the face of lower farm income.
The paper industry, currently operating close to capacity,
was undertaking expansion programs which some industry analysts ex
pected would again create problems of excess capacity possibly befo.e
the end of 1965.
A large and diversified Midwest producer of chem
icals reported that although the firm's over-all output was equal to
only 85 per cent of capacity, facilities to produce a number of
important products were being operated at virtual capacity.
Unu
sually large inter-regional shipments had been necessary to balance
supplies.
Nevertheless, Mr. Scanlon said, average prices received
6/17/64
-35-
by this firm for chemicals in the first quarter were only 1 per cent
above the average for the fourth quarter of 1963 and were 3 per cent
below the level of a year earlier.
Mr. Scanlon said a survey of large employers by his Bank's
research department revealed that most of these firms were expe
riencing difficulty in recruiting adequate staffs even though
unemployment rates were still above those of the mid-fifties.
The
labor supply was being increased appreciably by larger high school
graduating classes this month, but large employers of office workers
reported tha: experienced persons were still in short supply.
A
large Chicago area steel firm reported a substantial number of
unfilled positions (equal to 1.5 per cent of its work force) not
all of which required previously acquired skills.
This firm con
tinued to require that new employees be high school graduates,
however.
In the case of skilled metal-working trades--machinists,
welders, tool makers, and the like--shortages of workers were
reported generally by Midwest firms.
Mr. Scanlon reported that total loan demand at District
banks in recent weeks, as in the nation, had been dominated by
expansion of loans to security dealers.
Although business loans
at banks in the District's major cities had risen somewhat since the
end of April (compared with a decline in the same period of last
year) demand had been slightly less strong than in the nation.
-36-
6/17/64
Reserve positions of Chicago banks were tighter than in late
April and early May.
This development had been accompanied by a
decline in demand deposits and a rise in holdings of Treasury bills.
Most of the reserve needs of these banks had been covered by pur
chasing Federal funds.
Outstanding CDs of Chicago banks were now
above $1 billion, and at a new high, and a large proportion of
these would mature in June and July.
Mr. Scanlon felt that the recent posture of policy had been
about right and that it should not be changed at this time.
He did
not favor changing the discount rate, and the draft directive was
generally satisfactory to him.
Apropos Mr. Swan's suggested wording
change, he said that he found it difficult to differentiate between
the words "deterioration" and "less favorable."
Mr. Clay noted that the recent performance of the domestic
economy had been quite encouraging.
It had shown a balanced, orderly
expansion in activity with the average level of prices remaining
essentially unchanged.
This performace, however, was simply the
kind of development that had been sought as a necessary step toward
the economic growth and fuller utilization of resources that was the
goal of public policy.
In Mr. Clay's opinion, these domestic developments were
compatible with a continuation of the same monetary policy that the
Committee had been pursuing.
This called for money market conditions
6/17/64
-37
remaining essentially unchanged and for reserve expansion sufficient
to permit a moderate rate of growth in commercial bank credit on a
seasonally adjusted basis.
Mr. Clay thought that purchases should be made in longer
maturities to the extent necessary to provide reserve expansion if
operations in Treasury bills would put undue downward pressue on
Treasury bill yields for international payments purposes.
However,
the range of maturities within which operations were conducted might
be conditioned by the nature of any Treasury financing.
The substance of the current economic policy directive would
serve satisfactorily for the period immediately ahead, Mr. Clay said.
The implementation paragraph was entirely appropriate in its present
form, except for a reference to possible Treasury financing, but
the
first paragraph should be rewritten to reflect current economic con
ditions more accurately.
It was his opinion that the first paragraph
of the directive adopted at each meeting always should be written
specifically for that meeting, as had been done very recently,
rather than being readopted from the previous directive.
In that
way, the background statement of the directive would apply to the
current situation to a degree that was not likely to prevail otherwise.
It was highly probable, Mr. Clay said, that these fresh background
statements for the directives would make for a stronger and more
impressive public record of Committee policy actions.
The staff
6/17/64
-38
draft suggested for the economic policy directive for the period
immediately ahead appeared to him to be quite appropriate.
Mr.
Clay favored no change in the Federal Reserve Bank discount rate.
Mr. Wayne reported that business activity in the Fifth Dis
trict continued to improve, but the rate of increase had apparently
slackened a little, and some new uncertainties had developed.
Respondents to the Bank's latest survey were considerably less
optimistic t an they had been a few weeks ago.
Reports from nondu
rable goods manufacturers were mixed as usual, but the balance in
new orders, backlogs, and shipments was slightly on the down side.
The latest figures on nonfarm employment and manufacturing man-hours
showed some .light declines.
Problems of seasonal adjustment might
distort this picture to some extent, but i: did appear that some real
abatement had occurred.
Retail trade, however, continued to improve
more than seasonally during May, according to both the department
store statistics and the survey returns.
The textile business con
tinued generally strong, but the recently announced decision governing
cotton price equalization payments had prolonged and might further
complicate price and product uncertainties already present.
The
prosperous furniture industry appeared to have reached a plateau,
possibly a temporary one, with sales at retail reportedly down a
little in May.
The construction industry continued to operate at
or close to capacity, and the flow of new business remained heavy.
6/17/64
-39
In agriculture, up until the last three dys, lack of rain in some
areas seemed to be developing into a problem again this year.
Nationally, the economy was performing well, Mr. Wayne said,
and the pace of activity seemed to be accelerating moderately.
So
far as he could see at this time, it was a well-balanced expansion
with no significant bottlenecks and no overheating.
Especially
impressive had been the large increase in employment in recent months,
the drop in unemployment in May, the sharp rise in manufacturers' new
and unfilled orders in April, and the continued rapid climb in ma
chine tool orders.
These had been accompanied by slowly rising
retail sales and continued high levels of activity in construction
and in the production and sale of automobiles.
This heightened rate
of economic activity, apparently stemming in considerable part from
the tax reduction of three months ago, had been initiated and main
tained with hardly a ripple in the general price indexes.
There
might be pitfalls ahead which were not apparent now, but thus far
the attempt to provide a major stimulus to the economy by fiscal
means seemed to be proceeding on beam and on schedule and without
the price disturbances which many had feared.
In the matter of policy, Mr. Wayne saw no reason for any
change at this time.
Under the policy the Committee had followed in
recent months the economy seemed to be making as much progress as
could reasonably be expected.
While credit had been available in
6/17/64
-40-
adequate amounts, increases in bank credit and the money supply had
certainly not. been excessive.
In fact, both the money supply and the
turnover of demand deposits declined in May.
And the rate of growth
in the money supply in the past five months had been only about half
the rate of the previous six months.
The continued stability of
prices was additional evidence that there was no excess of purchasing
power in the economy.
So long as basic conditions remained as good
as they now appeared to be, Mr. Wayne would favor keeping the present
policy.
He would keep the discount rate where it was.
The draft
directive was acceptable to him.
Mr. Mills made the following statement:
Even if proof of a pegged market for U.S. Government
securities were needed, the operation of the System Open
Market Account for the last three weeks has clearly exposed
its existence even to the uninitiated. The average yield
on short-term Treasury bills continued to be immobilized
during this period at just under 3.50 per cent at the same
time that market pressures which could not be softened by
purchases of coupon U.S. Government securities caused
longer term interest rates to strengthen. These devel
opments occurred in the climate of a falling tendency of
total reserves and a definite reduction in the level of
free reserves. In effect, pegging the short-term structure
of interest rates through Federal Reserve System actions
was at the expense of imposing contractive pressures on
the expansion of commercial bank credit. The clearest
evidence of these pressures has been revealed in the
commercial banking system's reduction of its holdings of
U.S. Government securities at a time of a relatively slack
demand for credit other than the financing of securities
dealers.
The tight position of the commercial banking system
would have been more apparent except that it has been
glossed over by the constant increase in outstanding nego
tiable time certificates of deposit. Inasmuch as these
6/17/64
-41-
instruments are a form of direct borrowing by the issuing
banks, it follows that the rising total of negotiable time
certifi:ates of deposit, in effect, covers over what would
otherwise be a readily discernible tightness in the commer
cial banking system. In short, the Federal Reserve System's
monetary and credit policy is exerting undue restraint over
the expansion of credit and at the expense and risk of
throttling down national economic activity under conditions
when the absence of pronounced inflationary pressures have
not called for such action. The laggardly increase occur
ring in the money supply is a still further indication of
the restraining effects of the System's monetary and credit
policy.
There are those that may argue the case for maintaining
a stron
interest rate posture on the grounds that interest
rates are rising abroad as many foreign countries bring up
their interest rate structures in order to combat domestic
inflationary conditions and, therefore, it is necessary to
maintain a level of interest rates in the United States
high enough to prevent an outflow of funds attracted by
the higher interest rate yields obtainable in many foreign
countries. However, this reasoning neglects the fact that
inflationary conditions abroad reflect unsound fiscal and
monetary management which has weakened the exchange values
of many foreign currencies and thereby has shown up the
risks involved in their acquisition purely because of
interest rate incentives.
Instead of United States funds
moving abroad under present conditions, there is apt to
be a return flow.
If, in the rather unlikely event United
States funds should flow out merely in order to capture
higher interest rates for their holders, resistance to such
outflow; should take the form of fiscal measures and not of
monetary actions taken at the expense of weakening the
domestic economy.
Under the circumstances that have developed since the
Committee's last meeting, my reservations regarding its
instructions to the Manager of the System Open Market Account
were well taken in that during this period monetary and
credit policy has moved perceptibly toward more restraint.
A continuance of similar policy actions will have dangerous
cumulative effects and corrective action should be taken
promptly to supply the commercial banking system with
reserves more freely than has been the case.
6/17/64
-42
Mr. Mills added that he strongly urged the Committee to
consider the actions taken since the last meeting by the Account
Management to have been at fault in carrying out the Committee's
policy.
Mr. Robertson made the following statement:
The general business advance seems to me to be continuing
to develop in a manner that is compatible with our present
monetary policy. By that I mean not so slowly as to require
any more aggressive monetary stimulus than we have been pro
viding, but also without the kind of inflationary ebullience
that would call for any move toward monetary restraint. It
is gratifying to see the solid improvement in our use of
real resources that is being signalled by the increases in
the production index and the employment figures. I hope
that they can continue, and I think our monetary policy
should actively accommodate such further advances, so long
as inflation remains conspicuously abnent.
I see no developments on the international front that
should inhibit such a policy. The seesaw movements of
component:s of our international capital flows over the
past three months do not, in my opinion, reflect responses
to interest rate differentials that cculd or should be
closed by a less easy United States monetary policy. In
so far as bank loans to foreigners are concerned, I am
impressed with the evidence cited by Mr. Furth that a
relatively small number of banks is contributing the bulk
of such increased lending. I take this as confirmation of
the idea that such lending is still too narrowly confined
to warrant changes in nation-wide monetary policy in order
to affect it. If it is to be dealt with at all, it should
be by more selective means. As for the trade portion of
our payments balance, I note that our surplus is still
large, even though down from its cyclical peak. I believe
the most we ought to do with monetary policy in this area
is to promote further noninflationary domestic business
expansion.
With these broad policy objectives in mind, I favor
operations by the Desk to continue to foster money supply
expansion at least as strong or perhaps even stronger than
the average since December, with attendant bank credit growth
6/17/64
-43-
about like we have had thus far this year. It may be
somewhat harder to attain this money supply growth over
the next month or so, because of the dampening influence
of the expected build-up in Government deposits in June
and the possible package of Treasury financing in July.
Accordingly, I would favor money market conditions and
free reserve levels more like the average that prevailed
in May, rather than the somewhat tauter conditions
characteristic of the first half of Jure. I hope that
post-tax-date developments will give the Manager the
opportunity to re-establish the earlier climate, and I
urge that he be instructed to take every opportunity to
do so. In other words, in the prospective environment
of the next few weeks, I think doubts should be resolved
on the side of ease.
As for the directive, I see no pressing need to change
it. I have some preference for changing the reference to
foreign irterest rates from "advances" to "movements" in
order not to seem ignorant of the fact that the bill rate
trend in Canada has been downward, not upward. Similarly,
in the second paragraph, I have a preference for changing
the money market reference period from "recent weeks" to
"the month of May" in order to make clear the intention
of not continuing the slightly tighter feeling of early
June. But these are nuances, and I would not resist
continuation of the directive as is.
Having thus expressed my view as to the instructions
we should convey to the Desk today, I want to say a word
or two about the communications aspects of the daily con
ference telephone call with the Desk. It was exactly ten
years ago last month that the morring call procedure was
first established, and I believe the first suggestion for
such a procedure was mine. Many of the present members
of this Committee were not here then, and may not be aware
of the historical setting of this arrangement, and that
is what leads me to make these remarks.
From its inception, the "call" has had as its basic
purpose the exchange of information. It was not conceived
as an instrument for giving guidance to the Manager, for
urging personal views upon him, or for detracting in any
way from his sole and direct responsibility for the conduct
of operations between meetings.
The call has evolved since that time, both in terms of
the comprehensiveness of its contents and its rotation among
the President members of the Committee. Information that I
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6/17/64
assume is quite useful to the Desk is reported by the Board
staff and by the participating President. But information
is one thing, and policy guidance is another. I know that
the spokesman for the Desk on the call is always careful to
ask for comments on the intended program from any Federal
Open Market Committee member who is participating. This is
most courteous of the Desk, and I can imagine the Manager
is occasionally helped by others' interpretation of what the
Committee intended at its last meeting. But I think it
behooves each one of us, when we reply to the Desk's invita
tion to comment (if we do), to be very careful to speak in
terms of the Committee consensus and not our own positionswhatever they may be--and, furthermore, to speak with a view
to aiding the Manager in reaching his own decision rather
than endeavoring to override or even influence it.
Call procedures, of course, can be anything the Committee
wants them to be. This group is perfectly free to change them
at this meeting or any other. But until such time as a change
is officially voted by the Committee, I think we should all
make sure that our participation in the call is in accordance
with the established rules of the game.
Mr. Shepardson said he did not think he could add significantly
to the comments that had been made about the general condition of the
economy.
The advance was moving in a sustained way that he found
satisfactory.
Like Mr. Ellis, he had been poised for a long time
against the conditions he thought were approaching.
Reports of what
was going on in the labor area indicated that pressures might develop
which would bring the outbreak of price increases that the Committee
had been concerned about.
should keep
He continued to feel that the Committee
itself in position to move as early as the situation
seemed to justify toward restraining inflationary pressures before
they got out of hand.
The desirability of greater fluctuation. in free reserve figures
had been mentioned, Mr. Shepardson continued, including a possible dip
6/17/64
-45
below zero from time to time.
The figures for the last few weeks
indicated that there already had been a good deal of fluctuation.
For example, the figure for last week was down to $32 million, and
this morning the projection for the current week was back up to $186
million.
It seemed to him that if the figure happened to go to zero
or below the fluctuation would be within a pattern that already had
been established and would not be detrimental.
Mr. Shepardson thought that the operations of the Desk in the
last three weeks had accomplished what the Committee had desired.
He
favored maintaining about the same money market conditions and the
degree of ease that had prevailed in the past three weeks.
In his
judgment, continued fluctuation in free reserves would be helpful.
He approved the draft directive that had been distributed to the
Committee before the meeting.
Mr. Mitchell commented that he also was uneasy about some of
the things that Mr. Mills found disturbing.
He thought the point that
several people had mentioned--that banks were in a tight position--was
more real than the Committee had realied.
The tightness had resulted
from the efforts of banks to justify paying 4 per cent for CD money by
rearranging their portfolios, and they had about reached the end of
the line in this connection.
Although there was some evidence of
increased loan demand, an upsurge in business borrowing had not yet
occurred, and if one developed banks would have little room left to
-46-
6/17/64
meet it.
Mr. Mitchell thought that the Committee would have to be
prepared to accommodate it--and not grudgingly--if there was to be
a lift in the tempo of activity.
The second thing that concerned him, Mr. Mitchell said, was
the money supply.
While he was not of the school that considered
the money supply the only variable of impor:ance in monetary policy,
he did not think the Committee could afford to disregard its behavior
over an extended period.
According to the revised figures, the
money supply increased at a 4 per cent rate in the second half of
1963, but had risen at only a 2 per cent rate so far this year.
There
were various signs indicating that the economy was straining to live
with the money supply the Committee was providing.
For one thing,
turnover, while down slightly in May, was above the level of last
year; users were having to economize on money.
Even more persuasive was the behavior of the currency component
of the money supply, Mr. Mitchell said.
Currency increased at rates
of 6.1 and 6.7 per cent, respectively, in the last five months of 1903
and so far this year, while demand deposits rose at rates of 2.6 and
1.2 per cent in those two periods.
It was not certain that this
differential behavior was a cause for alarm but it suggested to him
that the economy was not being provided with enough money.
Mr. Mitchell said he was not deeply alarmed about the recent
trend in the money supply, but he would become so if the same trend
-47
6/17/64
continued for long.
He could not say what the right rate of growth
was but he would feel more comfortable with a 4 per cent rate than
with 2 per cent.
Mr. Mitchell agreed with Mr. Hayes that the balance of pay
ments problem was worrisome.
He did not find the decline in the
trade balance discouraging; the first quarter trade surplus was larger
than anyone had a right to expect, end the present level of the
surplus was more in line with reasonable expectations.
The balance
of payments problem, in his judgment, was largely a matter of capital
outflows, and like Mr. Robertson he thought selective measures should
be used to deal with it.
Banks obviously were contributing substan
tially to the outflows, and should be brought under the interest
equalization tax.
He did not think monetary policy was the answer.
The Committee should be trying to insure that the tax cut would raise
the domestic growth rate and would reduce unemployment from its
present leve , which most countries would regard as intolerable.
Referring to Mr. Mills' comments on the evidences of tight
ness in the past three weeks, Mr. Mitchell noted that the Account
Management had undershot the target of $100 million for free reserves
in four out of the past six periods.
He was not critical of the
Manager; the way to deal with this problem, he thought was to fix
the free reserve target at $200 million.
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6/17/64
Mr. Mitchell expressed satisfaction with the directive that
the staff had drafted.
He would like to have more attention given
to monetary expansion, and he thought that would be accomplished by
the higher free reserve target he had suggested.
Mr. Hickman said the highlight of the business news in May
was the sharp rise in retail sales complemented by a further appre
ciable increase in industrial production.
This was the first month
since the tax cut that there were pronounced increases in both pro
duction and sales, he noted.
Recent developments in the Fourth District indicated a
continuation of a moderate, balanced improvement in business, Mr.
Hickman said.
Steel production increased slightly in the District
in the most recent three weeks in contrast to a small decline in
the nation.
Steel producers who reported to the Cleveland Bank
indicated that demand for steel was strong, although June orders,
seasonally adjusted, were expected to be slightly below those of
May, and markedly below orders in April.
The seasonally adjusted
rate of insured unemployment continued to decline during the most
recent three-week period in almost all major labor markets of the
District except Cleveland, where work stoppages among construction
workers depressed employment.
It was perhaps worth noting in passing
that settlements recently reached in several of the building trades
in Cleveland were quite generous and far exceeded the Administration's
6/17/64
-49-
guidelines.
Several local major construction projects might be
postponed because of higher breakeven points.
At the board meeting of the Cleveland Bank last week, the
directors seemed to feel that, notwithstanding the record level of
retail sale; in May, the closing of many retail outlets on Memorial
Day, which was a Saturday, might have deferred some demand until
June.
This would, of course, help to increase retail sales in June,
perhaps somewhat similarly to the way in which the figures for
February were helped by the five Saturdays in that month.
The
sharp recovery in Fourth District department store sales in the
week ended June 6 lent some credence to this opinion.
Perhaps
further basic statistical work might be justified on trading-day,
holiday and Saturday adjustments of the retail sales data.
Sim
ilarly, the strength in industrial production in the first half of
each of the four years 1961 to date suggested possible review of
the seasonal pattern of that index.
Mr. Hickman continued to be disturbed by the widening
spreads between interest rates here and abroad.
The latest discount
rate increases in Holland and Denmark, as well as possible similar
steps or a firming of rates in London and elsewhere, might add
further to the imbalance in rates between the United States and
other countries, he said.
Europeans, with their vivid experiences
with inflation, were not disposed to overlook the classical remedies
for fighting inflation and balance of payments difficulties.
-50-
6/17/64
This led Mr. Hickman once again to urge that the Committee
and the Treasury reappraise the international financial position.
The present domestic economic situation did not indicate the need
at this time for added stimulus through monetary means.
A minor
firming of rates in this country would not check the balanced
business expansion, but might help the international position of
the United States.
So far as recent figures on credit availability were con
cerned, Mr. Hickman said, there seemed to have been a close conformity
to the Committee's intent, allowing for the usual errors in reserve
estimates.
On the other hand, the money market had continued
slightly easier than he thought desirable.
Projections of free
reserves suggested wide swings over the next three weeks, which
might make the reserve estimates more unreliable than usual.
This
being the case, Mr. Hickman said, the Desk should probably be guided
more by the volume of borrowings and the feel of the market than by
the usual marginal and aggregate reserve measures.
United States monetary posture here and abroad could, in Mr.
Hickman's opinion, be improved if the 91-day bill rate rose slightly
further and then fluctuated within the 3.50-3.60 per cent range, and
the rate on long-term Governments moved gradually upward to 4.20 per
cent from the 4.15 per cent level where it had held for the past few
weeks.
In addition, Mr. Hickman commented, the Special Manager,
6/17/64
-51
Mr. Coombs, might wish to consider whether anything further could
be done in the forward markets to reduce the covered differentials
that now existed in favor of London and Montreal.
Perhaps the
Treasury might wish to consider offering a strip of bills, in
addition to increasing the regular weekly offerings, and some
possible debt lengthening.
Mr. Hickman said that he would not recommend an increase
in the discount rate at this time, and it fact, would seek to avoid
such an increase by forehanded action.
He liked the revisions of
the current economic policy directive suggested by the staff, al
though he thought the reference to unemployment might be premature
in view of the large number of teenagers who had probably already
entered the labor force.
In a concluding comment, Mr. Hickman said he was particularly
appreciative of the guidance Mr. Robertson had provided with respect
to the morning calls.
In the one period during which he had partic
ipated in the call he had noted some exchanges that seemed to him
to border on harrassment of the Manager.
Mr. Bopp said that business was gcod in the Third District.
Labor demand and the status of the labor force remained strong or
improving.
Unemployment claims (Pennsylvania and Delaware) had been
low all year, and remained so; unemployment rates were decreasing in
most of the District's labor markets; and help-vanted indicators
were strong in most cities of the District.
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6/17/64
Output appeared reasonably vigorous.
Electric power consump
tion by District manufacturing industries increased steadily from
January through April.
Manufacturing employment had increased very
slowly, however, and had failed to match national increases.
Department store sales relative to 1963 totals equaled the
national advance.
However, sales in the District were being compared
to abnormally low levels in 1963.
Since the Committee's last meeting, Mr. Bopp said, reserve
pressures on District member banks had diminished somewhat and loans
continued to rise.
The basic reserve deficit of Reserve city banks
averaged around $28 million during the three weeks ending June 10.
This compared to an average deficit of $63 million in the preceding
three-week period.
Borrowing at the discount window continued to be
relatively Light.
Business loans at weekly reporting member banks during the
same three-week period rose $9 million, compared to a $3 million
decline last year.
Both business loans aid net loans adjusted con
tinued to run well above last year.
Recent economic developments, in Mr. Bopp's judgment, provided
little evidence to support a move toward monetary restraint.
It was
true that inventories, retail sales, and capital spending plans had
all risen.
But inventory policies remained quite conservative and
near-term business and consumer spending showed little probability
6/17/64
-53
of pressing upon productive capacity.
The fact that prices had been
so steady reflected the ability of business to meet demand without
encountering pressures on capacity.
As for the labor market, he was,
of course, happy to see the recent decline in unemployment.
Never
theless, the percentage of unemployed still remained high and the
decline in the percentage stemmed partly from relative stability in
the labor force, a condition which might already have been upset.
On the international front, Mr. Bopp continued to be impressed
by the stability of unit labor costs in this country.
so longas
He thought that
American costs remained under control the basic deficit was
likely to remain within manageable proportions.
It would be important,
of course, to watch flows of short-term capital closely, especially
with some interest rates rising abroad.
In line with this view of the domestic and international
situations, Mr. Bopp had some reservations about the recent trend of
reserve availability and the money supply.
With bank liquidity de
clining and with possibilities for increased demand for credit as the
economy expanded, he was inclined to resolve doubts on the easier
side.
The proposed directive appeared appropriate and he would not
change the discount rate.
Mr. Bryan commented that in terms of many statistical series
the Sixth District seemed to be doing less well than the nation as a
whole.
The series in which the District was doing better seemed to
be almost entirely in the financial area.
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6/17/64
As for the national economy and monetary policy, Mr. Bryan
said he had come to the meeting today with a rather changed attitude
of mind.
Others had spoken well on the question of the money supply.
What troubled him, however, was the behavior not of the money supply
but of the reserve series.
He did not want to associate himself in
any way with those who charged the Committee with the strangulation
of the economy.
But looking forward, he thought the Committee was
headed for trouble very soon if aggregate reserves were to continue to
expand only at the recent rate, because the economy was outpacing the
supply of reserve funds that were being created.
Accordingly, he felt
as some others did, that doubts should be resolved in the direction of
supplying additional amounts of reserves.
In terms of a free reserve
figure, Hr. Bryan said he placed his target for the next three weeks
at $150 nillion, with, of course, allowance for latitude on the part
of the Manager
target,
In terms of aggregate reserves he thought that the
at a minimum, should be a 3 per cent rate of growth, and his
personal preference was nearer to a 4 per cent rate.
Mr. Bryan said he was as alarmed about the balance of payments
problem as anyone else around the table, but he continued to think
that the Committee could make only a minor contribution to its solution.
For monetary policy to make a major contribution, a deflation of the
U. S. economy would be required of such proportions as to be neither
desirable nor tolerable.
6/17/64
-55
Mr. Shuford said that business activity in the Eighth District,
in contrast to the nation, had shown little change since late last
year.
This was not to be taken as disturbing, since activity was at
a relatively high level, but the District certainly had not had the
same expansion as the nation.
Employment had shown a downward drift
recently, and value added in manufacturing and bank debits had changed
little since last year.
On the other hand, business loans had risen
markedly since April, with major gains in the categories of construc
tion, retail trade, and durable goods manufacturing.
Mr. Shuford said he favored no change in policy.
The national
situation had been covered adequately this morning; in summary, the
economy was continuing to expand at a reasonable rate, with the major
indexes either rising or remaining at advanced levels.
The pace of
activity might be accelerating, but the expansion appeared balanced
and prices remained steady.
The balance of payments situation now
perhaps was less favorable than in the earlier part of the year, but
at present, the problem did not appear to be of proportions serious
enough to call for any change in policy.
With respect to monetary developments, Mr. Shuford's view was
that they had been reasonably appropriate for the conditions with which
the Committee was confronted and had been confronted for months.
Reserves had declined a bit recently and so had the money supply, but
total reserves nad risen at 1-1/2 per cent rate since December.
The
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6/17/64
money supply, according to the revised serie.,
had been rising at 2 per
cent rate since last year, somewhat less than he had formerly thought.
Certainly, Mr. Shuford said, he was among those who agreed that
money does matter; most did, but there were differences of opinion as
to how it mattered.
reserve base.
He would favor a further moderate growth in the
While he did not know what growth rate would be best,
he would not be disturbed by a continuation of the recent 1-1/2 per
cent rate in light of the conditions that had prevailed during the past
few months and with the possibility of acceleration.
He also would
like to see an increase in the money supply, at a rate preferably in
the range from 2 to 3-1/2 per cent, but a 4 per cent growth rate would
not disturb him.
Late last year he had been pleased to see a 4 per
cent rate and had not been particularly disturbed by 5 per cent; but
when the rate hit 6 per cent he had been happy to see it recede.
It seemed to Mr. Shuford that the Desk had observed the directive
in the past 3 weeks and had maintained about the same conditions in the
money market.
He would continue the same policy and would expect this
to result in continued moderate growth in the reserve base and in a
reasonable increase in the money supply.
He favored no change in the
discount rate, and he thought the draft directive was acceptable, with
the substitution of "less favorable" for "deterioration" in referring
to the balance of payments situation.
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6/17/64
Chairman Martin, referring to the comments that had been made
on the behavior of the money supply, said he did not believe that
recent fluctuations had had much impact on developments as yet.
He
thought Mr. Robertson had made a desirable point in connection with
the morning call.
In his opinion, however, the business of monetary
policy involved harrassment from beginning to end, and anyone who
could not take harrassment would be better off outside the field.
On policy, the Chairman continued, the problem that weighed
most heavily in his thinking at the moment was that of Treasury
financing.
The Treasury had a difficult row to hoe; all of the debt
lengthening that had been accomplished would be lost rapidly if they
were unable to move forward.
A firming of interest rates would bring
rates up against the 4-1/4 per cent ceiling and would require that
financing be at the short end of the market.
Accordingly, it was his
judgment that any move at this juncture toward either an easier or a
tighter monetary policy would be a mistake.
He hoped the Desk would
not have any doubts to resolve, but if it did, unlike Mr. Hayes, he
would favor resolving them on the side of ease.
Chairman Martin then proposed that the Committee be polled on
the basis of no change in policy.
It developed that this was the
consensus, with Mr. Mills dissenting.
Mr. Mills said the difficulty was that if the Committee adopted
a policy of no change it had to be no change from some previous position,
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and in his judgment the developments of the last three weeks were
toward tightening undesirably.
Therefore, it was impossible for him
to vote for a policy of no change.
In voting favorably, Mr. Robertson said he hoped that doubts
would be resolved on the side of ease; Mr. Mitchell commented that he
assumed the Desk had been trying to do what the Committee wanted even
though he personally was unhappy with the results; and Mr. Hickman
expressed satisfaction with the recent operations of the Desk.
Chairman Martin commented that it should be clear that no one
was impugning the Manager's integrity in this matter, but that the
members were applying their individual judgments on a subject that
was a matter of judgment.
Turning to the directive, the Chairman said he thought the
draft that the staff had prepared was good.
He noted that a number
of language changes had been proposed, including a suggestion that
the phrase "less favorable" rather than the word "deterioration" be
used in describing the recent performance of the balance of payments.
This involved a slight change in emphasis, bit the choice was largely
a matter of taste.
He, too, would be inclined to make some minor
changes if he were writing the directive himself.
On the other hand,
he thought the text as drafted was satisfactory for its purpose, which
was to reflect the Committee's general thinking.
As he had said before,
words meant different things to different people and they often involved
concepts that could not be defined narrowly.
It was not likely that a
directive could be written that would please everyone.
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Chairman Martin then proposed that the Committee vote on
adoption of the directive as drafted by the staff, except for the
modification he had mentioned in the reference to the balance of
payments.
Thereupon, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed, until
otherwise directed by the Committee, to
execute transactions in the System Account
in accordance with the following current
economic policy directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in 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.
This policy takes into account the recent data on production,
actual and planned business capital outlays, retail sales,
and unemployment, which indicate some quickening in the pace
of domestic expansion. It also gives consideration to the
continued relative stability in average commodity prices;
the continued underutilization of manpower and other resources;
the country's less favorable international payments position
thus far in the second quarter; and the interest rate advances
over past months in important markets ab::oad.
To implement this policy, and taking into account probable
Treasury financing activity, System open market operations shall
be conducted with a view to maintaining about the same conditions
in the money market as have prevailed in recent weeks, while
accommodating moderate expansion in aggregate bank reserves.
Votes for this action: Messrs. Martin,
Hayes, Hickman, Mitchell, Robertson, Shepardson,
Shuford, Swan, and Wayne. Vote against this
action: Mr. Mills.
At this point Chairman Martin called for distribution of a
memorandum on the Committee's current economic directive that had been
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prepared by Messrs. Ellis, Mitchell, and Swan in accordance with a
request made by the Committee at its meeting on May 5.
(Note:
A
copy of this memorandum, which was dated June 16, 1964, has been
placed in the files of the Committee.)
The Chairman then invited
Mr. Mitchell to comment.
Mr. Mitchell said he thought all of those who had worked on
the report had experienced a sense of satisfaction that he hoped the
others would share as they read it.
It had been a rewarding experience.
While the directive problem was a difficult one, it was not intractable;
something could be done about it, and he hoped the report represented
progress.
As the Committee would note, Mr. Mitchell continued, the recom
mendations mad
dogmatic.
were quite specific.
The authors did not mean to be
They did not feel that the course they recommended was the
only possible one, or that it necessarily was the best one; it was
simply the best: at which they could arrive.
Their objects were to
give the Committee some specific proposals to which it could react,
and to help create a climate in which desirable changes could evolve.
Finally, Mr. Mitchell said, he wanted to note that the Board's
staff had worked hard in assisting in the report's preparation.
The
final document was only about 12 pages long, apart from illustrative
material, and he believed the Committee would be interested in reading
it.
6/17/64
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Chairman Martin said the Committee was indebted to Messrs.
Ellis, Mitchell, and Swan, and to the staff, for their work on this
report.
It was agreed that the report would be discussed by the
Committee at the meeting to be held on July 28.
It was agreed that the next meeting of the Committee would
be held on Tuesday, July 7, 1964, at 9:30 a.m.
Thereupon the meeting adjourned.
Assistant Secretary
Cite this document
Federal Reserve (1964, June 16). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640617
@misc{wtfs_fomc_minutes_19640617,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640617},
note = {Retrieved via When the Fed Speaks corpus}
}