FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the
offices of the Board of Governors of the Federal Reserve System in
Washington on Tuesday,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
September 29,
1964,
at 9:30 a.m.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Daane1/
Hickman
Mills
Mitchell
Robertson
Shepardson
Swan
Wayne
Bryan, Alternate for Mr. Shuford
Messrs. Ellis, Scanlon, and Deming, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Clay, and Irons, Presidents of the
Federal Reserve Barks of Philadelphia, Kansas
City, and Dallas, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brill, Furth, Garvy, Grove, Holland, Koch,
Mann, and Ratchford, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account.
Mr. Cardon, Legislative Counsel, Board of Governors
Mr. Partee, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
l/
Entered meeting at point indicated in minutes.
9/29/64
Mr. Francis, First Vice President of the
Federal Reserve Bank of St. Louis
Messrs. Eastburn, Baughman, Tow, and Green,
Vice Presidents of the Federal Reserve
Banks of Philadelphia, 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
Mr. Geng, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Kareken, Econcmic 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 September 8, 1964,
were approved.
Before this meeting there nad 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
September 8 through September 23,
1964, and a supplemental repor;
the period September 24 through Setember 28, 1964.
for
Copies of these
reports have been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs said the gold
stock would remain unchanged again this week, and the Stabilization
Fund would probably close out the month with a gold balance of around
$183 million.
So far this month, the Gold Pool was just about in
balance as private buying had absorbed nearly all of the flow of
South African gold.
The Russians had remained out of the market
9/29/64
-3
despite the rise of the London gold price to relatively attractive
levels during the last week or so.
It
now looked fairly certair that
Russian sales between now and the end of the year would run much below
last year's levels.
The London gold market might become a trouble spot
again before the year was over, Mr. Coombs said..
On the exchange markets, the main feature had been recurrent
selling pressure on sterling since the middle of September, mainly
owing to election uncertainties and some worsening of the British trad
ing position.
Over a six-day period beginning on September 14, the New
York Bank joined forces with the Bank of England in market operations
designed to p t a floor under the sterling rate at around the $2.7830
level, and these operations seemed to have had a useful effect in steady
ing market confidence.
In the process, the New York Bank acquired a,
total of $10 million of sterling for System Account and a further $4
million for Treasury account.
The market had subsequently remained in
a more or less balanced position although lastFriday (September 25) and
again yesterday (September 28) the Bank of England was forced to inter
vene in moderate volume.
So far, a potentially dangerous period had
been gotten through with far less strain than seemed likely a few months
ago.
To help finance its market intervention, Mr. Coombs said,
the
Bank of England had drawn a total of $85 million on the swap line with
the System and had also secured similar short-term credits from other
European central banks and from the Bank of Canada.
The British Govern
ment probably would acknowledge receipt of such central bank credits in
9/29/64
-4
connection with publication of their end-of-September reserve figures,
but might withhold figures on the sum total of such credits or on how
much had so far been drawn.
Mr. Coombs had the impression, however,
that the British wanted to show some increase in their end-of-September
reserve figure as evidence of central bank credit assistance and had
probably been trying to decide how much of a reserve increase they
should show.
Yesterday, the Bank of England repaid $25 million of the
$85 million drawn on the swap line, and another $25 million today, so
they might have decided to show only a relatively small reserve increase
and to imply that sizable unused credit margins were still available.
Mr. Coombs commented that a very tight credit situation in the
Dutch guilder market had resulted in further heavy repatriation of
funds by the Dutch commercial banks, as well as inflows of both short
and long-term funds from other European centers.
As a result, the
System bad drawn a total of $95 million against the $100 million swap
line with the Netherlands Bank, and had also swapped into guilders a
total of $10 million equivalent of sterling for System Account and
another $10 million of sterling for Treasury account.
Despite these
operations, the dollar holdings of the Netherlands Bank remained only
$5 million short of their $200 million ceiling, while there was only
$5 million remaining under the swap line.
If this $10 million margin
did not suffice to deal with possible further inflows into the Nether
lands, the U.S. Treasury might be able to employ $25 million worth of
guilders recently drawn from the Fund to absorb temporarily further
-5
9/29/64
dollar accruals by the Netherlands Bank.
Mr. Coombs said that in
several telephone conversations he had had with the Dutch authorities
they had seemed disturbed and puzzled by the size of the inflow, and
had indicated that they hoped to take action shortly after the end of
the month to ease the market through open market purchases of Dutch
treasury bills.
Mr. Mills inquired whether the Dut.:h situation was largely a
reflection of repatriation of guilders rather than an inflow of dollars
seeking a higner interest return.
Mr. Coombs said it was his impression
that the bulk of the inflow reflected repatriation by commercial banks.
The Dutch commercial banks had been carrying a substantial net dollar
position.
Mr. hills asked if the Dutch were moving towards an adverse
balance of payments position that would suggest a reversal of the dol
lar inflow, and Mr. Coombs commented that the Dutch balance of payments
had been adve se on current account since the first of the year.
In
the first five months their deficit was over $200 million, a substantial
amount for a country of that size.
There had been some improvement in
July, perhaps partly because of tourist expenditures and other seasonal
factors, but the deficit still was sizable.
If their capital account
came into balance their current account deficit might give the System
an opportunity to pay off the swap drawings.
In response to a further question by Mr. Mills, Mr. Coombs
noted that the Netherlands Bank had issued instructions to commercial
9/29/64
-6
banks not to incur a net debtor position as a result of borrowings
abroad.
He would assume that this instruction would be effective.
Whether or not they would be able to prevent other private enterprises
from borrowing abroad was another question.
In general, this had been
the loophole in the programs of various European countries; the central
banks had been able to keep commercial banks under control but not non
bank private enterprises.
He thought the only solution would be an
easing of the restrictive credit policy of the Netherlands Bank.
Mr. Mills then asked whether the Dutch were likely to be
open-minded about any dollar accruals in excess of their $200 million
ceiling or whether they would want to convert them to gold.
replied that be did not think they would convert to gold.
Mr. Coombs
He was not
overly concerned about the Dutch situation, which he though was much
more of a prollem for them than for the United States.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
System open market transactions in
foreign currencies during the period
September 8 through September 28, 1964,
were approved, ratified, and confirmed.
Mr. Coombs observed that the $250 million standby swap line
with the Bank of Italy would mature on October 20.
He requested
approval of a renewal of this arrangement, with an extension of term
from six to twelve months.
He had discussed such an extension with
representatives of the Bank of Italy, and they were agreeable.
Renewal of the swap arrangement
with Bank of Italy, with extension of
term from six to twelve months, as
recommended by Mr. Coombs, was approved.
9/29/64
Mr. Coombs noted that a Japanese drawing of $50 million on the
swap line with the System had been made on April 30 and renewed for
another three months on July 30.
The Bank of Japan planned to pay off
$30 million of this drawing tomorrow, September 30, and might well pay
off the remaining $20 million before the next maturity date, October 30.
In the event that they were unable to do so, however, he would like to
request Committee approval of an extension for an additional three
months.
Also, on November 2 a $30 million drawing made by the Bank of
Japan at the end of August would reach its first maturity, and Mr.
Coombs requested approval of renewal of this particular drawing for
another three months if the Bank of Japan should so request.
In gen
eral, Mr. Coombs said, he was favorably impressed by the attitude of
the Bank of Japan with respect to swap drawings.
They seemed to under
stand fully the desirability of repaying drawings relatively rapidly,
with no more than oneor two renewals at most.
He was hopeful that
expected improvements in their trade balance would make it possible
for them to clear up their outstandings by November.
Renewal of the two drawings by
the Bank of Japan on the swap arrange
ment with the System, if requested by
the Bank of Japan, was noted without
objection..
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U.S. Government securities
and bankers' acceptances for the period September 8 through September 23,
1964, and a supplemental report for the period September 24 through
-8-
9/29/64
September 28, 1964.
Copies of these reports have been placed in the
files of the Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
I indicated at the last meeting of the Committee that
the job of conveying to the public the fact that monetary
policy had changed, but only gently, remained to be completed.
I can now report that during the past three weeks that task
has been completed. The public now understands that policy
underwent a shift toward less ease a few weeks ago, but that
the shift was a moderate one that did not necessarily carry
any adverse implications for long-ten interest rates.
Furthermore, the effects of the shift are now more fully
reflected in various market indicators than at the time of
the last meeting. Member bank borrowings are running some
what higher than in earlier months, ard initial free reserve
figures are coming out lower (although after-the-fact revi
sions of these figures continue to plague us). Dealer loan
rates have also risen, partly, I should add, because of the
inability of city banks to draw into the money market the
heavy excess reserves that have recently been lodged in
country banks. Also, Treasury bill rates have edged higher.
The average issuing rate for three-month bills in yesterday's
auction was 3.56 per cent, compared with 3.51 per cent in the
auction immediately before the last meeting. Rates on three
month bills continue to reflect the fact that that issue
matures in December. I would expect rates to edge somewhat
higher over the next two or three auctions as the three
month bills begin to carry January maturity dates. Additional
sales of bills by the Treasury may also tend to produce
higher rates; current tentative plans call for the announce
ment by the Treasury of an additional $1.5 billion of March
tax bills later this week, and possibly another issue of
$1-$1.5 billion bills later in October. Apart from these
projected bill offerings, however, no Treasury financing is
expected until the end of October, when the Treasury will
announce the terms of its November refunding. At around
that time the Treasury may also sell some June tax bills.
The markets for longer term issues have performed well
over the past three weeks. With the developing consensus
that the policy shift did not necessarily imply much upward
pressure on long-term rates, investors developed a greater
willingness to commit funds to longer term markets. Treasury
bonds moved upward in price, partly erasing the declines that
9/29/64
-9-
had occurred over the prececing few weeks. Some new corporate
issues moved quickly into investors' hands at yield levels
slightly below those prevailing only two weeks ago. A large
new municipal issue moved out well last week and prices turned
steady after having declined rather sharply earlier. The new
issue calendar for municipal bonds remains rather sizable,
however, and a substantial volume of municipal securities
remains on dealers' shelves. The corporate market is in a
better technical position, since dealer inventories have been
pared and the calendar of forthcoming offerings is below
recent levels. In the Treasury bond market, dealer positions
have declined to the point where the only area in which there
can be said to be any appreciable overhang of securities is in
bonds over 20 years. Dealer positions in that sector, which
were about $200 million at the time of the last meeting,
declined to the neighborhood of $160 million two or three
days thereafter, and held there until last Friday, when there
was a further decline to about $145 million. It will take a
reduction of another $75 million or so to put the long-term
Treasury bond market in a firm technical position.
I should like to close with a word about free reserves.
We have thus far been successful in avoiding a negative free
reserve figure, both on initial publication and in terms of
revised figures. I hope the Committee is aware that these
statistics are still subject to large errors in estimation
and that with free reserves ranging as low as they are the
time will very likely come when a net borrowed reserve figure
will emerge despite our best efforts to prevent it. If this
should happen, I would hope that the first occurrence would
be the result of an after-the-fact revision. The market
would, I think, take that in stride. A net borrowed reserve
figure on initial publication would elicit considerable dis
cussion and probably some market reaction, although even in
that case I would not expect any drastic result from an
isolated negative figure.
Mr. Mills asked whether the Desk had felt an obligation earlier
to operate in the coupon market in order to ease the tight situation of
dealers who were overpositioned, and, now that dealers had brought
their positions into more conservative areas, whether the Desk would
be less active in the coupon market.
Mr. Stone replied that during the three weeks before the
previous meeting the Treasury bill rate had been under strong downward
9/29/64
-10
pressure, as he had reported at that meeting, while the availability
of coupon issues in the market was heavy.
Given the Committee's
instructions at the August 18 meeting, it seemed appropriate to supply
the large volume of reserves needed before Labor Day through the
acquisition of coupon issues, thus minimizing the downward pressure on
the bill rate.
siderably.
However, more recently the situation had changed con
Treasury bill rates now were trending higher while dealer
positions in coupon issues had declined.
The Desk would have to supply
about $1/2 billion of reserves over the next 2-1/2 weeks, and he would
expect that most of this would be done through bill purchases and
repurchase agreements, and only a small part through acquisition of
coupon issues.
Mr. Mitchell referred to Mr. Stone's conclusion that dealers
would have to reduce their holdings of securities maturing in over 20
years by about $75 million before the market would be in a good tech
nical position, and he asked whether any nondealer banks held signifi
cant amounts of such securities that had been acquired with the
intention of reselling within a short period.
Mr. Stone said he thought
some banks had acquired securities with this intention during the July
advance refunding, but over the 2-1/2 months since that refunding they
had had ample opportunities to dispose of the securities at a profit.
In his judgment such banks generally had taken advantage of these
opportunities, and for the most part present bank holders of the secur
ities in question were content to retain them for the sake of their
interest return.
9/29/64
-11Thereupon, upon notion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period September 8 through
September 28, 1964, were approved,
ratified, and confirmed.
Chairman Martin then called for the staff economic and financial
reports, supplementing the written reports that had been distributed
prior to the meeting, copies of which have been placed in the files of
the Committee.
Mr. Koch presented the following statement on economic condi
tions:
The domestic economic news that has become available
since our last meeting has been generally favorable. It
confirms continuation of the unusually long-lived upswing
we have been experiencing for over 3-1/2 years. Some
recent developments, however, underline the possibility
that excesses may develop to threaten the sustainability
of the expansion. On the other hand, some developments
are similar to those that often characterize the later
phase of expansions and raise the question as to whether
we are likely to see the end of the current expansion
sometime in 1965.
As for some of the specific new economic developments,
our industrial production index was up another eight-tenths
of a point in August, about the average monthly rise thus
far this year. It probably is showing another substantial
rise in September. Steel and machinery production, which
remained robust throughout the usually slack summer months,
have continued strong in recent weeks; and production of
the 1965 auto models quickly reached high gear prior to the
GM strike. In contrast, unemployment, employment, and the
labor force are all probably little changed in September.
Retail sales in August were up about 1 per cent from
July; and September sales to date appear to have changed
little from the record August level. It is shaping up as
a bang-up holiday season for merchandisers, although con
sumption in the months ahead may not maintain its recent
2 per cent per quarter rate of increase. The direct effects
of the tax cut are likely to diminish and maintenance of
9/29/64
-12-
a rapid rate of increase in consumer spending will become
more dependent on larger increases in personal incomes
than we have been getting.
As for business spending, unfortunately the latest
inventory data are for July. Some pickup in the rate of
accumulation, though, is in prospect on the basis of antic
ipations data, and growing concern is being expressed about
the possibility of heavy hedging accumulation of steel
stocks. Auto companies and some other steel users are
apparently beginning to build up such stocks. This sug
gests that the steel industry is not likely to follow a
steady course in coming months. The only major factor
working against such a destabilizing development would be
an early steel wage settlement. Such a settlement could
come well before the May 1 deadline, possibly as early as
before the end of this year, thus removing the main reason
for the acceleration of steel stocks.
Manufacturers' new orders for durable goods were down
in August, but the decline was due mainly to defense order
ing, which had also been responsible for a large share of
the sharp rise in orders in July. Although new orders in
recent months have averaged about 10 per cent higher than
late last year, unfilled orders for such goods, as a whole,
are still only about 2-3/4 times current sales. In the
investment boom of the mid-1950s, unfilled orders in these
lines amounted to over 4 times current sales. The situation
is somewhat tighter for machinery and equipment where cur
rent unfilled orders are 3-1/2 times sales as compared with
4-1/2 times at their peak in the mid-'50s.
Another important economic development that has occurred
recently has been the labor settlements in the auto industry.
I am assuming that the General Motors strike, due to disagree
ment about work standards rather than basic wage or pension
demands, will be short-lived and will end in a settlement
involving about the same increase in labor costs as at
Chrysler and Ford. The settlements at Chrysler and Ford were
more costly than we had thought they would be and could have
undesirable effects in encouraging settlements elsewhere that
might contribute to price advances. The staff estimates that
they involve an annual rate of increase in labor costs of
between 4.3 and 4.5 per cent, excluding the cost-of-living
benefits.
Having said this, at least the immediate inflationary
impacts of these settlements can be exaggerated. In the first
place, in the auto industry itself, two-thirds of the higher
costs were in larger pensions and fringe benefits; the usual
September advance of 2-1/2 per cent in money wages was skipped
this year.
9/29/64
-13-
Secondly, the major producers have already announced
prices of 1965 models, which appear to be essentially
unchanged from those of the 1964 models. This holding of
the price line is not surprising in view of the recent high
rate of productivity increase in the industry.
Finally, although the auto settlements set up a target
for the unions in other industries to shoot at, it is not at
all clear that many of them will achieve that target. Auto
settlements in the past have not always been a bellwether of
settlements in other industries. Moreover, only a limited
number of key labor negotiations are scheduled for the rest
of this year and early next year.
I have already mentioned the most important one in
steel. Steelworker demands may be limited because there is
great concern within the union about the declining trend in
steel enployment and the large inroads in domestic steel out
put that have been made by other domestic materials and by
imports. On the other hand, steel profits have risen sharply.
and if steel output continues high, workers are likely to
obtain some wage increase, the first (not counting fringe
benefits) since 1961. How substantial any increase may turn
out to be is of course a speculative matter, but present
indications are that it is not likely to be anywhere near as
large as the 8 per cent annual increases of the mid-1950s.
In the price area, the long-expected increase of 2 cents
in copper prices of domestic producers has come, and copper
prices in world markets continue sharply above U.S. prices.
Markets for nonferrous metals generally remain tight and small
increases continue to be announced for some finished manufac
tured products. On the whole, however, price increases have
been scattered and have been accompanied by some declines,
including some in the steel industry where the talk has all
been about hoped-for increases. The over-all wholesale price
index for industrial commodities has been stable in August
and thus far in September.
Thus, I conclude this morning that despite the rather
rich auto settlements and some further selective price rises,
the economy continues to experience an orderly and reasonably
well-balanced expansion. Its pace appears neither to have
accelerated nor decelerated. Some recent developments on
the wage and price front will require careful watch, but
excesses and destabilizing forces are still mainly potential;
at the moment they do not appear to require decisive cor
rective action. Finally, and recognizing the lags in the
effects of monetary policy, we may be entering the later
stages of the current expansion when housing expenditures,
which presumably are appreciably affected by financial
conditions, are already declining for reasons of demography
and choice, and when Government expenditures are leveling off.
9/29/64
-14Mr. Deane entered the meeting during the course of Mr. Koch's
presentation.
Mr. Holland made the following statement concerning financial
developments:
A glance back over financial developments in the six
weeks since the Committee altered its monetary policy can
easily generate mixed emotions--a sense of relief that the
change has been carried through without serious bond market
repercussions, but concern that the intervening bank credit
and monetary expansion has nonethelese been very large.
One possible explanation consistent with both results is
that the change of policy was so small as to have no effect
in either area. A more extended explanation, to which I
am persuaded, is that we are living through another of
those occasions when a modest shift in monetary policy has
coincided with a sizable increase in credit demands, of a
duration that is as yet uncertain, and of a type that has
thus far focused the bulk of its pressures on the banking
system.
The chief element of change on the demand side appears
to be a belated increase in business demands for external
funds, following a long period in which internally generated
funds served to finance an unusually h.gh proportion of
total business operating and investment outlays. Most
recent evidence of such a shift consists of stronger than
seasonal bank loan increases by a growing number of indus
tries, over the tax date and by some lines for several
weeks before. These include such cyclically significant
borrowers as metals, petroleum and chemical, trade, public
utility, and miscellaneous manufanturing firms. The sharp
run-off of corporate holdings of CD's over the tax date,
and the recent greater difficulty and higher cost with
which dealers have obtained corporate RP's, are further
signs in this direction.
In general, the capital markets have thus far been
little strained by the pressure of the latest increases in
credit demand. Each of the three major markets for debt
securities has felt some supply pressures in recent weeks,
as Mr. Stone has pointed out in his reports, and each has
undergone a differing degree of upward yield adjustment as
a consequence. In no case, however, has that yield adjust
ment been large to date. That the capital markets have
done as well as they have reflects a continued very large
flow of funds into savings and investment intermediaries.
9/29/64
-15-
While the GNP savings rate seems to have declined somewhat
in the third quarter from its high post-tax-cut level, the
flow of financial-type savings into savings institutions
has continued unabated, at least through August. And demands
upon these institutions by borrowers other than businesses
seem to have mounted less this year than last.
For the commercial banks, the direct and indirect
pressure of corporate cash needs appears to have led to
large seasonally adjusted deposit creation in September, on
the heels of vigorous expansion in each of the three preced
ing months. Average total member bank deposits are expected
to have increased at about an 11 per cent annual rate in
September, compared with an 8 per cent average over the June
August period. The portion of that deposit growth that took
the form of money supply additions was quite large through
mid-July, and then was relatively moderate from mid-July
through mid-September; but most recently the money supply
inrease has apparently been sharp once again.
Asset acquisitions by banks during this period of strong
deposit expansion have varied.
In August, the largest step
ups in bank asset growth occurred in investments, both
Governments and other securities. As the dividend and tax
date passed, bill holdings, business loans, and dealer loans
all mourted more than usual, and CD's outstanding dropped as
banks bore the brunt of corporate and dealer adjustments.
The reserves to support such bank credit expansion up
through mid-September were made available irregularly,
reflecting not only inadvertent fluctuations in free reserves
but also varying reserve distributions between country and
city banks. City banks borrowed sizable amounts of funds
through the Federal funds market, and also stepped up their
Since the tax date credit
borrowing at the discount window
bulge, the sense of pressure on city banks has tended to be
greater, first inside and then outside New York City. These
banks have raised rates on dealer loans, sold Governments in
some instances (although not on a net basis), and tried to
continue buying Federal funds, althoug in total the supply
of Federal funds has contracted, and can be expected to
contract further, because of the competitive attractiveness
of a 3.55-3.60 per cent bill rate. At the same time, given
present System reserve targets, the reserve city banks are
probably going to continue bearing most of the weight of
$300-$400 million average indebtedness to the Reserve Banks.
It seems to me that such a discounting need is not yet
fully appreciated by the banking system, and that as such
pressure settles down upon particular banks, some liquida
tion of the earning assets acquired in recent weeks and
months may well occur. Aggressive CD sales may also be
attempted. Both types of action would produce some further
9/29/64
-16-
upward yield pressures in whatever sectors of the market
banks chose to concentrate their actions. Some bank demand
deposits would be absorbed in the process, and the resultant
over-all net growth in bank credit and money would be rendered
somewhat more moderate. I must say this strikes me as the
most likely expectation of what would happen if reserve
availability were to be held about where it is now by appro
priate System action.
But if this does not prove to be the case, and if bank
credit should continue to mount sharply, then we will need
to look carefully for one or two possible contributing fac
tors: a dulling of the discipline of the discount window,
particularly for larger banks; and/or a more lasting kind
of upward shift in demands for bank credit and money, partic
ularly by business. With regard to the first of these factors,
I myself think that our discount procedures are tight enough
to stand the current strain, although as bill rates are inched
further aid further above the discount rate the handicap
imposed upon discount administrators grows greater and greater.
Insofar as the possibilities of a major and longer lasting
shift in demands for bank credit are concerned, this cannot
be judged at this moment, so close to the possible event and
with such partial information. Changing demands for bank
credit and money need to be viewed in the perspective of
seasonal and cyclical shifts in other financial stocks and
flows, and against the background of current and prospective
pressures on resources. The staff plans to present a formal
projection of GNP and related flows of funds at the next
meeting of the Committee that we hope may be of assistance
in this regard.
Mr. Mitchell asked whether the larger than usual business cash
demands over the tax and dividend dates in September reflected some
structural changes in the attitude of corporations toward cash balances
and CD's.
Mr. Holland replied that during September corporations
apparently made net reductions in their holdings of all types of
interest-bearing liquid assets.
What this signified was not yet clear.
He had heard of comments by individual corporate treasurers to the
effect that cash flow had slowed down.
This might reflect growth in
9/29/64
-17
accounts re:eivable, inventory building, or a step-up in various types
of outlays.
No statistics were available on business outlays on
inventories, operating expenditures, and capital expenditures in Septen
ber to validate a judgment that corporations were changing their
borrowing-liquidity-spending patterns.
It should be possible to see
these developments in better perspective later, but it was too early to
assess then now.
Mr. Mitchell said he would be surprised if cash flows were
slowing down at this point, since profits were rising and depreciation
allowances were continuing to make a substantial contribution.
Mr.
Holland observed that while undistributed profits had shown a large
rise in the first quarter they had not risen much since then.
Cash
outlays currently might be rising faster than the cash throw-off from
operations, and corporations could therefore be relying increasirgly
on the banking system for financing.
Mr. Reynolds presented the following statement on the balance
of payments:
Complete preliminary data for August on U.S. reserves
and liquid liabilities (including Rcosa bonds) show a pay
ments deficit of $285 million without seasonal adjustment;
this i; smaller than was expected at the time of the last
meeting. Indicators for the first three weeks of September
suggest a deficit this month of less than $200 million,
despite a large transfer to Canada by U.S. power companies.
For the quarter, the unadjusted deficit or regular trans
actions may be about $1.1 or $1.2 billion, assuming no
change in military prepayment accounts.
Seasonally
adjusted, this would be about as large as the second quar
ter deficit, now revised downward to $2.7 billion at an
annual rate. But it would not be appreciably larger, as
had earlier been feared.
9/29/64
-18-
I should point out that the figures ultimately published
by the Commerce Department for the third quarter may look
better than this. Sales to the Canadian Treasury in September
of $204 million of nonmarketable U.S. Government securities
may be treated statistically as an ordinary long-term capital
inflow above the line, instead of being treated like all
previous sales of such securities. But I and my colleagues
on the Board's staff see little reason to treat these partic
ular securities differently from earlier ones; so we have made
our calculations on the old basis.
U.S. reserves of gold, convertible foreign currencies,
and the IMF gold tranche position will have changed very lit
tle during the third quarter. Liabilities to foreign official
institutions, including all Roosa bonds, will have increased
by perhaps $600 million. Thus, these official settlements
have financed only about half of the unadjusted deficit on
regular transactions. The other half was financed by private
foreign holders of liquid assets in this country--mainly
commercial banks--who increased their holdings contrasea
sonally.
U.S. banks report only negligible net outflows of U.S.
short-term private capital in August; we have no details yet.
In July. they reported no significant outflow on short-term
loans and acceptances, and an inflow of liquid funds that
was only partly offset by outflows reported by nonfinancial
concerns. Thus, there is no evidence yet of any net outflow
of U.S. short-term capital in the third quarter, whereas in
each of the first two quarters there had been record outflows
of $600 million. (There was an equally abrupt reversal last
year, but not in earlier years.)
On the other hand, long-term outflows--other than direct
investments, for which we have no data--have increased this
quarter. Net long-term lending by U.S. banks in July and
August totaled $120 million, and was above the average rate
for the first half year. Net U.S. purchases of foreign
securities were negligible in July, and new issues in August
were apparently nil. But in September, new issues may total
$100 million; and, in addition, U.S. power companies made a
$250 million capital payment to British Columbia for 30 years
of water control on the Columbia River. These bits and pieces
indicate that for the quarter, seasonally adjusted outflows
of U.S. long-term private capital other than direct invest
ments were more than double the $250 million average for
the first two quarters, although they have probably not
risen by as much as short-term outflows have declined.
With the deficit on regular transactions about unchanged
between the second and third quarters, it is of some interest
to try to see just where we stood in the second quarter, for
9/29/64
-19-
which detailed preliminary figures are being published tomorrow
in the Survey of Current Business.
The surplus on goods and services (including military
sales and expenditures) was high in the second quarter, $7
billion at an annual rate, even though it was down sharply
from the extraordinary first quarter peak. In the first half
of 1960, a comparable perioc in many ways, the rate of surplus
on goods and services was only $3 billion. The $7 billion rate
of the second quarter this year is probably a little above the
Long-run trend, considering the present unusual conjuncture of
strong demand in both the industrial and the nonindustrial
countries. But it is clear that there has been a substantial
underlying improvement since 1960.
The main reason that this improvement has not reduced
the over-all payments deficit as quickly as some of us had
hoped is that outflows of U.S. private capital have been
enormous. Such outflows were at an annual rate of $5-1/2
billicn in both the first and second quarters of this year.
This rate is as high as that temporarily reached a year
earlier, before the interest equalization tax was proposed
and before Federal Reserve discount rates were increased.
The outflows have varied in form from quarter to quarter,
and only fragments of them can be specifically related to
short-term interest-rate differentials. But the total flow
must have been influenced by differential credit conditions
of all kinds--in long-term as well as short-term credit
markets--and specifically by the cotrast between continued
ease in this country and progressive tightening abroad.
Whether these large capital outflows point towards the
desirability of some further firming of monetary conditions
in this country depends partly on how important it is to
eliminate the over-all deficit fairly soon, and on how much
the capital flows would be affected by a moderate change in
policy.
These are "iffy" questions. But the balance-of
payments case for a policy change becomes much stronger if
it can be shown that continuation of the current degree of
ease substantially increases the risk of future inflationary
developments at home, since these would jeopardize the pro
gress already made in the international balance on goods
and services.
Chairman Martin then called for the usual go-around of comments
and views on economic conditions and monetary policy, beginning with
Mr. Hayes, who presented the following statement:
Business is continuing its solid advance, and the outlook
is for a continued advance in activity for 1964 and well into
1965. Among the important favorable factors are the prospect
9/29/64
-20-
for rising outlays on plant and equipment and strength in
consumer spending, which may well increase as the full effects
of the tax cut work through the economy. The only significant
areas of relative weakness are housing and a few industries
seriously affected by the declining defense orders. While
unemploynent remains substantial, the level of the rate of
recent mnths, both for the total and for married men alone,
has been appreciably lower than last year or early this year.
Undoubtedly the most important developments in our sphere
of interest since the last meeting have been the announcement
of the labor settlements with Chrysler and Ford and the strike
at General Motors. I share the view of many observers that
this had brought a good deal closer the danger of a resumptior
of inflationary tendencies in the economy--in fact the long
record cf price stability may now be in more serious jeopardy
than at any time in recent years. On the other hand, it is
too early to assess these prospects accurately, and there are,
of course, significant counter-inflationary influences in the
form of unused resources and prospects for further productivity
gains. It is also possible that part of any general increase
in costs might be reflected in lower profits rather than in
higher prices.
Although the auto industry itself apparently intends to
absorb the higher costs without raising prices, there remains
a grave danger that the generous settlements may have pervasive
cost and price effects in other areas. The settlements, which
were apparently in the range of 4-1/2 to 5 per cent per annum,
exceeded both the 3.2 per cent guideline and the increases of
somewhat over 3-1/2 per cent gained in each of the years 1958
and 1961 but they were well below the increases of 6 to 6-1/2
per cent in 1950 and 1955. With much of the latest increase
taking the form of fringe benefits, it is not clear just how
strong the influence will be on labor settlements in other
industries, where fringes may tend to differ in nature and
where there may be greater resistance on the part of manage
ment. I should add, however, that greater resistance might
result ir serious strikes as an alternative to excessive cost
increases, and the prospect of hard bargaining in the steel
industry is not reassuring. Furthermore, apart from labor
cost effects, the auto settlements may have significant
psychological influences in the direction of inflation. This
could show up in greater willingness in other industries to
attempt price increases, greater interest in inventory
accumulation, and higher raw material prices. Although the
major price indexes are stable, the index of raw industrial
prices has been moving upward, and most individual price
announcements in the last week or two have been in that direc
tion. On the other hand, we must recognize that the spurt of
inflationary psychology of recent weeks could subside with the
passage of time.
9/29/64
-21-
In evaluating credit developments. it seems to me wiser
to adopt a reasonably long perspective rather than to give
much weight to the latest month-to-month fluctuations. On
this basis, it seems clear that bank credit and the money
supply have been growing this year at just about the same
substantial pace as last year, while the growth of time
deposits has been somewhat slower. With total bank credit
up at the rate of about 7 per cent per annum in the first
eight months, it seems to me that the System has been doing
all that could possibly be expected to facilitate the busi
ness expansion.
The balance-of-payments data for September and the third
quarter are, of course, still uncertain, but I suspect that
the favorable results in the first two weeks of September
reflected a return flow of corporate funds to meet tax and
dividend needs, and payments data may well show a reversal
over the next month or so. While the third quarter deficit
probably will be smaller than seemed likely a month or so
ago, it will nevertheless be much higher than it should be.
As was predicted so often early in the year, the very favor
able trend in the balance of payments in late 1963 and early
1964 has not been maintained, and the prospective deficit
for the full year 1964 is still disturbingly high. I was
impressed anew at the annual meeting of the IMF and World
Bank in Tokyo by the fact that, although the dollar has
been reasonably firm in the exchange markets and still
enjoys a high degree of confidence, there is a pronounced
underlying uneasiness as to our ability and will to get
our balance of payments problem under control. And as a
result of this, our bargaining power in the international
financial sphere is being steadily eroded.
The present combination of domestic and international
conditions is not one that would seem to call for a prompt
and decisive change in monetary policy. Nevertheless, I
don't see how we can view these conditions without a feel
ing of apprehension and without suspecting that the System
is being driven gradually and inexorably by the force of
events toward a less easy policy.
From a strictly domestic point of view, the threat to
price stability looms rather large, but a real inflationary
surge is still only a threat rather than a reality--hence
we can afford to await further evidence of a general infla
tionary trend before making a policy change on this ground.
If we look at the international side, the question is more
perplexing, but I think we would still be justified in
deferring a decisive move, such as a discount rate increase.
Although the balance-of-payments deficit continues to run
at or above the $2 billion level, cross currents in recent
weekly data obscure the case for an immediate and overt
9/29/64
-12-
policy change. Moreover, the political realities--both
national and international--would suggest a need to make
a particularly persuasive case for any such move. I am
concerned, however, not only with the problem of relative
interest rates, credit availability, and resultant capital
flows, but also with the danger that the enhanced possi
bility of inflation since the auto settlements may under
mine still further our international bargaining position
and may even jeopardize confidence in the dollar unless
it can soon be demonstrated that the System sees this
danger and is doing something about it. So I would con
clude that the time may not be far distant when a decisive
policy change will be necessary.
Fortunately, most of the time between now and the end
of the year is clear as far as "even-heel" considerations
are concerned, except during the refunding operation to be
announced late in October and completed by mid-November.
Hence, there should be ample opportunity this fall to review
developments here and abroad and to adjust monetary policy
to the extent necessary. In the meantime, it would seem to
me desirable to maintain present "snug" conditions in the
money market and even to move very slightly further in this
directior. With the economy moving ahead vigorously, there
will probably be a natural tendency toward firmer shor:-term
interest rates in the next few months. I would hope that the
System would support this tendency rather than supply reserves
so generously as to offset it. A 90-day bill rate objective
of 3-5/8 per cent would seem reasonable, with free reserves
in the zero to $50 million range. I think the Manager should
not be criticized if free reserves occasionally go below zero,
although I would not suggest any deliberate effort to get
below zero.
As has been mentioned by several Committee members at
recent meetings, a reduction in reserve requirements some
time this fall to meet a substantial portion of seasonal
reserve needs seems to be a useful way of minimizing down
ward pressure on bill rates. I believe such action could
readily be explained as a technical measure adopted for
balance of payments reasons and in no sense constituting
a measure of increased monetary ease.
As for the directive, the first paragraph, as recast
by the staff, rightly eliminates the reference to the slacken
ing of money supply expansion and brings up to date the com
ments on the balance of payments. However, I think it also
ought to include a reference to the inflationary implications
of the settlements in the automobile industry. I think the
money market conditions I have proposed can be met within
the framework of the present second paragraph, although meet
ing them may require an understanding that the Desk should
resolve doubts on the side of less ease.
9/29/64
-23
Mr. Francis reported that since early summer economic ac:ivity
in the Eighth District had again been expanding, following a pause
during the late winter and spring.
Employment, manufacturing output,
spending, bank loans, and bank deposits all had risen since May.
Information on contracts awarded indicated that construction activity
had also been rising.
However, agricultural crop estimates and price
developments indicated that cash farm income in the area this fall
might be below year-ago levels.
Payroll employment in the major labor markets of the area had
risen at a 2 per cent annual rate sirce May, Mr. Francis said.
major industry groups shared in the gains.
All
Sharpest increases in
employment were in the Memphis, Evansville, and Fort Smith areas.
St. Louis and Louisville had moderate gain.
Payroll employment fig
ures for the States of Missouri, Arkansas, and Kentucky, which were
available through July, indicated that there was also a rise in employ
ment in each of those States in the early summer.
Manufacturing production in the District had risen at a 5 per
cent annual rate since May.
The volume of construction contracts
awarded during the first seven months of the year was about 25 per
cent greater than in the corresponding period last year, with sub
stantial increases in each of the District's metropolitan areas.
Bank debits had risen markedly since April, after remaining on a
plateau since August of last year.
9/29/64
-24
Banking activity in the District had experienced both strong
loan demands and marked deposit increased, Mr. Francis observed.
Since
May, total deposits at all member banks had risen at a 7 per cent
annual rate.
Time deposits had expanded at a 13 per cent rate and
demand deposits at a 1 per cent rate.
loans had risen markedly since May.
Both business loans and other
The dollar gain in deposits had
virtually matched the loan increase, and District banks had had to
make but limited adjustments in their other accounts during this
period.
Investment portfolios had remained nearly unchanged on balance;
average borrowings at the Reserve Bank had been moderate, and Federal
funds purchases and sales had been about equal at the larger banks.
Agricultural conditions in the District had been less favorable
this year than last, Mr. Francis continued.
Estimated crop production
was down in most of the area in line with the national pattern.
Corn
production in the seven District States was estimated at 8 per cent
less than the 1963 output.
Oats were expected to be down 25 per cent,
soybeans 5 per cent, cotton 3 per cent, and tobacco 18 per cent.
Of
the major District crops, only rice and wheat estimates exceeded 1963
output.
Also, prices of major crops were somewhat less than in 1963.
Soybeans were down about 4 per cent, cotton about 3 per cent, and
wheat about 25 per cent.
Farmers might, however, receive slightly
higher prices for tobacco and corn.
The declines in output and prices pointed to a decline in cash
farm receipts during the heavy marketing season ahead, Mr. Francis
said.
In the first seven months of this year, cash receipts from farm
-25
9/29/64
marketins in the District States were slightly higher than in the
same months of 1963; the gain was the result of a greater-than-normal
carry-over of crops from the preceding year.
Mr. Bryan commented that the Sixth District economy, on the
whole, seemed to be expanding.
Construction, which had been tending
to level off or decline, now was rising, and the figure on insured
unemployment was down.
Bank deposits were up sharply, as was the
money supply both on a strict definition and including time deposits.
Banks were experiencing a large loan demand.
It seemed to Mr. Bryan that the Committee's change in policy
had been accomplished in an extraordinarily mild and gentle fashion,
and expertly.
He was not prepared to say whether the economy was
going to become inflationary or not; he had been inclined to think
that some recent developments were inflationary, but his staff argued
otherwise.
With free reserves at present levels, Mr. Bryan continued, he
did not see how the Manager could avoid having a negative figure appear
inadvertently at some point.
But he also believed that at this time
the free reserve figure might be a rather dangerous one to use for
target purposes, since maintaining free reserves at any selected level
would mean supplying all of the reserves demanded.
He favored keeping
the reserve situation snug, to use Mr. Hayes' term, but he thought that
an aggregate reserve figure, such as total or nonborrowed reserves,
would be preferable to free reserves as the leading guide to policy.
9/29/64
-26
If he were to give a quantitative guideline in terms of a seasonally
adjusted growth rate for total reserves, he would consider the lower
part of the range between 2 and 3 per cent to be appropriate.
Mr.
Bryan saw no reason at this time to take so dramatic a step as to
increase the discount rate.
Mr. Bopp said the economy of the Third District was about
where a realistic optimist would have predicted it might be in the
current phase of an extended recovery in the nation's business--it
was doing much better than it had for some years, but the rise had
been more sluggish than the national upswing.
Unemployment rates in
a majority of labor market areas were lower than at any time since
1956-1957.
Output was climbing slowly.
Department store sales,
though not sensational, exceeded the totals of 1963 by a healthy
margin.
Increased reserve pressures and greater loan activity were
the most significant developments in Third District banking since
the Committee's last meeting.
The deficit in the basic reserve posi
tion of reserve city banks, $94 million for the week ending September 16,
was the highest since mid-April.
Total loans and investments (adjusted)
rose $82 million and business loans, which at last report had declined,
increased $29 million.
As the third quarter drew to a close, Mr. Bopp continued to
be impressed by the broad forward movement of the economy.
Despite
the breadth of the advance, however, convincing evidence of excess
was not yet present.
Inventories continued low compared with sales.
-27
9/29/64
Increases in business spending for capital goods and in State and
local government expenditures appeared to be coinciding with a level
ing in housing demand and in Federal Government spending--a sort of
rolling readjustment.
Despite some increases in nonferrous metal
and livestock prices, the broad price indexes remained stable.
And
although the labor contract negotiated in the auto industry might
prove to be inflationary, this remained to be seen in the present
environment.
Meanwhile, unemployment and the level of resource
utilization left room for further expansion.
The financial situation seemed to have been changing in line
with the Committee's desires, Mr. bopp remarked.
The three-month bill
rate was now around 3.55 per cent, and, if adjustment were made for
the particular attractiveness of the December maturity, the rate would
probably be nearer the 3.60 per cert level.
Growth in the money sup
ply had been erratic but the liquidity of the banking system was
getting tighter.
A study which the Philadelphia Reserve Bank recently
made of banks in the Third District indicated that economizing of cash
assets had been particularly marked at smaller banks.
This suggested
that the lag in response of these banks to changes in monetary policy
would be less than in the past if the System were to move toward
restraint.
On the international front, it now appeared that the third
quarter deficit in the balance of payments would be no greater than
that sustained in the second quarter.
While the payments problem
-28
9/29/64
remained a major concern, the apparent improvement since the large
July deficit did provide some encouragement.
In view of the present international environment, and taking
into consideration the continuing problem of unemployment and the Jack
of speculative excess in the domestic economy, Mr. Bopp recommended that
the Committee's policy posture be maintained without change.
The staff's
proposed directive was appropriate, in his judgment.
Mr. Hickman commented that although the economy continued to
move along in a generally moderate and balanced fashion, the Committee
should not disregard signs of imbalance that seemed to be emerging.
In this connection, the settlement in the automobile industry was
appreciably in excess of the guidelines.
It might, therefore, be
difficult for management in other industries to resist similar demands
by labor.
During the remainder of this year a number of labor con
tracts would expire between the auto workers' union and companies
producing auto parts and farm machinery.
Other industries, including
steel, would also face stiff labor demands in the near future.
In
some industries, where profit margins permitted, an increase in unit
labor costs might be absorbed, but in other industries the costs
might be passed through to the consumer in the form of higher prices.
Thus, a rise in industrial prices and a step-up in the rate of rise
in consumer prices were possible.
Another area of possible imbalance, Mr. Hickman said, was the
accelerated demand for steel, to which he had referred at the Committee's
last meeting.
Steel companies reporting to the Cleveland Bank confirmed
-29
9/29/64
press reports that auto companies had given notice to parts suppliers
and to the steel industry that they were embarking on a steel inventory
buildup as a hedge against a possible strike on May 1 next.
Present
plans appeared to involve an accumulation of inventories equal to
three and one-third months' supply, which was a full two months in
excess of the supply normally held in this period.
Serious pressures
had already emerged in the case of flat rolled products, with alloca
tions reported by some producers and with additional older, higher
cost plants being pressed into production.
Thus, there were prospects
of inventory buildup and slump in steel.
Recent developments in the Fourth District confirmed both the
general advance of business activity and instances of possible near
term imbalances, Mr. Hickman continued.
During the most recent period
electric power production showed sharp increases in all District areas
in contrast to moderate gains in the nation.
This was typical of the
District in periods when demand for steel was heavy.
Mr. Hickman reported that rising exployment in District steel
mills had spearheaded a continued reduction in the level of insured
unemployment, which had been occurring at a faster pace than in the
nation.
As the Board's staff had noted, the Pittsburgh labor market
had been reclassified as group "C,"
"D" or worse for almost seven years.
after carrying a designation of
The decline in unemployment in
Pittsburgh reflected both higher employment and a shrinkage in the
labor force.
Only one Fourth District area--Wheeling--now had a "D"
classification.
9/29/64
-30
The most recent information on District steel developments
illustrated an acceleration of activity.
Not only were the final order
figures for August higher than originally estimated, but estimates of
orders coming in for September were the highest in the three years
covered by the series.
Lead times were being lengthened, with a
number of incoming orders being placed for delivery in the first
quarter of 1965.
In the light of the imbalances that might be emerging, Mr.
Hickman said, one was tempted to recommend a further modest tighten
ing in policy, perhaps to a zero level of free reserves.
On the
other hand, the Committee must reckon with the fact that any evidence
of further System tightening at this juncture could trigger a sharp
decline in bond prices and a disproportionate decline in capital spend
ing.
Also, further tightening might cause some people to conclude
that the System saw sharply rising prices in the near future, which
might further encourage speculative inventory building.
In short,
the Committee should have moved much earlier, but to move now might
worsen the situation.
It seemed to Mr. Hickman that about the best the Committee
could do at present was to strive to achieve fully the modest shift
in policy that was decided upon six weeks ago, aiming at free reserves
around $50 million and a 91-day bill rate of 3.60 per cent.
He con
tinued to be disturbed by the large-scale upward revisions in the free
reserve statistics that pushed the final figures far beyond anything
-31
9/29/64
contemplated by the Committee.
This again highlighted the pressing
need for more accurate and more up-to-date information on reserve
positions across the nation.
The staff draft of the directive was acceptable to Mr. Hickmar,
although he had no objection to Mr. Hayes' suggestion for adding a
reference to the auto wage settlements.
He would not favor a change
in the discount rate at this time.
Mr. Daane said he agreed with much of Mr. Hayes' analysis,
particularly with his conclusion that now was not the time for an overt
change in policy.
He also agreed that the Committee might find such a
time in the early fall, given the portents of the auto settlements and
the rather rapid rise that was occurring in the money supply.
A gentle
change in System policy, reflected in a narrowly lower margin of reserve
availability, had been successfully achieved through a skillful perforn
ance by the Desk and, he would add--with no intent to minimize the Desk's
performance -through some amount of luck.
In Mr. Daane's judgment, the
Committee should strive to maintain the current market tone, and should
not run the risk of pushing its luck too far or of asking too much of
the Desk by refining the free reserve target from $50 million down to
$20 million or to zero.
He disagreed with Mr. Hayes' suggestion that
doubts should be resolved on side of tightness.
Mr. Daane would accept
the directive drafted by the staff and he would make no change in the
discount rate.
Mr. Mitchell commented that it was evident from the staff review
that some changes might be taking place in domestic economic and
9/29/64
-32
financial circumstances, particularly financial, that soon might
require a reappraisal of the Committee's policy posture.
However, he
did not think the evidence was clear enough as yet to warrant a change
in the Committee's current policy.
In his judgment, a negative free
reserve figure would have an "announcement effect" something like chat
of a change in the discount rate.
He hoped this effect would not be
wasted by having a negative figure come about inadvertently; it would
be preferable to save it for a time when it was intended as a deliber
ate signal.
Mr. Mitchell thought that the linkage between System actions
and conditions in credit markets was extremely taut at present, so
that a small move might have large undesired effects on security
prices and credit terms.
present posture of policy.
He was much in favor of maintaining the
The staff draft directive was acceptable
to him.
Mr. Shepardson remarked that yesterday he had attended a meet
ing of institutional lenders to agriculture.
As had been the case at
a similar meeting four months ago, the discussion had been devoted
largely to the heavy competition for agricultural loans and the
associated lowering of credit standards and easing of terms.
The
general attitude was one of concern about the lowering of agricultural
credit quality, and representatives of two or three insurance companies
reported that their companies were no longer aggressively soliciting
farm loans.
land prices.
Concern also was expressed about the continuing rise in
-33
9/29/64
On the national economic situation, Mr. Shepardson said that
bank credit and the money supply were continuing to expand at a higher
rate than seemed to him to be desirable or sustainable.
He did not
know at what point the situation would unfold in figures reflecting
price developments, but he felt that inflationary pressures were
being generated in the present wage negotiations and in other adverse
factors.
Personally, he favored acting to forestall inflationary
developments rather than attempting to correct them after they were
underway.
He recognized that he was in the minority on this matter,
but he thought it would be unfortunate if an inflationary movement
was permitted to get started.
In the past when that had happened,
the best the Committee had been able to do was to attempt to stop it;
a reversal was not possible.
Recognizing realities, Mr. Shepardson said, he would favor a
policy about as Mr. Hayes had suggested.
Within the framework of the
proposed directive, he would advocate working toward the lower level
of the free reserve range.
He would make no change in the discount
rate.
Mr. Robertson made the following statement:
This morning, even more than usual, I am impressed with
the uncertainties that attach to several important current
developments--ones that may eventually prove to be the key
to future changes in monetary policy.
On the labor front, we have a generous but not necessarily
inflationary settlement (and one that is not yet quite a full
settlement) in the automotive industry. But as the analysis
in the green book ("Current Economic and Financial Conditions")
points out, there are about as many reasons for expecting that
it will not set a pattern for other industries as for believing
that it might.
9/29/64
-34-
We have heard a good deal of talk about intended inventory
accumulation which, if it emerged, would be a destablizing
factor. But we have no evidence as yet of any appreciable
deeds to back up these words, either in the inventory statis
tics themselves or in manufacturers' orders or shipments, or
even in price quotations which often give a confirming signal
of any onrush in business buying.
We have had strong over-all bank credit and monetary
expansion this past month. But whether that is a temporary
swing, a rise to finance orderly further advances in spending
or the beginning of an upsurge that could eventually carry as
to unsustainably high rates of expenditure cannot be determined
at this juncture.
We have capital markets that have come through the trials
of the last month or so without serious misadventure. But it
seems to me that neither the dealers, the investors, nor the
commercial banks are as yet fully adjusted to the distinctly
tighter money market conditions that have evolved since the
September tax date and that we presumably intend to preserve.
And, lastly, we have balance of payments figures that
have been oscillating a great deal from week to week and
month to month, often in amounts not as great as was initially
indicated, and often for reasons not fully comprehended. The
latest swing is a more optimistic one, but one that certainly
cannot be claimed to have resulted so promptly from our policy
shift, and the significance and duration of such improvement
is (as the staff has told us) impossible to judge at this
juncture.
What, in the light of all these uncertainties, should
the Federal Reserve be doing? To guess now that all the
uncertainties in the current situation are going to be
resolved on the side of an inflationary upsurge seems to me
to be putting too much weight on the presumption that the
history of the 1950's will repeat itself. In point of fact,
we know that the current expansion has been fundamentally
different from previous postwar performance--more sustained,
more orderly, more noninflationary than ever before. More
than once this past year or so, sparks have been struck of
the type that ignited inflationary blazes in the past, but
this time businesses and consumers alike have been consis
tently more moderate and sensible in their spending, saving,
and investing decisions. I think our presumption ought to
be that they will continue so, at least until their actions
demonstrate otherwise.
Do we have the "elbowroom" to wait for actual perform
ance, rather than anticipations, to either confirm or
overthrow this presumption in the weeks and months ahead?
9/29/64
-35-
For the answer to this question, I think we have to turn
our minds to the basics of the situation--the relationships
of demands to resources. We have increased our use of labor
and industrial capacity this past year, but the important
facts are that such increased use has been gradual and that
additional human and material resources still remain to be
employed. Thanks in part to productivity advances, over-all
costs have remained under control, and broad measures of
prices have continued essentially stable. With a margin of
unutilized resources still available to cushion further
rises in demand, and the entire banking system on a short
rein because of its narrow cushion of liquidity, I think
the System needs to worry more about tightening too early
rather than tightening too late. In the current environ
ment, the much-advertised "lags" in the effects of monetary
policy seem to me likely to be no more than a desirable way
of making our influence felt, gradually but progressively,
and pervasively when, as, and if we want to act.
Given what has taken place in the past six weeks, I
would not want to add to the confusion by a rollback of
policy. I would, however, favor maintaining money market
conditions no tighter than they have oeen during September,
as we watch to see how business proceeds this fall.
Mr. Robertson added that the proposed directive was acceptable
to him.
Mr. Mills said that as he interpreted the staff's appraisal of
the economic situation, it was their belief that a point was approach
ing at which there would be either a downturn in economic activity or
a continuation of the moderate acceleration in growth that fortunately
had been experienced for a long period.
The question had been raised
as to whether, with this possibility of downturn or upturn, the Federal
Reserve System should follow a policy that would anticipate a downturn.
In particular, one reason that had been given against the Committee's
following a policy of aggressive or even moderate restraint was that
consumer income was not rising to any active degree.
However, it would
appear to be significant that while previously there had been a large
-36
9/29/64
internal flow of funds moving to a substantial degree into capital
expansion programs, there now was observable a rather active demand
for bank credit.
It was possible that this bank credit would be trans
lated into more aggressive consumer actions than had resulted from the
more lethargic flow of internal funds.
With this possibility, another reason existed for anticipating
a rising economy and growth of inflationary pressures, Mr. Mills said.
He thought the Committee's policy should remain about where it was,
but he would have no grievance if reserve positions were slightly
tightened.
Fortunately, the seasonal expansion in credit demands in
itself was working toward tightening, and was buttressing the kind of
policy that the System should conduct.
Mr. Mills thought the Committee should be careful to avoid
what could be regarded as a past error of showing no flexibility in
policy and allowing the language of the directive to remain unchanged
for a long period.
He thought the financial community should be
alerted to be on its toes to adapt its own programs to a System policy
that itself was alert to changing conditions.
The difficulty that had
been experienced in carrying out the recent slight change in policy
was an example of the problems that resulted from doing nothing for
long periods.
Mr. Mills remarked that references to a reduction in reserve
requirements seemed to keep turning up like a bad penny.
The suggestion
evidently was to avoid having to depress bill yields by buying bills
-37
9/29/64
in the market.
However, in his judgment a distinction should be made
between the purchase of bills to supply net additional reserves as
contrasted with buying bills to relieve reserve pressures on the bank
ing system that otherwise would tighten the market--the sort of
development that was now approaching.
He did not agree that bills
purchased to meet fall reserve needs would exert any downward pressure
on bill rates.
Mr. Wayne commented that a landmark had been reached.
West
Virginia's in;ured unemployment rate in the first half of this month
got down to 2.6 per cent, the same as the national figure.
Previously
the two rates had been equal in only four widely scattered weeks it the
past seven years.
improve.
In the District as a whole, business continued to
Nonfarm employment and factory man-hours rose further in
August while bank debits held only slightly below the all-time high
reached in July.
The Reserve Bank's industrial contracts on balance
continued to report increases in orders, backlogs, shipments, employ
ment, and hours worked per week.
About one-fourth said that wages had
risen, but prices were reported quite stable except for a few instances
in textiles, furniture, and lumber.
Leading textile producers were
reportedly booked solid for the rest of the year with little to sell
before next March, and demand for both current and future delivery of
several important cotton gray goods apparently remained unsatisfied.
The small, scattered price increases in tight areas of the textile
market, which had been reported for some time, now seemed more signif
icant since the wholesale price index for cotton products rose
9/29/64
-38
three-tenths
of a point in August.
In agriculture, most major crops
were expected to set production records this year.
Marketing of flue
cured tobacco was running 26 per cent ahead of last year but because
of slightly lower prices, the increase in dollar sales through mid
September was 25 per cent.
On the national front, Mr. Wayne said, business activity
apparently continued to move up moderately from a high level.
In
August, industrial production, retail sales, and personal income made
significant gains to register new records, although the increase in
personal income was due in considerable part to higher civil service
salaries, including retroactive payments.
There were no indications
of any reversal in any of these thus far in September.
Production of
1965 model automobiles was gaining momentum and, assuming an early
settlement of wage nego.iations, this should continue.
tion also showed further gains.
Steel produc
But there were several soft spots
which suggested that the economy as a whole was not subject to any
excess demand.
New orders for durable goods dropped 9 per cent in
August, housing starts declined nearly 6 per cent to the lowest point
since January 1963, and expenditures for new construction were down
about 1 per cent.
Inventory accumulations continued at a very low rate.
Altogether, the economy seemed to have maintained its balance remark
ably well under the impetus of the large tax cut last March.
In the policy area, Mr. Wayne continued, the Committee had
completed the slight firming movement started six weeks ago.
What
-39
9/29/64
effects it would produce, if any, probably would not be evident for
some time.
The present situation did not seem to him to require any
further change.
Domestically, the economy was functioning quite well
with no evidence of any deficiencies or excesses which called for cor
rection through the use of monetary measures.
Internationally,
Mr. Wayne did not foresee any gain to be derived from pushing up short
term rates which would justify the risk to the domestic economy.
In
this situation, he favored a continuation of the present policy with
no change in the discount rate.
The draft directive was satisfactory
to him.
Mr. Clay said that in his judgment monetary policy should
continue unchanged for the period ahead.
should be that
In other words, the policy
which now had been implemented upon the basis of the
decision made six weeks ago and renewed at the last meeting.
While
the domestic economy continued to grow in an impressive manner, that
growth needed to be further facilitated by an expansive monetary policy.
The resources for further growth were available, price developments
generally were favorable thus far, and the economy had shown little
evidence of the maladjustments characteristic of the later stages of
a business upswing.
Moreover, Mr. Clay observed, note needed to be taken of the
narrowing of the base from which economic expansicn was emanating.
Throughout the business upswing, there had been a continuing change
in the composition of demand expansion, as evidenced currently by a
9/29/64
-40
further contraction in the residential construction component.
As a
result of this internal shifting, the burden for further growth had
come to rest primarily upon consumer and business spending.
When recognition was given to the importance of orderly
conditions at this stage of the business upswing, the recent labor
contract settlements in the automobile industry were a disturbing
development,
It was too early, Mr. Clay said, to know what the impact
upon the economy would be in terms of costs and prices.
Much depended
upon the extent to which the terms of these contracts came to constitute
a pattern for settlements in other industries.
There could be little
doubt, however, that they were a potential threat to cost-price stabil
ity in a way that would be very awkward for monetary policy to deal
with.
Mr. Clay commented that current monetary policy should have as
its intermediate financial target the provision of member bank reserves
in sufficient volume to permit commercial bank credit expansion in line
with the average growth rate so far this year.
For the near-term target,
money market conditions should be maintained essentially the same as
in recent weeks.
The staff draft of the economic policy directive
appeared appropriate for the period ahead, Mr. Clay said.
In his opin
ion, no change should be made in the Federal Reserve Bank discount rate.
Mr. Scanlon reported that the level of economic activity in the
Seventh District continued to rise.
Producers of capital goods were
experiencing further increases in orders.
Additional firms, particularly
machine tools, reported that they were operating at capacity and giving
9/29/64.
-41
consideration to possible expansion.
However, important Midwest
producers of industrial, construction, and agricultural machinery
reported that they had capacity to handle additional orders for most
of their lines.
In some soft goods lines, including paper and chem
icals, production was also reported to be at or near capacity in
increasing numbers of firms.
Lead times on orders were reported to
be lengthening somewhat for a broad range of commodities.
Farm cash receipts in the District had been higher through
July than in the year-ago period.
However, dry weather had reduced
prospective production of corn and might cause a decline in market
ing of crops during the remainder of the year, which would not be
offset fully by receipts from livestock.
Seventh District banking figures indicated some acceleration
of credit demands from businesses and consumers, Mr. Scanlon observed.
Loans appeared to be rising faster than the usual seasonal, but it
was still too early to judge what portion of the mid-September loan
expansion represented temporary borrowing for -tax purposes.
Over the
past six weeks borrowing by durable goods manufacturers had been rising
more than usual for this time of year.
The major District banks
expected a more-than-seasonal increase in loan demand during the final
quarter of 1964.
Mr. Scanlon reported that the basic deficit position of the
major Chicago banks had risen sharply over the tax date as loans rose
and CDs matured.
Although their net purchases of Federal funds had
declined the past week, there were rather severe reserve pressures.
-42
9/29/64
Nearly all of the District's biggest banks borrowed at the discount
window last Wednesday.
Mr. Scanlon remarked that there had been several references to
the wage settlements in the automobile industry.
Mr. Hayes and Mr. Koch
had both referred to the settlements as being about 4-1/2 or 5 per cent.
This might be absolutely correct but because such a large part of the
settlement was in the form of fringe benefits it was difficult to
measure the exact costs.
One manufacturer estimated the hourly cost
over the three-year period of the contract at 60 cents--an increase of
about 5 per cent each year.
However, this firm estimated that half of
this cost, or 30 cents, would come the first year.
per cent, based on an hourly rate of $4.00.
This was about 7-1/2
While the company might be
able to absorb these increased labor costs over the three-year period
without incre.sing car prices, it certainly would pinch them profit
wise the first year.
Perhaps this was the type of reaction one should
expect from a manufacturer following a wage settlement.
He
Mr. Scanlon said he did not know what these moves implied.
was concerned about them but he believed that it was too early to
determine their impact.
As to policy, he agreed with those who recom
mended an even keel position.
He found the draft directive acceptable
and he would not change the discount rate.
Mr. Deming said that Ninth District economic prospects were
little changed since the previous meeting.
Nonresidential building
was somewhat stronger in the District than nationally.
Bank credit
expansion was not nearly as large as for the country as a whole.
Loans
9/29/64
-43
were growing, but at a rate only about equal to the average for the
past four years.
Deposits were expanding, and, if anything, the liq
uidity positions of District banks had improved.
In both August and
September loan-deposit ratios declined.
Mr. Deming commented that he had referred on several occasions
to a Reserve Bank survey of corporations with headquarters in the Ninth
District that operated nationally and in some cases internationally.
Results of the most recent survey indicated a continuation of fairly
strong upward movements in production and employment, and a prospect of
further gains.
The profit picture continued good.
With respect to
prices, in the past there usually had been reports of both declines and
increases.
In the most recent survey, however, there were no indications
of price declines.
Out of 25 firms, 6 reported that they had raised some
prices in the current quarter, and 5 others anticipated some increases
over the next quarter.
The changes were not large, but they indicated
the prevalence of upward price pressures.
Mr. Deming said he would concur with what seemed to be the
majority position on policy, that the Committee's posture should remain
unchanged at the present time.
him.
The staff directive was acceptable to
He did not favor an increase in the discount rate.
Mr. Swan reported that during August total employment declined
somewhat more in the Pacific states than in the rest of the nation,
after rising faster in July.
However, neither difference was marked.
As in the country as a whole, the rate of unemployment increased 2/10
9/29/64
-44
of 1 percentage point in August, but the level in the Pacific states
was 1 percentage point higher than the national level--rising from 5.9
to 6.1 per cent.
In the defense- and space-related industries further
layoffs were in prospect, despite receipt of substantial new orders
for commercial aircraft by some District firms.
Mr. Swan commented that there had been a number of references
at recent meetings to the decline in housing activity.
He was not
sure that the extent to which this decline was concentrated in the
western part of the country was fully realized.
One might take the
"west" to include the States of the Twelfth District plus Montana,
Wyoming, Colorado, and New Mexico.
On this basis, for the first eight
months of 1964 housing starts nationally were 4.1 per cent above the
comparable period a year ago, but they were down 8.2 per cent in the
west, and up 9 per cent in the rest of the country.
The same pattern
held for building permits, which were up almost 1.4 per cent nationally,
down 11.4 per cent in the west, and up 7.8 per cent elsewhere.
Twelf:h District reserve city banks were under somewhat less
pressure in recent weeks than earlier, Mr. Swan said.
Some banks, in
light of higher dealer financing rates, had increased their arbitrage
operations in Federal funds, borrowing net in interbank transactions
and lending to dealers.
Mr. Swan agreed with those who thought that no change in policy
was in order at this point.
He definitely would not increase, even
slightly, the tightening that had been decided on at the August 18
meeting, preferring to maintain the present position as nearly as
-45
9/29/64
possible.
He would accept the directive su.gested by the staff, and
he would make no change in the discount rate.
Hr. Swan added that if a more decisive policy move became
necessary at some point soon it was unlikely that it could be carried
out without some effect on long-term rates.
He was concerned about the
impression that was being given by some spokesmen outside the System
that such a policy move could be accomplished without significant
effects on long-term rates.
Mr. Irons said that economic activity in the Eleventh District
was continuing at a high level, with some small short-run fluctuations
but, on the whole, a quite desirable degree of stability.
Most recently
industrial production was off a little, mainly in durable goods.
Con
struction activity was high, but the number of residential units started
was down a bit.
Employment was inching up fractionally, and the unemploy
ment figure continued to run at about 4 per cent.
Retail trade was
down slightly but demand for automobiles was strong.
Recent rains had
improved the agricultural outlook, and it now appeared that farmers
would come out about even, as they usually did, following a period in
which the outlook had seemed critical.
At banks, Mr. Irons continued, demand for loans had been strong
in all categories.
were up.
Investments were up moderately, and deposits also
The position of large city banks in the District was not as
liquid as it had been earlier.
With the strong loan demand, banks were
stepping up their borrowing from the Reserve Bank a bit and they were
increasing their Federal funds purchases on balance.
Bank liquidity
9/29/64
-46
positions were such that if it were necessary to firm credit conditions
further, the effect would be felt rather promptly at the discount window.
On the
other hand, Mr. Irons said, during the past week two of
the District's largest savings and loan associations had cut the rates
they offered from 4-1/2 to 4-1/4 per cent because the supply of funds
to them was greater than they felt they could invest in mortgages of
the quality they sought.
At a time when the situation of banks reflected
tightness, savings and loan associations seemed to have plenty of funds
for first-class mortgages.
Mr. Irons commented that the recent mild policy move had been
administered effectively and with satisfactory results.
He would favor
continuing the recent policy over the next three weeks, maintaining
about the same standards of reserve availability and preserving the
current ,eneral market atmosphere.
The Comittee had been using free reserves as a target variable
for good or ill, Mr. Irons remarked, and he did not think it would be
desirable at this time to change horses in mid-stream.
The free reserve
figure was now at a level from which it could easily drop to the negative
side.
He did not think the Committee could lower its target if it wanted
to avoid negative figures; there was not much leeway below $50 or $75
million.
He would not be greatly disturbed by negative figures, but he
would prefer that they be avoided if possible.
Mr. Irons said he was not sure he would favor the reduction in
reserve requirements that had been referred to as a possible means of
meeting seasonal reserve requirements in the foreseeable future.
He
9/29/64
-47
would want to think the matter through carefully before forming an
opinion.
He did not favor a change in the discount rate at this time.
Mr. Irons concluded by noting that he would not be surprised
if there were an increase in activity at the discount window even in
the absence of a policy change.
Mr. Ellis said that economic conditions in New England remained
impressively good but were not spectacular.
Despite stability in meas
ures of employment, insured unemployment was registering greater than
seasonal declines, and in early September reached lows not matched
since 1962.
Manufacturing output was continuing to rise slowly.
As he had noted at the previous meeting, Mr. Ellis continued,
in financial terms the expansion seemed to be proceeding at a faster
pace.
First District banks were anticipating an increase in loan
demand over the next few months, and the statistics revealed a New
England business loan expansion rate 20 per cent faster than the national
pace in the past year.
Demand deposits were hard to come by, but rapid
growth in time deposits--at a 28 per cent rate over the past twelve
months, compared with 14 per cent nationally--had been helping to keep
the banks in finds.
It was evident at several banking conferences held
during the preceding week that most District banks had little interest
in borrowing through their own notes as long as their time deposit
inflow continued.
Turning to monetary policy, Mr. Ellis said he agreed with the
staff judgment that developments thus far did not provide clearcut
indications that inflationary forces were dominant.
However, his own
-48
9/29/64
analysis suggested that the recent auto wage settlements were in excess
of productivity gains and contributed to the sentiment that price
increases were likely to come.
Banks were financing consumer and busi
ness spending at a more rapid pace, and the currently high rate of
reserve expansion was enabling this borrow:ng to continue at a rate
which he did not consider sustainable.
In his judgment the underlying
pressures were becoming increasingly inflationary.
From this point of view, Mr. Ellis said, it seemed to him that
the Committee's next move should be in the direction of less ease.
There was a question of timing, however, and he leaned to the view
that the present was not a good time to take overt action.
He concluded
that it would be desirable to continue the Committee's current policy,
but to move as far as possible within the context of the directive
towards firmer conditions.
He welcomed the Manager's appraisal of
probable market reactions to a negative free reserve figure.
He thought
some imperfection in achieving targets was inevitable, and he was will
ing to accept the possibility that negative free reserve figures might
eventuate.
However, he would seek to have free reserves in the zero to
$50 million range.
He would like to see the rate on Federal funds con
sistently at 3-1/2 per cent, member bank borrowings consistently above
$300 million and perhaps rising over the next several weeks, and short
term rates in the 3.55-3.65 per cent range.
He d d not favor a change
in the discount rate at present.
Mr. Balderston said he agreed with much that had been said
around the table.
It seemed to him, however, that the applause had
9/29/64
-49
been for the fact that the Committee had not caused anyone much trouble
during the past few weeks.
He was concerned, for the reason Mr. Mills
had suggested, that if the Committee continued to maintain the status
quo it might stumble inadvertently into real trouble.
He would urge
the Committee to continue to make its policy changes smoothly and
gradually, and perhaps almost imperceptibly.
But he also hoped that
the Committee would face up to the dangers now confronting the economy
and continue ,:o move in the direction of greater tightness.
Mr. Balderston said he was not appalled by the automobile wage
settlements, particularly since they did not call for any wage rate.
advance for a year.
But he was concerned by the accumulation of steel
stocks against the possibility of a strike next spring, which threatened
the stability of steel production.
The economy had lived through this
sort of experience in 1956 and 1959, and he sensed it was coming again.
The only cure would be an early labor settlement in the steel industry;
unless that occurred automobile manufacturers and other users of steel
would act to protect themselves.
If the steel industry attempted to match the auto industry's
pension program, Mr. Balderston said, their pension costs might be
raised as much as 50 per cent.
A strong demand for liberalization of
pension benefits in steel or elsewhere could prove very costly.
Earlier,
the steel industry had sought to meet the problem of the impact of auto
mation on employment by its extended vacation plan.
In dealing with the
same problem the auto industry might have taken a more constructive
approach by permitting early retirements.
9/29/64
-50
Turning to the financial figures, Mr. Balderston noted that
nonborrowed reserves had grown at an annual rate of 4.5 per cent so
far this year, the money supply at a 4.4 per cent rate, and total mem
ber bank deposits at a rate of 7.4 per cent.
Now that so much time
had passed since the advance refunding, he no longer was concerned
about the possible ill effects of having free reserves drop occasionally
below zero.
He did not agree with Mr. Mitchell's suggestion that nega
tive free reserves should be saved for a time when the Committee wanted
to use them as a deliberate signal.
He appreciated that Mr. Stone had,
with great dexterity, brought certain market forces into reasonable
balance
and that he (Mr. Stone) might want an additional few weeks to
achieve a still better balance.
In the meantime, however, as Mr. Reynolds
had indicated, capital outflows were enormous.
It would be hard to
handle cutflows at a $5-1/2 billion annual rate with any likely trade
surplus.
In addition, both British and U.S. elections were in the off
ing, and either might precipitate a run on gold such as had occurred
four years ago.
Looking at the statistics involved in the gold drain, Mr. Balder
ston said, $90 million already had been committed as gold cover in
connection with conversion from silver certificates to Federal Reserve
notes, and this conversion would continue, pre-empting still more gold.
The growth in currency outstanding was taking a still bigger bite out
of "free" gold, as was the expansion in System deposit liabilities
associated with the growth in the economy that everyone hoped would
continue.
Because of these factors, Mr. Balderston would use a
9/29/64
-51
reduction in reserve requirements to .ave some $300 million of gold
cover, and thereby delay the day when the country would have to recognize
that the 25 per cent gold requirement had been reached or breached.
To
avoid committing $300 million of gold would postpone that day for pos
sibly a year.
As far as policy was concerned, Mr. Balderston would move the
free reserve target down gradually towards zero.
If the figure occasion
ally proved to be negative he would not be disturbed, and he did not
believe there would be adverse effects in the bond market.
As to the directive, Mr. Balderston would accept the suggestion
made by Mr. Hayes to add a reference to the auto wage settlements.
He
also would prefer to delete the last clause of the suggested first para
graph, relating to the third quarter balance of payments deficit, which
read, "although possibly not as high as in the preceding quarter."
Chairman Martin said he agreed with the position taken by the
majority of members.
The modest change in policy decided upon at the
August 18 meeting seemed to him to be about all the Committee could
successfully accomplish at present, and under the circumstances he
thought the wisest course now would be to mark time.
The Chairman then
suggested that a vote be taken on the draft directive prepared by the
staff.
Mr. Hayes said he was puzzled as to why no reference to the
auto wage settlements had been included in the staff's draft.
He
noted that a considerable amount of concern had been expressed over
the implications of these settlements in the course of the discussion
9/29/64
today.
-52
The settlements were a significant economic development however
one might feel about their implications, and he thought the directive
at least should indicate that the Committee was aware of them.
Mr. Noyes said that the major reason the reference had been
omitted was that the staff had had difficulty in framing language that
indicated the relevance of the settlements to the "no change" policy
decision that the draft envisaged.
Also, it was assumed that the text
of the policy record entry would reflect any discussion of the matter
at the meeting.
Mr. Young commented that it also was the staff's thought that
it would be more appropriate to include a reference to wage settle
ments if and when similar settlements had been made in a number of
industries and were part of the basis for a decision by the Committee
to move to a firmer posture.
Mr. Hayes said he recognized that the wage settlements would
be discussed in the policy record entry, but so would be other develop
ments that were mentioned in the directive.
Nor did he think that
difficulty in assessing the implications of the settlements for policy
invalidated a reference to them.
Policy decisions usually were based
on a combination of factors, the implications of some of which were
clear and others uncertain.
The Committee often took note in the
directive of significant changes--for example, in the balance of pay
ments--which it did not conclude called for immediate modification of
policy.
He continued to feel the reference should be included.
9/29/64
-53In the course of an extended discussion a number of alternative
ways were suggested in which a reference to the auto wage settlements
might be formulated, and various views were expressed on the desira
hility of incorporating such a reference in the directive.
After this
discussion, Chairman Martin suggested that the Committee vote on the
directive as originally proposed by the staff.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of New York
was authorized and directed, until
otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the follow
ing 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 continued orderly expansion
in economic activity, relative stability in broad commodity
price averages, and indications that the money supply is
expanding rapidly again after some slackening in August and
early September. It also gives cons:.deration to current
estimates that the deficit in the U.S. balance of payments
in the third quarter continued t a high rate, although
possibly not as high as in the preceding quarter.
To implement this policy, System open market operations
shall be conducted with a view to maintaining about the same
conditions in the money market as have prevailed in recent
weeks, while accommodating moderate expansion in aggregate
bank reserves.
It was agreed that the next meeting of the Committee would be
held on Tuesday, October 20, 1964, at 9:30 a.m.
Chairman Martin then proposed that the Committee continue the
discussion begun at the meeting of July 28 of the memorandum by Messrs.
-54-
9/29/64
Ellis, Mitchell, and Swan, dated June 16, 1964, on the current economic
policy directive.
It seemed to him that the Committee was making progress
on the question of how it should construct its directive.
The staff,
working with the authors of the memorandum, had been giving considerable
helpful attention to the matter, and he thought the Committee should
continue to work steadily on it.
The Chairman suggested that the go
around resume where it left off on July 28, with Mr. Hickman, and that
after it was completed Messrs. Ellis, Mitchell, and Swan be given -n
opportunity to comment.
Mr. Hickman noted that the statement he would make was little
changed from that which he had prepared originally for the July 28
meeting; he had not attempted to update it in light of the discussion
at that meeting.
He then made substantially the following statement:
Under the present system, the FOMC reviews the state of
the domestic and foreign economy and the financial markets,
and on that basis instructs the Manager over the next three
weeks to implement a policy that is more easy, less easy,
or about the same. Under the proposed system, an attempt
would be made to spell out the description of the state of
the economy and of the financial variables in great detail,
to formulate in quantitative terms of FOMC's long-run policy
goals, and to quantify the short-run instructions to the
(1) The great length of
Desk. Two basic issues stand out:
the proposed descriptions, and (2) the problems inherent in
attempting to quantify the instructions and goals, given our
limited knowledge of financial processes, and our limited
ability to forecast various reserve measures that would have
to be known with tolerable precision if we tried to instruct
the Manager in precise quantitative terms about the Committee's
intent.
Because of the great length and detail of the new directive,
it would have to be drawn up before each meeting by the Board's
staff. The FOMC would then "react" to this document. We might
quibble about details, but individual members would have little
choice but to accept or reject the package prepared by the
9/29/64
-55-
staff. This would mean, in effect, that the locus of policy
making would pass largely from the Committee to the staff.
I am not entirely sure in my own mind whether this transfer
of power would be wholly undesirable, but it would alter the
Federal Reserve System as we know it, and it would be of
doubtful legality under the present Federal Reserve Act.
To be more specific, the economic and financial data
that would, under the proposed system, be contained in ele
ments 1 and 2 are now being reviewed before each FOMC meeting
by the Board's staff and by the Research Departments of the
several Reserve Banks. Such information is at best never
complete nor it it necessarily accurate, and is of course
subject to many different interpretations. Under the present
system each member of the FOMC evaluates this information
and then makes his best judgment. Adaption of the directive
would change the procedure, allowing the staff to make the
judgments in elements 1 and 2, including possible trade-offs
among major policy objectives. More specifically, this
would substitute a Washington point of view for a composite
based partly on Washington thinking aid partly on that of
the various sections of the nation.
A second type of problem is involved in an attempt to
spell ou: in element 3 the Committee's long-run policy intent.
This element in effect would ask the FOMC to accept the staff's
judgment as to current monetary policy and to adopt the staff's
guidelines and growth objectives for private demand deposits,
and staff estimates of amounts needed to support Government
deposits, time deposits, currency in circulation, and so forth.
Time and again we have learned that this is a very difficult
area in which to project goals; in the final analysis the
public makes the choice as to the forms of its liquid asset
holdings rather than the FOMC or the staff. To quote from
the Illustrative Draft Material for New Directive dated
June 17, 1964:
"The target level for free reserves of about
$100 million continues to be associated with a lower rate of
expansion in aggregate reserves, in money supply, and in total
bank credit than prevailed in the last five months of 1963,
and no factors suggesting a departure from recent relation
ships are evident."
As things actually worked out, free
reserves remained around $100 million but the money supply
jumped violently over this period at an unsustainable
growth rate of 9.3 per cent.
In element 4, short-run operating instructions to the
Desk would be quantified. Rather than less ease, more ease,
or about the same degree of ease, the staff (acting for the
Committee) would decide upon free reserves of, say $100
million, plus or minus $100 million. The range would neces
sarily be very broad to enable the Manager to hit the target
9/29/64
-56
because of the large errors in the reserve forecasts, and
the differential effects of the regioral distribution of
free reserves, the volume of borrowed reserves, and the
like. Even then, the staff might, retroactively, revise
the Manager "out of the range."
Under the new system the Manager would have even more
leeway than under the old, unless the staff spelled out all
the possible permutations and combinations of side conditions
that might occur over the next three weeks. But then, how
would the Desk operate if, for example, market conditions
and free reserves moved in opposite directions? Would the
Desk move gradually and try to stay in the middle of the
free reserve range at all times? Or would the Desk wait
until the free reserves figures approached the limits of
the range before acting? The basic question, of course,
is whether the FOMC really wants to be committed to some
one's at'empts to quantify the color, tone, and feel of
the market, given our current limited knowledge of this
vast and complex area.
Mr. Bopp commented that Mr. Broida deserved the Committee's
thanks for his initial memorandum on the directive of April 8, and that
Messrs. Ellis, Mitchell, and Swan had earned gratitude with their memo
randum of June 16, which had induced the Committee to do some construc
tive thinking.
He would state at the outset that he was more sympathetic
to their proposals than were those who already had commented.
It
seemed to Mr.
difficulty in
Bopp that there were two main sources of the
which the Committee found itself:
lack of knowledge, and
differences in judgment as to the proper mix of objectives--that
is,
as
to the relative weights to be attached to employment and unemployment,
price levels, balance of payments considerations,
viewed the proposal,
and so forth.
As he
it was aimed primarily at the first difficulty.
The main goal evidently was to focus attention on improving knowledge
and increasing the stimulus to research.
experimental nature of the approach.
He would emphasize the
9/29/64
-57
In principle, Mr. Bopp continued, if the Committee had complete
knowledge it could give instructions to the Account Manager in terms of
either the volume of free reserves or the rate of interest.
At the time
of his initial introduction to monetary theory some years ago, he had
tended to place greatest emphasis on reserve factors, but since then he
had become increasingly impressed with the advantages of formulating
instructions in terms of money market conditions.
The directive had to
be written in terms of interest rates if the Committee wanted to give
the Manager instructions that he unquestionably could carry out, at
least as long as there was an adequate and appropriate inventory of
securities in the System portfolio to keep rates from falling and
adequate gold reserves to keep them from rising.
If instructions were
formulated in terms of reserves--whether free, nonborrowed, or totalthe Committee never could be sure that the Manager would be able to
meet them.
The first two paragraphs of the staff memorandum on member
bank reserves, dated July 24, 1964, illustrated the hazards.
These
paragraphs read as follows:
In the latest 3 weeks ending July 22, free reserves
averaged $65 million, about $80 millicn below the average
for the preceding 3 weeks. This fluctuation in average
free reserves reflected in part large revisions of the
preliminary figures reported for the weeks of July 1 and
8.
In the same 3 weeks, excess reserves and member bank
borrowings fluctuated widely. In the week of July 15
country banks built up large reserve surpluses while city
banks had to increase borrowings from the Reserve Banks
to meet their reserve requirements. In the following week,
a country bank settlement period, these banks made their
large previously accumulated reserve surpluses available
to city banks, which in turn were able to reduce sharply
their borrowings from the Reserve Banks. Federal funds
trading volume was very large during the week ending
9/29/64
-5S
July 22, and the effective rate an these funds declined
sharply below the discount rate for the first time since
late May.
Mr. Bopp was concerned with the frequent large misses in
reserve projections and especially with the size of the subsequent
revisions.
He asked whether these errors might not he reduced by
developing additional information on required reserves of country
banks.
He felt strongly that the Committee should not give direc
tives in terms that the Manager could not certainly achieve because
of the danger that the Manager might otherwise be accused of frus
trating the Committee's intentions even though he had in fact acted
in good faith
From time to time some members of the Committee had expressed
concern becaue policy had been continued unchanged for a considerable
period or bec;use certain magnitudes had not changed.
share this concern.
He did not
If a given monetary policy continued to be
appropriate because economic conditions had not changed, that policy
should be continued.
He saw harm rather than virtue in change merely
for the sake of change.
There were several technical matters on which he would like
to comment, Mr. Bopp continued.
The Committee might ask the Manager
to estimate on the basis of his experience the range of reserves,
free or some other, within which the Committee could reasonably
expect to come.
He might also be asked to indicate whether there
were any additional technical tools or types of information, such
9/29/64
-59
as improved data on country bank required reserves, that would increase
his ability to meet reserve targets.
Mr. Bopp referred to a recent article in the Journal of Finance
by Albert Cox and Ralph Leach, on which Mr. Sternlight had commented,
concerning the money market disturbances associated with last days of
reserve periods, especially biweekly Wednesdays when the end of the
period for reserve city banks coincided with that for country banks.
There tended to be an easing of rates on these days, as the excess
reserves of country banks came into the certral money market.
Perhaps
this problem could be mitigated if not eliminated by having the reserve
periods for different groups of banks end on successive days.
He
appreciated that data for past periods no longer would be relevant to
current operations if such a procedure were instituted.
This problem
would be temporary, however, since data would continue to be collected
and experience on the new basis soon would be acquired.
There might
be other disadvantages to the procedure, but it seemed to have enough
merit to warrant further study.
Another possibility worth considering would be to have reserve
requirements for country banks for the current two-week period based on
their actual average daily deposits in the preceding two weeks, so that
the banks would be operating in terms of a known target.
Under the
present procedure required reserves were not knowr until the period was
over, and the banks had a moving target.
There might be problems with
this proposal also, but it, too, merited investigation.
-60-
9/29/64
Mr. Bcpp said he would prefer to have market rates and money
market conditions used as the basic operating targets, and, more gen
erally, to employ targets that the Committee was reasonably confident
could be hit.
If the target happened to be missed he thought the
Committee should always indicate the reasons in a subsequent review,
in order to forestall mistaken criticisms by historians to the effect
that the Manager had failed to follow his instructions.
Finally, Mr. Bopp said, he was pleased to see that interest
in the general. subject had been heightened at the Board and the
Reserve Banks as a result of the proposals for the directive.
He
also was happy to see work going forward under System committees in
compiling an inventory of research work in the area and in undertak
ing more systematic study of linkages.
Mr. Bryan then made substantially the following statement:
The subject is one I have studied and briefly talked
about on a number of other occasions. The subject is also one
on which, admittedly, I have strong convictions. Accordingly,
everyone here would correctly assume that I want to compliment
and endorse the Ellis-Mitchell-Swan report. I have some sense
of satisfaction in the fact that for the first time in my
recollection a committee of the Open Market Committee has gone
on record as favoring the need for a quantitative directive.
I admit that carrying the group's recommendations into
effect is not going to be easy from a technical or an organi
zational standpoint. But I am convinced that the Committee
has no alternative. We have been criticized with some cogency
by various members of the Congress, who have said our present
method of writing a directive is unsatisfactory. We have been
similarly criticized by nearly every other person addressing
himself to this subject in the Banking and Currency Subcommittee
hearings. Of equal importance, we in this Committee at one
time or another have nearly all expressed ourselves of varying
degrees of dissatisfaction with the qualitative language in
our instructions. I think, therefore, that we have no choice
other than to devote our best efforts and minds to instructing
the Manager in clearly defined terms--in my view, quantitative
terms.
9/29/64
-61-
In preparing for this meeting, I have re-read and studied
every word of the discussion of this subject at our July 28th
meeting.
Going through the minutes . found--and I hope that
I am not offending anyone by omitting a point he has madethat the chief objections to the type of directive recommended
were these:
The first is that the state of the arts is not deemed
sufficiently advanced for this Committee to determine quanti
tative targets. No one who has studied the economists' con
flicting statements and testimony before the House Banking
and Currency Subcommittee can help but agree that our knowledge
of monetary processes falls far short of perfection. But
again, I ask, what choice is there? Eliot Swan wisely called
our attention to that point in the report, which reads:
"How
ever deficient the state of the art, the Committee must, and
now does, make judgments of the sort that would be required
under the proposal."
Does anyone here really think that no matter how good a
group of economists he had on his staff, or how prescient the
help he can get outside his shop, he will soon find "the
answer" to questions of monetary theory? Of course not. But
the essential and unavoidable point, as Eliot Swan has noted,
is that those judgments are already being made. If we are
fearful in expressing them as a Committee, then the Manager,
whose actions must and do result in reserve numbers, has to
make this decision for us. In my opinion, that is an inevita
ble and unavoidable conclusion. But if the Manager must make
decisions regarding reserve numbers it may fairly be asked:
have we not delegated, vested, or abdicated--choose the word
you prefer--our responsibility?
Is this something we are
permitted in contemplation of law to do? Is it fair to the
Manager, or to the Agent Bank? I, for one, believe not.
Let me say a word about qualitative terms. There is
undoubtedly a reality to them. Such words as love, beauty,
grace:
all of them have meaning, even as the words tone and
feel of the market have meaning; but though they are real,
they are intuitive. They are in the eyes of the beholder.
They represent an area of intuition that simply cannot be
exercised by a Committee such as this. When we use similar
qualitative terms, directly or by implication, in our
instructions to the Manager, seeking thereby to avoid coming
to grips with a definitive and quantitative instruction, we
make, in my opinion, an abject public confession that we
have avoided our responsibility.
In any event, we are now much worried about linkages
between reserve figures and other aspects of the monetary
and economic scene. I, for one, doubt that we shall ever
9/29/64
-62-
find linkages that are always and utterly true. I have this
doubt for the reason that, in my view at least, mankind is
not a mechanism always making an automatic, reflexive, and
deterministic response to a given monetary stimulus. Man
has free choice. Men are often capable of their own indeter
minate and, alas, irrational responses. However, if we fear
quantitative instructions to the Manager because linkages
are not determinate, then I express the doubt that there
exists now a better determination of linkages with qualitative
terms, such as tone and feel. If it be affirmed that quali
tative terms are wise and quantitative terms unwise, because
of indefinite linkages, then those affirming this view should
accept the burden of demonstrating that there is a better
linkage between our objectives and, say, the tone and feel
of the market. Moreover, if the Committee does adopt a
quantitative, measurable reserve objective, then, as Eliot
Swan and others have suggested, I believe the Committee
will certainly set about the business of gaining an improved,
even though ultimately imperfect, understanding of monetary
processes.
The second major objection raised against the Ellis
Mitchell-Swan proposal is that this would mean delegating
judgments to staff. I have some sympachy for this point of
view. The distilled descriptions now on a trial-run basis
must be drafted before the Committee meetings, at a time
when the interpretation and emphasis the Committee will place
on the reported facts are still an unknown quantity. Further
more, I do not believe that this material has a place in a
directive since the Manager cannot control employment, the
price level, and other general objectives alluded to, albeit
it does have a place in the policy record.
Of far more fundamental importance, however, is the
clear recognition that a group such as this needs to lean on
its highly competent staff. The confidence we have reposed
in our staff is not only evidenced by the information and
evaluations we obtain from it, but is made clear by the
presence of these advisers at our deliberations. Whether
we like to admit it or not, few of us, when we are seated in
a large group around this table, can draft a technically
perfect directive, either qualitative or quantitative. We
must by necessity rely on the staff for drafting alternative
types of directives, among which the Committee can choose
and which it should feel free to modify after full discussion
among Committee members. Let me further say that under
present procedures we rely very heavily, indeed, on technical
judgments of one staff member--the Account Manager.
The third objection raised against the new type directive
is that the variables are likely to fall outside the target
and that such deviations could be misunderstood and criticized.
-63-
9/29/64
On this point, I for one have always believed that the Manager
must have a target range rather than a single-figure target.
If he fi.ds it impossible to operate within this target range
or, because of unforeseen events, he believes that doing so
would defeat the Committee's more fundamental purposes, then
we have well-developed means of communication available to
deal with this problem.
I add that in my judgment a quantitative type of directive
would not at all demean or degrade the Manager's job. His
sense of perception of the nature of underlying money market
conditions would still be invaluable. There would be remaining
with him the use of his judgment within the context of the
target range set by the Committee. He would have added the
monumental responsibility of advising the Committee of his views
of an appropriate quantitative target and target range.
In short, while I may have some reservations about some
of the details of the Ellis-Mitchell-Swan proposal, I doubt
that the reservations are important. The important point, I
think, is that the proposals represent a giant step forward
on a problem to which we may never find a perfect solution
with which everyone can entirely agree. The overriding and
paramount consideration, I feel sure, is that we must get
greater clarity into our directives.
I do not mean to be dramatic in the slightest. But if
we fail in clarity, then I think the very existence of this
Committee is at stake.
Mr. Bryan added that one of the problems with the present
directive was well illustrated by today's discussion of whether a
reference to the auto wage settlements should be included.
Instead of
focusing on instructions to the Manager, the discussion turned on the
desirability cf trying to convey something of the news of the day in
an elliptical phrase that would be difficult for anyone to interpret.
He was sympathetic with the proposal to refer to the wage settlements,
but he also was concerned with various other problems that might as
readily be mentioned.
As he had indicated, Mr. Bryan said, he believed
that statements on such matters should be included in the policy record
entry and not in the directive.
9/29/64
-64
Mr. Balderston said he had no comment to make on the directive
proposals, other than that he favored continued experimentation in the
area.
The Chairman then invited Messrs. Mitchell, Ellis, and Swan to
comment on the discussion to this point.
Mr. Mitchell said that he
and his two colleagues, with the assistance of the staff, had reviewed
the criticisms that had been offered of their proposals at the July 28
meeting, and had prepared a rather lengthy memorandum of comment.
In
this memorandam, which would be submitted to the Committee at the close
of today's meeting, the criticisms were considered in three groups,
which would be discussed in turn.
Mr. Ellis would comment on the first
group of criticisms, relating to the proposal as a whole, after which
Mr. Swan would discuss criticisms specific to the proposed elements I
and 2, and he (Mr. Mitchell) would consider criticisms specific to
elements 3 and 4.
Mr. E:lis said that five general criticisms of the proposals
had been sorted out from the July 28 discussion.
The first was that
the proposal offered no advantages to the formulation of monetary policy.
Essentially, Mr. Ellis said, the Committee's task at each meeting was
to reach agreement on three questions:
(a) the nature and interpre
tation of economic and financial developments, (b) the policy objectives
to be pursued in light of developments, and (c) the instructions to be
issued to the Desk for the next three weeks in light of policy objectives.
This was not an easy task, Mr. Ellis said.
The authors of the proposal
9/29/64
-65
were convinced that there would be real gains for policy if the
Committee was able to deliberate on language dealing specifically and
in logically structured fashion with the three essential questions fac
ing the Committee at each meeting, proceeding from developments to
policy to instructions.
This process would make any weaknesses or
inconsistencies in analysis more apparent and hence more subject to
remedy.
By this device, the Committee would consider language that
was sufficiently clear and detailed to cover the questions at issue
adequately.
It was always possible to get nominal agreement by using
elliptical language, but meaningful agreement could not be achieved
in this way.
The second general criticism was that the proposal would impose
an undue burden on the Committee and staff,
The authors would note
that it was the function of the staff to provide information and tech
nical assistance to the Committee in reaching conclusions on the three
essential questions.
To ask the staff to prepare draft materials for
a directive of the proposed type was, in effect, to ask it to supple
ment all of the detailed facts, interpretations, and judgments it now
provided to the Committee with a formal synthesis organized in terms
of these questions.
It was clear that the proposal was complex, but
that was only because the Committee's job was complex.
The Committee
had an obligation to do its job as well as it could, and an interestparticularly because of the complexity of its task--in doing it as
efficiently as possible.
-66-
9/29/64
It also had been suggested, Mr. Ellis noted, that because the
Committee was unable to edit a long and complicated document around
the table, there would be a tendency to adopt language proposed by the
staff without substantive change, and this would amount to an undesir
able shift of responsibility to the staff.
Mr. Ellis submitted that
the Committee long had recognized the need for staff assistance, and
that the proposal called for assistance of a wholly conventional type.
He believed it was safe to assume that the Committee would not abdicate
its responsibility under the proposed procedure.
In fact, with the
draft directive making explicit the analytical judgments and expected
results, the Committee would find it easier to recognize and alter any
expressions that were at odds with its wishes.
This would represent a
greater degree of Committee control than under the present directive.
Some had suggested that the proposal was premature, Mr. Ellis
said, and that more research was needed before it would be practical.
The authors agreed that more intensive research was essential.
same time, the Committee must make policy decisions now.
At the
In their
judgment, the committee was not making the best decisions of which it
was capable because it often did not come to grips with either the
known or unknown consequences of its decisions, and because it did not
make decisions on policy and instructions in clear, complete, and con
sistent terms.
Because of lack of knowledge of linkages and market
psychology future decisions might not always be good, but they would
be better if the Committee made maximum use of what was known.
9/29/64
-67
Finally, Mr. Ellis observed, it had been said that there were
dangers in explicating the Committee's analysis in the manner proposed;
in effect, the Committee would lose the opportunity "to be right for
the wrong reasons."
Surely, he said, as a public body the Committee
should not endeavor to cover up the areas in which it was uncertain by
silence.
Moreover, some serious criticisms to which the Committee now
was exposed would be overcome--that the directives were not intellig
ible to the informed observer, and that they did not give clear and
consistent instructions to the Manager.
Also, much present criticism
was not constructive simply because the Committee had not made clear
how it formulated the problems facing it and how it reasoned in arriv
ing at conclusions.
The more clearly the Committee exposed its thinking
the more like.y that criticism would be helpful.
Mr. Ellis added that there seemed to be some impatience with
the difficulties of selecting words and phrases to express the Com
mittee's intentions.
In the final analysis, however, that was the only
way in which issues were really pinned down and resolved.
As Mr. Bopp
had said in a letter last May, "There is no more important way in which
we can spend cur time than in defining our objectives more sharply and
stating our views more precisely."
Mr. Swan said the basic objection to the proposed elements 1
and 2 had been that such material was more appropriately included in
the policy record, prepared after the meeting, then in the directive.
However, the primary purpose of elements 1 and 2 was to contribute to
-68
9/29/64
the development, at the meeting, of a clear.r and more consistent
assessment by the Committee--acting as a Committee and not as individ
uals--of econonic and financial developments.
The Committee already
was making such an assessment in the first paragraph of its present
directive.
But it faced problems under the present format of having
to use elliptical language, which were illustrated by today's discus
sion on the directive for this meeting.
The proposal for elements 1
and 2 represented an effort to make the Committee's assessment of
developments clearer by preparing an expanded and more analytical
statement.
It was not essential that this assessment be considered part
of the directive, Mr. Swan observed, and it could be made separately
if there were objections to including it in the directive.
However,
the authors did believe it important for the Committee to consider
and formally adopt language assessing significant developments,
whether it chose to include this language in the directive or to keep
it separate, describing it, say, as the Committee's "consensus on
economic and f'nancial conditions."
While these elements might serve as a substitute for the first
part of the present policy record entry, Mr. Swan said, the entry could
not serve as a substitute for them because it was prepared after the
fact and not in the course of the meeting.
The discussion this morning
on a possible reference to the auto wage settlements illustrated the
point.
Some members might feel that this discussion had been a waste
of time, but he would not agree.
He thought it had served a useful
9/29/64
-69
purpose, and he was happy that Mr. Hayes had brought the matter up even
though the final decision had been to omit the suggested reference.
He
did not consider questions of wording unimportant, and he would not
shrink from such discussions.
A final point, Mr. Swan said, was that the policy record was a
Board rather than a Committee document under the terms of the Federal
Reserve Act.
Although members were asked to comment on drafts of the
entries, final decisions on the language of the record were not up to
the Committee.
This was another, although perhaps less important,
reason why the policy record entry was not a substitute for elements 1
and 2.
Mr. Mitchell, referring to the discussion of the auto wage
settlements, noted that a whole paragraph had been devoted to this sub
ject in the "trial" directive prepared for today's meeting which, he
thought, everyone would agree was an excellent statement.
He then
remarked that he wanted to say a word about what he considered to be
the substantative issues faced in preparing the proposals for elements
3 and 4.
These could be summarized in terms of the problems of speci
fication, identification, linkages, and quantification.
By specification, Mr. Mitchell said, he meant naming the relevant
variables that should condition Committee actions at any given time and
that would show the results of those actions.
By identification he
meant the distinction between independent and dependent variables.
The
classic problem of this type for the Committee was whether the economy
caused the money supply to rise or whether the System, by increasing
-70
9/29/64
the money supply, caused economic activity to rise.
Some analysts were
sure that the direction of influence was from the money supply to activ
ity, but others believed that under certain circumstances changes in
the economy were responsible for changes in the money supply.
Such
questions were not confined to this case; they arose in many connections
and posed difficult problems that the Committee could not ignore.
By linkages Mr. Mitchell meant the channels through which
monetary action was transmitted to money and credit market conditions
and thence to final spending, and the time lags involved.
The Committee
did not know enough about these linkages, but it was desirable to create
a framework within which what was known could be used fully.
By quan
tification he meant the ability to measure the dosages of monetary
action and the quantitative effects of those dosages on the dependent
variables the Committee sought to affect.
Obviously, Mr. Mitchell said, there was a great deal to be
learned before the Committee could use monetary tools with precision
and with confidence in predicted effects.
But in his opinion the Com
mittee could never achieve these goals if it did not start using
what it had, and concentrating its efforts on extending and improving
whatever beginning it was able to make.
In trying to do so, the Com
mittee would stimulate a great deal of productive effort on the part
of its staff.
The authors thought the Committee and the staff could
make significant progress on all of these fronts, and would do so if a
systematic start was made with the four-part directive that had been
suggested.
9/29/64
-71
Mr. Mitchell said he would like to emphasize that the proposed
directive had been drafted specifically to avoid a commitment to any
particular theory of monetary causation.
Both the views of those who
felt the impact of policy ran from reserves to the money supply to
economic activity, and the views of those who felt it ran from reserves
to bank credit to credit conditions to economic activity, were accommo
dated under the proposed format.
Whatever one's analytical preference,
there could be no argument with the proposition that the System's policy
was effectuated by changes in the reserves made available to the bank
ihg system.
Such changes influenced both the money supply and the
banking system's contributions to total credit flows.
The common ele
ment in both theoretical structures was bank reserves, and this was
the reason that element 3 contained a statement of the policy intent
of the Committee in terms of reserves rather than of either the money
supply or bank credit.
In the very short run, Mr. Mitchell continued, the System's
own participation in financial markets could be a critical element in
the supply and demand for specific financial instruments and, of course,
expectational effects engendered by System operations had an influence
in all credit markets.
But the longer-lasting impact of policy was
through changes in bank reserves resulting from open market operations,
and the ways in which the banking system made use of them.
Neither was the System committed analytically by the specification,
in element 3, of growth in reserves behind private demand deposits, Mr.
Mitchell said.
All that the proposed directive asked of those who
-72
9/29/64
preferred a money supply line of causation was that they be willing to
specify the desired rate of expansion in each category of bank deposits
and of currency.
This was set out clearly in the "trial" directives.
For those who preferred analytically the asset side of the ledger, the
sum of the reserve growth specified for each type of bank liability
determined the growth in total bank credit, enabling proponents of this
point of view to adjust or compensate for those changes in bank credit
which reflected diversions of credit flows from other instruments into
time and savirgs deposits at commercial banks, thereby focusing on the
expansion of bank credit attributable primarily to expansionary or con
tractive monetary policy.
Mr. Mitchell remarked that the Comm.ttee could not avoid the
fact that reserves were related by law to deposits rather than to some
asset or group of assets, and that net reserve availability therefore
was affected by changes in the Treasury balance, shifts of funds between
time deposits and other liquid claims, and the absorption or release of
reserves by the currency component of the money supply.
The purpose,
and advantage, of the approach recommended for element 3 was that it
provided for the systematic analysis of the behavior of these various
aspects of reserve utilization.
Finally, Mr. Mitchell said, he would not want to give the
impression that this proposal provided an easier way to operate or that
it would sprout, grow, and flourish in the span of a few meetings.
More than anything else it was put forth as a framework for accommodat
ing the use of better intelligence and more advanced analytical techniques
9/29/64
-73
and a clearer understanding of linkages between monetary action and
the real economy.
Chairman Martin said he though Messrs. Ellis, Mitchell, and
Swan had done a splendid job of setting forth the basic problems that
the Committee faced in formulating monetary policy.
They also had
indicated an area in which the Committee had received a great deal of
criticism from the outside--criticism to the effect that it did not
make clear what its objectives and purposes were, and what it intended
to achieve.
He thought Mr. Bopp had been right when he used the word
"experimental"; in the Chairman's view anything the Committee might
do in this area had to be experimental.
Such an experiment, far from
making the work of the Committee and staff easier, would make it harder.
Chairman Martin said that he had seen an early draft of the
memorandum commenting on criticisms of the proposal that would be dis
tributed today.
On reading it, he had been impressed by the fact that
on some occasions in the past he had not thought through all of the
implications of a possible course of action because of the difficulty
of the problen.
And at times he had tended to feel that it was easier
not to engage in debates on the specific words to be used in the direc
tive.
But he thought that all members should make a sincere effort to
grapple with these problems before concluding that the Committee could
not improve the formulation of its directives which, after publication,
would provide the basis for evaluations of the policy decisions made.
9/29/64
-74
Chairman Martin then called for distribution of the memorandum
of comment on criticisms of the proposal, bearing today's date.
He
suggested that the discussion be continued at the meeting of October 20,
on a topic-by-topic basis rather than in a go-around.
It might be
found desirable to carry that meeting into the afternoon, but because
this was not certain he did not think it was necessary at this time
definitely to schedule an afternoon session.
No objections were made to the Chairman's suggestions.
Thereupon the meeting adjourned.
Cite this document
Federal Reserve (1964, September 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640929
@misc{wtfs_fomc_minutes_19640929,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640929},
note = {Retrieved via When the Fed Speaks corpus}
}