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, October 20, 1964, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Daane
Hickman
Mills
Mitchell
Robertson
Shepardson
Shuford
Swan
Ellis, Alternate for Mr. Wayne
Messrs. Scanlon and Deming, Alternate Members of
the Federal Open Market Committee
Messrs. Bopp, Clay, and Irons, Presidents of the
Federal Reserve Banks of Philadelphia, Kansas
City, and Dallas, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Econonist
Messrs. Brill, Furth, Grove, Holland, Jones,
Koch, Mann, and Ratchford, Associate
Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Governors
Messrs. Garfield and Partee, Advisers, Division
of Research and Statistics, Board of Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
10/20/64
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
Messrs. Heflin and Paterson, First Vice
Presidents of the Federal Reserve Banks
of Richmond and Atlanta, respectively
Messrs. Holmes, Eastburn, Taylor, Baughman,
Parsons, Tow, and Green, Vice Presidents
of the Federal Reserve Banks of New York,
Philadelphia, Atlanta, Chicago, Minneapolis,
Kansas City, and Dallas, respectively
Mr, Meek, Manager, Securities Department,
Federal Reserve Bank of New York
Mr Anderson, Financial Economist, Federal
Reserve Bank of Boston
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Commit
tee held on September 29, 1964, were approved.
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Open
Market Account on foreign exchange market conditions and on Open
Market Account and Treasury operations in foreign currencies for the
period September 29 through October 14, 1964, and a supplemental
report for the period October 15 through 19, 1964.
Copies of these
reports have been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs said that the
gold stock remained unchanged again this week and the Stabilization
Fund had a gold balance of slightly more than $200 million.
On the
basis of actual and prospective orders, the Stabilization Fund would
10/20/64
-3
end the month with a balance of slightly less than $160 million.
On
the London gold market, private buying had continued to absorb all
of the current flow of newly-mined gold.
During September the Gold
Pool had been unable to acquire any gold at all, and so far in
October it had been necessary to dip into the $40 million reserve
to the extent of $5 million in order to prevent the market price
from rising further.
The Russians remained out of the market despite
the attractiveness of the current price of roughly $35.12.
On the exchange markets, Mr. Coombs said, there had been
recurrent selling pressure on sterling.
During September the British
experienced an over-all reserve loss of $230 million, of which $185
million was offset by net drawings of $20 million on the Federal
Reserve swap line and $165 million on seven other central banks.
So
far in October, the Bank of England had drawn a further $100 million
on the Federal Reserve swap line for a total of $135 million, and
shortly before the month-end it would probably make further drawings
on various European central banks and the Bank of Canada.
He thought
it probable that the Bank of England would use some of those prospec
tive drawings on other central banks to pay down part of their
drawings on the Federal Reserve, so as to maintain a pattern of
roughly proportional drawings on each source of short-term credit.
Mr. Coombs commented that the availability of such short
term credit facilities had played a most useful role in restraining
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10/20/64
a massive speculative drive on sterling such as had occurred in 1957
and 1961.
The problem faced by the new British government, however,
went far beyond defending the pound against speculative pressure.
As the committee knew, for a number of months now the British trading
position had been deteriorating.
Imports had risen sharply, which
could reflect a fair amount of precautionary buying against the back
ground of statements by both Conservative and Labor party officials
that they might have to resort to import controls.
Of much greater
concern, however, had been the disappointing trend of exports, despite
continuing price stability in the United Kingdom and rising prices
in many of its overseas markets.
Mr. Coombs thought it likely,
therefore, that the new government might soon find itself compelled
to take some pretty drastic action, possibly a combination of a Bank
rate increase plus the introduction of some temporary import surcharges,
or similar measures.
Meanwhile, there might be still further British
use of the Federal Reserve swap facility as well as other central bank
credit lines, with a subsequent funding of those credits, if necessary,
by a sizable drawing on the International Monetary Fund.
In other markets, Mr. Coombs remarked, buying pressure on
both the Dutch guilder and the Belgian franc had continued, mainly
attributable to a credit squeeze in both countries.
In both countries,
however, there was a growing recognition that the credit squeeze was
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proving self-defeating,
and he hoped that alternative policy approaches
would soon be developed.
In reply to questions by Messrs. Swan and Ellis, Mr. Coombs
said that the situation in
Earlier,
the London gold market had changed recently.
this market had been a major source of gold; more than $300
million had been acquired through it
by the U.
S.
Treasury during the
first half of the year, and nearly $50 million in July and August.
However,
during September none at all had been acquired,
October the Pool was in
deficit.
ahead unless the Russians found it
rest of the year.
decline in
the market.
and in
Some possible problems might be
necessary to sell gold over the
In part the change in
the situation reflected a
the supply of gold, since the Russians had been out of
But the main problem was the increase in
buying, which continued heavy day after day.
speculative
Such buying was not
surprising in view of the political and economic uncertainties in
the world.
It might come to an end if some of those uncertainties
were clarified; otherwise, the situation right well get worse.
Thereupon, upon motion duly
made and seconded, and by unanimous
vote, the System open market trans
actions in foreign currencies during
the period September 29 through
October 19, 1964, were approved,
ratified, and confirmed.
Mr. Coombs noted that the $100 million standby swap arrange
ment with the Bank of France would reach the end of its three-month
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10/20/64
term on November 6, 1964.
He recommended its renewal for another
three months.
In reply to Mr. Deming's question as to whether the Bank of
France was interested in lengthening the maturity of the swap line
to twelve months, Mr. Coombs said he had not approached the French
on the matter, preferring to wait until all of the other swap arrange
ments were on the longer basis.
Mr. Robertson suggested that it might be desirable for the
Committee to authorize an extension of maturity to twelve months,
so that Mr. Coombs could complete the negotiations on that basis
if the French indicated a preference for the longer term.
Mr. Mills said he thought there was a useful discipline in
asking Mr. Coombs to come back to the Committee for such authority.
As he looked at the other proposals which Mr. Coombs had indicated
by memorandum that he would make today, he thought the Committee
might well want to consider whether it was surrendering a greater
degree of authority to the Manager than was consistent with its
own responsibilities.
These transactions were complex and difficult
to follow, and he felt that they should come before the Committee
as often as possible, so that the Committee would understand fully
what was being done.
For example, Mr. Mills continued, a recommendation would be
made today to increase the swap line with Belgium.
The situation
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10/20/64
there was parallel to that in France and the Netherlands; each of
these countries was drifting into recession with tight money market
conditions and deficits in
their international payments.
Despite
the fact that these countries were moving into circumstances
in
which they should be making requests of the United States, this
country would be asking them to grant a request for expanding the
swap facility.
Mr. Mills thought this was unbecoming to the United
States and diplomatically undesirable.
should deal from strength not weakness.
In his opinion the U. S.
The Belgian inflow of
dollars had come about very largely out of necessity on their part;
they had borrowed from New York banks.
He did not understand why
the System should request them to expand the swap arrangement when
the difficulty lay with them and not with the United States.
Commenting on Mr. Robertson's suggestion, Mr. Coombs said
that he could communicate readily with Committee members by telegram
if the French indicated an interest in extending the maturity of the
swap arrangemet to twelve months.
Accordingly,
he did not think it
necessary to request authority for such an extension of term today.
Chairman Martin suggested that the Committee hold the question of
term extension in abeyance, and vote on the recommendation for renewal
of the arrangement for another three months.
10/20/64
Renewal of the swap arrangement
with the Bank of France for a further
period of three months, as recommended
by Mr. Coombs, was approved.
Mr. Coombs then noted that swap drawings on the Netherlands
Bank in the amount of $20 million and $10 million would fall due on
November 4 and November 10, respectively.
Unless there was a quick
turn-around in the Dutch payments position, he saw no possibility of
paying these off at maturity and, accordingly, requested Committee
approval of their extension for another three months.
In each case,
this would be the first renewal.
Renewal of the two swap drawings
on the Netherlands Bank was noted
without objection.
Mr. Coombs then noted that the System had now exhausted its
holdings of Be.gian francs under the $50 million swap with the
National Bank of Belgium.
in dollars.
The National Bank was continuing to take
Mr. Hayes and Mr. Coombs had had informal conversations
with Belgian officials at the last meeting of the Bank for Inter
national Settlements as to the best way of handling the situation.
In these conversations the Belgians had indicated that they would
be agreeable to increasing the standby swap arrangement from $50
million to $100 million and to extending such a standby swap arrange
ment to a full twelve-month term.
Whereas the existing $50 million
swap line had been fully drawn from the beginning, the Belgians
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would prefer to place the additional $50 million on a standby basis
until drawings became necessary.
In general, Mr. Coombs thought
that the swap line with the Belgian National Bank had been on the
low side, and that the recommended increase to $100 million would
bring this arrargement
into better alignnent with the others.
As Mr. Mills had indicated, Mr.
Coombs continued, part of
the dollar inflow to Belgium had resulted from their borrowing from
New York banks.
such borrowing,
However, the U. S. had interposed no barriers to
nor had it
use of the proceeds.
tried to freeze or limit in any way the
On several occasions in the past when the
Belgians had borrowed in New York the Treasury had engaged in
a
sort of counterpart operation by issuing a bond denominated in
Belgian francs to the Belgian authorities, thus avoiding a dollar
conversion problem for them.
It was probable that the proceeds of
their recent borrowing would be disbursed in October and November,
so that the operation to some exten: was self-reversing.
The Belgians
pursued a fairly rigid policy with respect to gold and foreign exchange
holdings; they had what was tantamount to a 100 per cent gold standard,
holding little or no foreign exchange.
This created something of a
problem for the U. S. since any dollar accruals on their part involved
a risk of conversion to gold.
On the other hand, they had proved
cooperative during this period, drawing no gold from the U. S. from
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-10
mid-1962 until last week.
And they had been helpful indeed in
various international negotiations.
Mr. Mills remarked that he would approve the recommendation
with reluctance because he felt that the negotiations had gone beyond
the point at which they could be nullified without embarrassment to
the Special Manager.
However, as he had indicated on other occasions,
he would hope that in the future negotiations would not be carried to
this point until an understanding had been reached with the Committee.
Mr. Coombs said he would feel no embarrassment whatever if
the Committee should disapprove this recommendation.
The discussions
with the Belgians had been of the informal sort continually held with
countries in the swap network, concerning such questions as whether
the swap lines were at appropriate levels.
The Belgians had indicated
only that they would be willing to increase the size of the swap line
if the System thought that desirable.
If the Committee decided not
to do this and the Belgians bought gold or made some other adjustment
ot be personally embarrassed.
he would ..
Mr. Hayes said that his
position was identical with that of Mr. Coombs.
Mr. Daane said the recommendation seemed to him to be in accord
ance with the intent of the Committee and with the best interests of
the United States.
The question was whether the Committee wanted to
take this additional insurance for protecting the U. S. gold stock,
and in his judgment the answer should be yes.
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Mr. Deming asked what the advantage was of having half of
the swap line fully drawn and half on a standby basis.
Mr. Coombs
replied that he would have preferred to have the whole line on a
standby basis, as was the case with other swap arrangements.
The
initiative for the agreement under which the original arrangement
had been fully drawn from its inception had come from the Belgians,
for reasons that might have been related to their high gold ratio.
Under the fully-drawn arrangement they had access to a source of
foreign exchange for use on a day-to-day basis.
Mr. Hayes added
that he thought the Belgians might encounter certain administrative
difficulties if they attempted to unwind the original arrangement,
but
they would like any supplement to the swap line to be on the
same basis as were those with other countries.
An increase in the swap arrange
ment with Belgian National Bank to $100
million, with extension of term from
six to twelve months, as recommended by
Mr. Coombs, was approved.
Mr. Cocmbs then noted that the Committee had received his
memorandum dated October 16, 1964, recommending an expansion of the
authorizations relating to forward currency operations to include
forward sales of authorized foreign currencies.
(A copy of this
memorandum has been placed in the files of the Committee.)
As the
memorandum indicated, good results had been obtained from such trans
actions undertaken for Treasury account in German marks, Swiss francs,
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10/20/64
and Dutch guilders.
He thought the Committee might well find it
desirable to engage in such operations in the months ahead.
noted in
the memorandum,
As
the risk incurred by the System in under
taking such operations was that of a revaluation of the foreign
currency, and was no different from the risk incurred in drawing
on a swap line.
In both cases, the Committee could protect itself
against such a risk by placing standing orders on the foreign
central bank to protect its short positions against revaluation
of the foreign currency concerned.
If the Committee were to approve
this request, Mr. Coombs said, appropriate amendments to the con
tinuing authority directive and to the Guidelines would be required,
as indicated in the memorandum.
Mr. Mills asked whether transactions of this sort fell within
the surveillance principle that had been adopted by the Group of Ten.
Mr. Coombs replied that the concept of multilateral surveillance was
not precise, and efforts now were being made to delineate it better.
Swap drawings were reported to the Governors at Basle, but he thought
it
was highly unlikely that other cent;al banks would want to report
forward operations.
In general, central banks considered forward
operations to be among their most closely held secrets.
He would
recommend that any such operations conducted on behalf of the Committee
should not be reported to the Governors at Basle.
10/20/64
-13
Mr. Daane added that the discussions on multilateral surveil
lance involved such matters as compatibility in the form of the
reports made by the various countries.
To his knowledge there had
been no suggestion that forward operations should be subjected to
multilateral review.
Mr. Mitchell said he thought the capacity of market partic
ipants to evaluate events would be impaired if the Committee were
to start tinkering with the market.
As he understood the Committee's
past position, it had been prepared to use forward operations only on
an extremely limited basis, and, in principle, only to stop outflows.
It might be useful, he said, to explore briefly the sort of situation
in which the Special Manager would use the authority.
For example,
would he expec: to use it to induce a flow of funds into this country?
Mr. Coombs replied that he thought the rationale of operations
would be as follows.
Assuming that interest rates differed in two
countries, forward exchange rates for the currencies of those countries
ordinarily would tend to a position at which the two interest rates
were equalized on a covered basis.
Where this tendency worked out in
practice there would be no reason to attempt to create artificial
conditions for the sake of inducing flows.
Intervention might be
desirable only in cases where the forward exchange rate had got out
of line with interest rate differentials, or where the forward rate
had moved in response to speculation on a possible revaluation of the
foreign currency.
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10/20/64
There had been two recent instances of the latter situation,
Mr. Coombs said.
In the spring of 1961, following the revaluation
of the German mark, the forward rate went to a premium of as much as
4 per cent, as a result of market expectations of a further revalua
tion.
At that rate, pressures on the dollar became a serious threat.
Through joint operations of the U. S. Treasury and German Federal
Bank, the rate had been brought down to about 1 per cent.
These
operations conveyed official assurance that the mark exchange rate
would be unchanged for at least 90 days.
The operation was success
ful, and it was completely liquidated in a relatively short time.
In February of this year the New York Bank conducted a similar opera
tion for U. S. Treasury account when there again were active rumors
of a revaluation of the mark.
This time it took a smaller volume of
forward sales to reassure the market.
This, Mr. Coombs said, was essentially the kind of operation
he had in mind--one of preventing the forward rate from getting out of
line with interest rate relationships, and thus minimizing, and perhaps
even reversing, flows into the foreign currency.
He would consider such
operations to involve corrective therapy for abnormal situations rather
than the creation of artificial conditions for the sake of forcing
flows in a direction they would not follow under more normal circum
stances.
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10/20/64
Mr. Mitchell asked if the Treasury planned to discontinue
operations of this type or if it felt its resources were inadequate,
and Mr. Coombs replied in the negative to both questions.
The
Treasury had been quite satisfied with the operations that had been
conducted.
Nor was the issue one of resources; the Treasury had no
specific dollar limits to its forward operations, other than those
imposed by the size of the Stabilization Fund, and at present their
forward position was reduced from past levels.
If the proposed
authority was granted it would be the final step toward making the
Committee's operations coterminous with the Treasury's; except in
this case, existing authorizations permitted operations on behalf
of the Committee of all types in which the Treasury engaged.
In
his judgment it was desirable for the two agencies to be able
mutually to reinforce each other's actions.
Mr. Daane said that with the uncertainties existing abroad
it seemed to him appropriate for the System to be able to act side
by side with the Treasury as specific situations developed.
Mr. Mitchell said that he did not object to this aspect of
the proposal.
What made him uneasy was the possibility that the
Committee would be papering over difficulties, and concealing from
people who had a legitimate concern with the market facts they other
wise could read in market performance.
He agreed that market partici
pants often were wrong in their judgments, and took speculative
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positions that clearly were off base.
He thought the Committee
should do whatever it could to correct such ;ituations.
But how
could one differentiate between such cases and others in which the
Committee might be trying to do something of a much more marginal
nature?
How would the Committee know whether the objective in a
particular operation was one it could support?
Mr. Robertson said that he shared Mr. Mitchell's belief
that the Committee should not edge into a situation in which it
was tinkering arbitrarily with the market.
He suggested that the
Committee approve the recommendation on an experimental basis, the
authority to be used sparingly with the understanding that the
Special Manager would give the Committee a full accounting of the
nature and results of every action taken under the authority.
Mr. Cocmbs commented that the Committee now got a full
accounting on all operations, and he was not suggesting any change
in this procedure.
As for giving information to the market, a
complete report was made every six mont:s.
He did not think there
was a risk of misleading market participants by the proposed forward
operations; it would simply be made clear that the authorities did
not want a forward rate to go beyond some given point.
As for the
suggestion that the authorization should be used sparingly, he would
expect to use it primarily in dealing with a sudden boiling up of
pressures, such as might arise if people thought there was a clear
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risk that a certain foreign currency might be revalued.
If the
New York Bank, with the agreement of the foreign central bank
involved, could step in and offer the foreign currency forward,
it could have a major impact by providing the assurance the market
was looking for.
In response to other questions, Mr. Coombs said that he
would expect to undertake forward operations of the type proposed
exclusively in the interest of the dollar and not to protect a
foreign currency; and that he would not expect to engage in such
operations to deal with market worries about devaluation, as dis
tinct frcm revaluation, of a foreign currency.
He also observed
that it was not possible to specify in advance how large a covered
interest rate spread would represent a sufficient degree of dis
equilibrium to require action.
This would depend on the circum
stances of the particular case, and he would anticipate that both
clear-cut and marginal situations would arise.
Further discussion mainly concerned the types of limitations
that should be placed on forward operations.
Among the matters
discussed were the appropriate dollar limits for such operations,
the question of whether it was preferable to continue to specify a
single dollar limit for all forward operations taken together or to
establish separate limits for operations of each authorized type,
and the question of whether it would be desirable to require the
10/20/64
-18
Manager to obtain advance approval for each use of the newly proposed
type of forward operations, with limits set to both the time period
and the dollar amounts in which they could be undertaken.
In the course of this discussion, Mr. Mitchell said he felt
that under the proposal the Committee would be authorizing operations
of a sensitive type in a sensitive market without adequate guidelines
to the Special Manager and without sufficient control over his activities.
He would prefer to have the authorization less open-ended.
With respect to the question of dollar limits, Mr. Coombs
noted that the Committee already had authorized forward operations
for three purposes with a combined limit of
150 million.
If the
recommended fourth type of forward operation was approved, it was
proposed to increase the combined limit to $200 million.
He would
not expect to use this amount entirely in cornection with the new
type of fcrward operation because of the desirability of leaving
scope for the other three types.
Mr. Hayes commented that setting a combined limit probably
was a more conservative approach than specifying separate limits for
each type of forward operation, since the aggregate likely to be
considered necessary would be greater under the latter procedure.
He added that the proposed limit of $200 million was relatively small
compared, for example, with the size of the authorized swap lines.
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Mr. Daane observed that in his judgment it would be undesirable
to require advance approval for specific operations since the situa
tions requiring action might arise quickly and unexpectedly.
Advance
approval also was unnecessary, in his opinion, because he had confi
dence in the Special Manager's judgment which he was sure the Committee
shared.
Moreover, the Committee was protected against the possibility
of undesirable operations by the dollar limits that would be set, and
by the fact that the Special Manager would continue to make regular,
full reports.
Chairman Martin remarked that the Treasury had been engaging
in operations of this sort since early 1961, but they would be a
pioneering type of activity for the System and he thought it desirable
that members should raise any questions they had at this time.
If the
requested authority was approved it was possible that the Committee
might decide af:er experience to withdraw it.
The approach recommended
by Mr. Coombs seemed reasonable to him, including the suggested combined
limit of $200 million, although it was
difficult to say in advance what
the appropriate dollar limits would be.
In a final comment, Mr. Coombs saidhe would assume that any
operations undertaken would be conducted in parallel fashion with the
Treasury, and it would be his intention to use the authority sparingly.
He thought the Committee should be under no illusions, however, with
respect to one matter:
once an operation of this type was undertaken
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to deal with a specific disturbance, there could be no holding back,
since a commitment would have been made.
The System's participation
would be limited by the $200 million maximum, and by the need to
preserve part of that sum for possible use in
other approved types.
forward operations of
Therefore, if in a particular case the appro
priate amount had been employed by the System, the Treasury's part of
the operation might well balloon.
Mr. Yourg observed that if the proposed subparagraph (d) was
to be added to the continuing authority directive for foreign currency
operations, it would be desirable to revise the language of the present
subparagraph (c), by the insertion of the word "concurrent" before
the word "sales " to clarify the distinction between the types of
operations contemplated by the two subparagraphs.
Chairmar Martin noted that another amendment to the continuing
authority directive was in order.
It had been
the Committee's practice
to specify, in the first paragraph of the directive, a dollar limit on
the aggregate amount of foreign currencies held under reciprocal
currency arrangements of an amount equal to the sum of the authorized
individual swap arrangements.
Earlier today the Committee had approved
an increase in the arrangement with the National Bank of Belgium from
$50 million to $100 million.
Accordingly, it would be desirable to
change the aggregate limit from $2.05 billion to $2.1 billion.
1O/20/64
-21Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Committee approved an amendment,
recommended by Mr. Coombs in his
memorandum of October 16, 1964, to
the Guidelines for System Foreign
Currency Operations, as reaffirmed
by the Committee on March 3, 1964,
in which the following second para
graph of Section 1 of the Guidelines
was deleted:
Holdings of a currency shall generally be kept sufficient
to meet forward contracts in that currency (exclusive of con
tracts made under parallel arrangements with foreign monetary
authorities which provide their own cover) expected to mature
in the following 3-week period.
Upon motion duly made and seconded,
and by unanimous vote, the following
continuing authority directive to the
Federal Reserve Bank of New York with
respect to foreign currency operations
was approved:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations reaffirmed
by the Federal Open Market Committee on March 3, 1964, as
amended October 20, 1964; provided that the aggregate amount
of foreign currencies held under reciprocal currency arrange
ments shall not exceed $2.1 billion equivalent at any one
time, and provided further that the aggregate amount of
foreign currencies held as a result of outright purchases
shall not exceed $150 million equivalent at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
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10/20/64
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized
and directed to operate in any or all of the foregoing cur
rencies in accordance with the Guidelines and up to a combined
total of $200 million equivalent, by means of:
(a)
(b)
(c)
(d)
purchases through forward transactions, for
the purpose of allowing greater flexibility
in covering commitments under reciprocal
currency agreements;
purchases and sales through forward as well
as spot transactions, for the purpose of
utilizing its holdings of one currency for
the settlement of commitments denominated
in other currencies;
purchases through spot transactions and
concurrent sales through forward transac
tions, for the purpose of restraining
short-term outflows of funds induced by
arbitrage considerations; and
sales through forward transactions, for the
purpose of influencing interest arbitrage
flows of funds and of minimizing speculative
disturbances.
The Federal Reserve Bank of New York is also authorized
and directed to make purchases through spot transactions,
including purchases from the U. S. Stabilization Fund, and
concurrent sales through forward transactions to the U. S.
Stabilization Fund, of any of the foregoing currencies in
which the U. S. Treasury has outstanding indebtedness, in
accordance with the Guidelines and up to a total of $100
million equivalent. Purchases may be at rates above par,
and both purchases and sales are to be made at the same
rates.
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
-23-
10/20/64
and bankers'
October 14,
acceptances for the period September 29 through
1964,
and a supplemental report for the period
October 15 through October 19,
have been placed in
1964.
Copies of these reports
the files of the Committee.
In supplementation of the written reports, Mr.
Stone
commented as follows:
The firmer money market atmosphere achieved several
weeks ago was generally maintained during the recent
period except for the aberration that occurred over the
Columbus Day holiday, when float--as it often does at
that time of the year--acted perversely indeed.
The
bill ra:e edged upward as the three-onth issue moved
from December to January maturity dates and as the
firmer money market conditions and the attendant higher
cost of carrying positions exerted their effects.
In
yesterday's auction, the three-month bill
was sold at
an average rate of about 3.59 per cent, up 3 basis
points from the auction three weeks ago.
The Treasury bond market has undergone a gentle
downward drift in prices over the past three weeks in
response to renewed uncertainty over the course of
monetary policy, and hence over the course of interest
rates, during the balance of the year. The fact that
the prize declines have been small and gradual despite
considerable discussion of the possibility of a shift
in credit policy toward less ease and despite the
occurrence of potentially unsettling international
events is, I think, evidence of the underlying firm
position of the market. A number of factors give rise
to this position.
Dealer inventories, are in good shape,
although the market would be on more solid ground if
there were further reductions in the over-20 year area,
where $115 million are still held; there has been little
or no urgent selling by banks and other investors despite
circumstances that might have triggered such selling; the
Treasury has indicated that it will confine its financing
to the short-term area over the remainder of the year;
the volume of forthcoming public offerings of new corporate
and municipal issues is relatively light, although private
10/20/64
-24-
placements are taking up some of the slack; and finally,
the market continues to pay a great deal of attention to
forecasts of a continuing large flo of savings that will
be seeking investment outlets and to the prospect that
the volume of available mortgages may continue below
earlier levels.
Turning to Treasury financing, an auction of $1.5
billion March tax anticipation bills will be held today.
Next week the Treasury will announce the terms on which
it will refund $8.7 billion of November 15 maturities,
only $2.3 billion of which are held by the public. The
Treasury is expected to issue a short-term note in a cash
refinancing operation; the books will probably be open
only on November 2, the day before the election. Barring
some unexpected event, the operation should be a relatively
routine one. Shortly after the election, the Treasury
may, depending on its cash position, announce an issue
of $1.5 billion tax bills maturing in June.
There has been a good deal of discussion recently of
the practice initiated by a major New York bank of paying
a rate above the discount rate for federal funds. The pay
ment of 3-5/8 per cent for funds has been rather sporadic,
and the amounts of funds traded hav been quite small
relative to the amounts traded at 3-1/2 per cent. I sus
pect that the practice will continue to be of only limited
significance unless monetary and credit conditions should
at some point become substantially tighter than they now
are. In general, a bank would be willing to pay more than
the discount rate for Federal funds either as an alternative
to going to the discount window, or as a means of acquiring
additional funds to re-lend in short-term outlets. A bank
would use the device as an alternative to the discount
window only if it had been borrowing there rather continuously
and had been subjected to some of the discipline of the
window, or if it had a shortage of eligible collateral to put
up against loans from the Reserve Banks. I do not believe
that either of these conditions is widely prevalent under
present circumstances. We come, then, to the acquisition
of funds above the discount rate for the purpose of re-lending
them at short-term. The most likely outlet for such funds is
dealer loans. But for any great volume of funds to be bought
above the discount rate for that purpose uould require a
combination of heavy dealer positions and a particularly
short supply of money from the dealers' usual out-of-town
-25
10/20/64
lending sources. This combination of circumstances will
recur from time to time even under present money and
credit conditions; but it is not likely to exist contin
uously unless and until there is a significant tightening
of money and credit. If and when we do find a large volume
of funds trading above the discount rate with great fre
quency, the administration of the discount window will of
course become more difficult.
Mr. Stone added that projections at both the New York Bank
and the Board indicated that it would be necessary to supply a sub
stantial volume of reserves in late October and early Novemberperhaps on the order of $1--1-1/2 billion.
In considering ways in
which such needs might be met, the possibility was raised of sup
plying $400 million of reserves by a temporary reduction in the
Treasury balance, from the level of about $930 million near which it had
been held recently to the earlier average level of about $500 million.
Such a reduction would have the advantages over bill purchases of
minimizing downward pressures on short-term rates and of reducing the
System's required gold reserves.
It was his understanding that the
Treasury was prepared to cooperate if such an operation was considered
desirable.
Mr. Swan asked what factors underlay the Treasury's decision
to allow a 50 per cent tax and loan account credit on the issue of
March tax anticipation bills.
Mr. Stone replied that the Treasury announcement of this bill
issue had been made on the preceding Wednesday, the day before the
British elections were to be held.
It had seemed possible that a
-26
10/20/64
Labor Party victory, particularly if the margin was sizable, might
lead to a speculative attack on sterling and a consequent increase
in Bank rate.
This in turn, it was thought, might suggest to the
market that sooner or later the Federal Rese:ve discount rate might
be increased.
In view of these possible causes of market weakness,
the Treasury thought it prudent to take out some insurance by allowing
the 50 per cent tax and loan account credit.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period September 29 through
October 19, 1964, were approved, ratified,
and confirmed.
The staff economic and financial review at this meeting was
in the form of a visual-auditory presentation.
Copies of the text
of the presentation and of the accompanying charts have been placed
in the files of the Committee.
The introductory portion of the review, presented by Mr. Noyes,
was as follows:
As you will all recall, earlier this year the staff
presented an analysis of Administration views on 1964
economic prospects and attempted to assess the kinds of
financial pressures that such unfolding economic develop
ments might generate. Recent developments in the economy
seem to be stimulating sufficient uneasiness--even before
the developments of the past week--to make an evaluation
of differences between actual and projected events appro
priate at this juncture.
-27-
10/20/64
Over all, the economy has been performing close to the
target of substantial growth at reasonably stable price
levels. Conflicting trends with:,n the totals are evident,
however, and there is no agreement as to just what the next
move will be.
Some observers read the downturn in housing and the
leveling off in Federal spending as portending a general
slowing up, likely to be succeeded by a downturn late next
year barring some new stimulus.
Others, noting the rise in some maerials prices, the
widening pressures on capacity, substantial wage settlements,
and strong business investment demands, feel these imply a
speculative binge in the near term, which might also
eventuate in a downturn next year but reach it through a
more disastrous route.
And finally, there are the eternal optimists who
think the economy may be able to continue along its recent
growth path but still maintain reasonable stability in prices
for quite some time to come.
It is not our purpose this morning to present a staff
choice from among these alternatives. Rather, our effort
will be directed at analyzing the cross currents tugging at
the economy, and at suggesting the kinds of adjustments
that may be necessary to keep the economy headed in the
right direction at the right speed. With this, we will try
to picture a pattern of financial developments that would
be consistent with an economy continuing to move gradually
toward fuller employment of resources without succumbing
to inflationary pressures. We begin with a review of major
developments in incomes, spending, and financial markets
so far this year by Mr. Garfield.
The concluding portion of the revie , presented by Mr. Brill,
was as follows:
Before turning to the policy implications of this
analysis, let me review briefly the ground we have coveredand the ground we have avoided. We have not presented a
staff forecast. Rather, our effort has been to call attention
to the major financial and nonfinancial forces threatening
sustainability of the expansion, and to suggest one pattern
of orderly expansion.
10/20/64
-28-
At the risk of oversimplification, the analysis may
he summarized as follows: Principal immediate threats
to sustainability lie in the possibi.ity of a rapid
acceleration of business inventory buying, particularly
of steel, and also in the possibility of wage increases
exceeding productivity gains. These forces can interact,
with the fear of excessive wage settlements or interrup
tions to supply stimulating hedging purchases for inven
tories, and the resultant pile up of new orders reducing
business resistance to wage demands.
This does not mean, however, that inventory building
must stay at the low rate of recent months to avoid
significant price pressures. A moderate increase in the
rate
of stockpiling is not only consistent with price
stability, but possibly a necessary concomitant of
expansion, given the exceptionally low current stock/sales
ratios. We must also distinguish between wage increases
which stay within productivity boundaries, and those
settlements which exceed the capacity of the industries
affected to absorb them without price increases. More
over, it is widespread cumulative price changes that are
to be avoided as damaging to balanced expansion; selective
increases and decreases are essential to the production
Our concern
adjustment process in a free market economy.
and
policies
inventory
both
is directed to excesses in
only
remain
wage settlements, excesses which fortunately
at the moment.
potentialities
But our concern is directed also to another threat
to sustainability, namely, the possibility that final
demands for output may not advance enough to validate
either projected plant expansion or expected growth in
the labor force. A major contribution to continued
growth will need to come from business spending for
fixed capital, given present trends in Government spend
ing and residential construction. Will the markets be
there to meet expanded productive capacity?
With incomes rising at a slower rate than earlier,
consumers would have to spend a larger share of income
than usual in order to clear goods markets as new pro
ductive capacity comes on stream. The problem is hardly
a new one; one readily recalls the experience of 1956-57
when sluggish final demands, at a time when installation
of new capacity was continuing at a high level, resulted
in a declining rate of capacity utilization.
10/20/64
-29
The projection shown for the balance of this year and
early 1965 could be realized if business, labor, and con
sumers display both the prudence and confidence needed to
avoid excesses or shortfalls. All participants have
learned from the 1955-57 experience and its consequences,
and from the major structural shifts since then, particu
larly the increased possibility of foreign and interproduct
competition and the decline in job opportunities in major
industries. These are as evident to business and labor
leaders as they are to economists. The possibility that
appropriate adjustments will be made in business and con
sumer spending patterns, and in business and labor pricing
policies, is thus a real alternative.
What sort of financial picture would likely ensue from
the course of economic activity portrayed? In terms of
credit market developments, total financing would decline,
as Federal borrowing needs are reduced. With respect to
private borrowing, the picture is similar to the moderate
growth we have seen over the past year. These needs could
be met at approximately stable rates of interest without
any drastic alteration in the rate of expansion of bank
credit.
Among the significant prospective developments to which
we called attention is the projected growth of the money
supply. Even in the context of relatively moderate total
credit demands and the relatively moderate expansion
in bank
credit projected, money supply increases could continue
considerably larger than in recent years, reflecting he
changes in asset needs and preferences discussed earlier by
Mr. Holland.
A consequence of these changes would be a substantial
increase in reserve needs, in effect reversing the situation
earlier in this expansion when the System could meet the
public's preference for time and savings deposits rather
The
than demand balances with minimal reserve additions.
test of whether these increased reserve needs should be met
the
by
is the public's use of the credit and money created
additional reserves. So long as economic expansion and
price stability are maintained, as the projection suggests
is possible, shifts in asset preferences need not occasion
shifts in monetary policy. Indeed, if the economy can
clear the immediate hurdle of steel wage and price deter
mination, and international capital flow considerations
10/20/64
-30
permit, we may find it appropriate subsequently to be
thinking of possible needs for more stimulative policies.
Following the presentation, Mr. Mitchell asked whether there
was any eviderce to indicate the extent to which the recent low rate
of inventory accumulation was involuntary.
Mr. Brill replied that
inventory growth so far this year had fallen short of the amount
reported as planned in the business anticipations survey conducted
by the Department of Commerce.
This implied that the low rate of
accumulation was to some extent involuntary.
However, there had
not yet been enough experience with this survey to permit a confident
interpretation of the differences between prior plans and actual
performance at different stages of the cycle.
Mr. Shepardson asked whether the involuntarily low inventories
reflected supply shortages or higher than expected sales.
Mr. Brill
replied that as far as he was able to determine supply shortages
were limited to a few lines, such as nonferrous metals and, recently,
autos.
For the most part he did not think inventory developments
reflected supply shortages.
Mr. Hayes asked whether there hadn't been a more general
trend than the presentation had suggested toward price increases for
products of industrial importance.
It was his impression that the
preponderance of announced price changes in the past month or so had
been on the up side.
10/20/64
-31
Mr.
Garfield commented that the index of sensitive materials,
prepared at the Board, had shown a substantial rise in the 1955-1956
period and a lesser advance in 1959.
This year, however, the index
had increased relatively little, and only to early spring; in the
last few months it had shown no change.
This was because prices of
some included items, such as lumber and plywood, had been tending
down,
and prices of others were unchanged.
On the other hand,
the
BLS index of basic materials prices had risen sharply recently--in
fact, by three-fourths as much as it had in 1955-57.
covered only 13 commodities,
This index
of which 4 were nonferrous metals.
Thus,
it was heavily weighted in the area in which recent price increases
had been concentrated.
It did seem, Mr.
Garfield continued,
that one saw announce
ments in
the press of new price increases every few days--for
example,
in
particular paper products--and yet when one consulted
the BLS index of paper product prices he found it
substantially
The explanation was that many of the announced price
unchanged.
increases had not actually been made effective.
Paper producer
kept trying to raise prices, but they had encountered real resist
ance.
In
the area of fuels,
kind,
to cite an example of a different
there had been price declines.
Despite high levels of activity in
they
petroleum production, product prices were lower now than were
a year ago.
10/20/64
-32
Mr.
Balderston asked how the projection of a decline in. the
growth rate for funds advanced by banks could be reconciled with
the projection of a rise in
the growth rate of bank reserves and
the money supply.
Mr. Holland replied that part of the reconciliation lay in
the project.on of an increase in
but a decline in
the growth rate for demand deposits
the growth rate for time deposits, with a correspond
ing dampening of the increase in
total deposits.
requirements were higher for demand deposits,
Since reserve
a step-up in
the rate
at which reserves were supplied would be required to maintain the
growth rate in total deposits.
Mr.
Brill added that the projection also incorporated an
estimate that the Treasury balance would be reduced significantly
by the end of the 1965 fiscal year.
growth in private demand deposits,
The combination of a more rapid
a slower growth in
time deposits,
and a decline in Government deposits implied a slower rate of expan
sion in
bank assets.
Chairman Martin then called for the usual go-around of
comments and views on economic conditions and monetary policy begin
ning with Mr.
Hayes,
who presented the following statement:
The business situation is basically unchanged since
our last meeting, although it does appear that the infla
tionary dangers already noted at that time are becoming
10/20/64
-33-
somewhat more clearly visible. On the price front,
announcements of specific increases have been fairly
numerous and have included such important products
as sulphuric acid and reinforcing steel bars. Mean
while, the talk of a general steel price rise is
intensifying and is probably having effects on inven
tory policies. Areas of particular strength in the
business picture are automobile sales and steel orders,
with the latter affected by anticipatory demand re
lated to the May 1965 expiration of present wage con
tracts, as well as to possible further steel price
increases. The broader business indicators show no
real change in the pace of the advance, and construc
tion has been relatively sluggish.
Recent balance of payments data have been subject
to sizable revisions, and the third quarter annual rate
of deficit is now estimated at about $2.2 billionsomewhat below the second quarter rate but still dis
turbingly high. October seems likely to produce a large
deficit because of the customary heavy flow of United
States corporate funds to Canadian banks at the begin
ning of each quarter. One encouraging aspect of our
recent balance of payments has been the continuing
favorable trend of exports, with the resulting well
maintained trade surplus. Also, the substantial portion
of the deficit attributable to the flow of corporate
funds to Canadian banks suggests less difficult problems
than if the flow were to Europe; and it is noteworthy
that most of this year's over-all deficit has bee.,
financed by means of enlarged foreign private holdings
of dollars. Yet despite these mitigating factors the
payments problem must still be viewed as decidedly
serious. It seems quite likely that the British pay
ments difficulties may lead eventually to an increase
in the British Bank rate, although the probable timing
is by no means clear--nor is it clear how much pressure
such a move might put on the dollar.
Bank credit rose during the first nine months of
1964 at an annual rate of 8.2 per cent, a little above
the rate of increase for all of 1963. Thus there still
seems to be no evidence of a significant slowdown in
credit growth, in spite of the various modest changes
in monetary policy that have occurred in the last few
years. Business loans have grown faster this year than
10/20/64
-34-
in 1963 or 1962, and some further strengthening of loan
demand could take place this autumn. Since loan-deposit
ratios at reporting banks outside of New York City are
high histcrically and in relation to current levels at
New York City banks, any acceleration in loan demand out
side the money centers could be quickly translated into
pressure on the money market banks, with somewhat more
upward pressure on rates than has been the case in the
past. The money and capital markets have been calm in
the face of momentous events abroad, but they continue
in a rather sensitive state because of expectations of
eventual changes toward a less expansive credit policy.
With the Treasury expected to announce the terms of
the November refunding about a week from now, we should
help to maintain an "even keel" in the money and capital
markets during the coming three weeks. By the time of
our next meeting our election will be over, the refunding
will be close to completion, and we shall have had a
further opportunity to assess the strength of inflationary
tendencies in this country as well as the economic impact
of the British change in government and the outlook for the
U.S. balance of payments. While no change in policy seems
advisable for the moment, we may well find it prudent fairly
soon to try to slow down the rate of bank credit expansion
over the remainder of the year, with sone consequent firming
of the interest rate structure.
For the present no change in the discount rate is
desirable. As for the directive, the second paragraph might
well be left as it is, but the first paragraph might be
modified in recognition of the work stoppage at General
Motors, the growing threat to price stability, and the
latest developments with respect to bank credit, the money
supply, and the balance of payments.
Mr. Ellis remarked that with puzzlement and some concern he
reported again that the New England economy seemed to be expanding
steadily, although its manufacturing activity, as measured by emplov
ment and estimated output, remained on a plateau.
Part of his puzzle
ment traced to the apparent inconsistency between production levels
10/20/64
-35
and the evicent activity in business investment.
quarterly survey of manufacturers'
in
tabulation,
The Boston Bank's
experience and expectations,
now
suggested that this year's outlays in New England would
reach the 16 per cent year-to-year expansion reported to the Bank
last spring.
Statistical evaluation of 1965 expectations suggested
a further expansion in outlays for next year.
These same manufacturers
reported expectations of a 3.5 per cent increase in sales between the
third and fourth quarters of this year.
His concern, Mr. Ellis said, traced to the failure of manufac
turing employment to grow, to declines in the index of factory manhours,
and to the year-to-year stability in factory output totals.
nonmanufacturing employment was growing .teadily,
Fortunately,
and personal income
through August of this year was 4.6 per cent higher than last year.
Mr. Ellis said that the pressure of strong loan demand,
with a steady influx of time deposits,
had led the weekly reporting
banks into increasingly Less liquid positions.
week reported (October 7),
together
For the most recent
liquid assets fell to 10. 2 percent
of total
deposits adjusted compared with 13.2 per cent for all member banks ii
the nation..
Loan-deposit ratios for all New England weekly reporting
banks stood at 70.8 per cent,
average.
national
four full points above the
10/20/64
-36
With the national elections just two weeks away, Mr. Ellis
said, it clearly was undesirable to launch a monetary policy action
that might in itself become a political issue.
By the same token,
he would hope not to lose ground in the execution of the policy
initiated in August.
It was reassuring to have the Manager of the
Account report that lessened ease showed through the events of the
last three weeks.
The week ending October 14 probably should be
added up as involving a miss on the side of ease--with Federal funds
rates slipping on three out of five days, with dealer lending rates
easing, and with net free reserves averaging $186 million.
Looking to the immediate future, Mr. Ellis continued, in the
absence of overt policy moves, he would urge the targets he had
expressed earlier:
net free reserves in the zero to $50 million
range, member bank borrowings at $300 million or over, the Federal
funds rate at 3.50 per cent or better, and short bill rates in the
3.55 to 3.65 per cent range.
Looking further ahead, he would antic
ipate that the November 10 meeting would provide an opportunity for
the Committee to reappraise its policy in view of the current sharp
and unsustainable rate of credit expansion, a rate far in excess of
production and employment gains.
Mr. Ellis urged the Committee to consider discarding the last
phrase of the second paragraph of the directive.
Given the current
-37
10/20/64
strength in the economy, the first phrase, with respect to main
taining the sane conditions in the money market, clearly was
inconsistent w:th the second phrase calling for moderate expansion
in aggregate bank reserves.
The inconsistercy would remain, he
thought, even if the shift in the composition of deposits shown in
the staff projection was realized.
Rather than giving the Manager
conflicting instructions and requiring him to choose between them,
Mr. Ellis preferred to eliminate the second phrase.
He found the
first paragraph of the staff draft acceptable with possible dele
tion of the bracketed phrase referring to the settlement in the
automobile industry.
Mr. Irons said there had been little change recently in
the Eleventh Pistrict; economic activity was; moving along at
about the same general level as in the past few months.
ment was up and unemployment was shading down.
Employ
Retail trade had
risen slightly, and industrial production was down a bit.
On the financial side, Mr. Irons said, there had been
declines in loans and demand deposits, but increases
ments and time deposits.
in invest
District banks still were not in too
liquid a position, and they continued to use Federal funds
rather heavily, with purchases running at about $650 nillion a
week as compared with sales of about $250 million a week.
Both
10/20/64
-38
the number of applications at the discount window and the dollar
volume of discounts had lessened a bit in the past few weeks.
Mr. Irons recommended a continuation of the Committee's
present and immediately past policy.
With the uncertainties
existing at present it seemed to him to be almost out of the
question to make any decisive change.
The figures he had in
mind were much the same as those Mr. Ellis had mentioned.
He
would like to see free reserves at around the $50 million level,
and he would not be overly disturbed if they trended down to
zero or perhaps below zero for a day or so; the Treasury bill
rate in the 3.55-3.65 per cent area; and the Federal funds rate
at 3-1/2 per cent.
he thought.
Some increase in discounting might develop,
He did not favor a change in the discount rate.
The first paragraph of the draft directive that had been
distributed was acceptable to Mr. Irons.
He had no strong feelings
on whether the bracketed phrase referring to the settlements in
the automobile industry should be included or not.
He was
inclined against deleting the last phrase cf the second para
graph, relating to moderate expansion of bank reserves, as
Mr. Ellis had suggested.
The sense of this phrase was
reflected in the first paragraph also, and he did not think
that much would be gained by deleting it from the second para
graph and retaining it in the first.
-39
10/20/64
Mr. Swan reported that employment in the Pacific Coast
States rose slightly in September, as a result of a small increase
in nonagricultural employment and a considerably larger increase
in agricultural employment.
The behavior of the employment series
had been somewhat erratic in the past several months; the September
rise followed an August decline and a July increase.
ment rate had remained unchanged at 6.1 per cent.
The unemploy-
Employment in
the construction industry had declined, however, and orders and
prices in the lumber industry were said to be reflecting a slow
down in housing construction.
One bright spot in the defense--and
space-related area had been a scheduled increase of something over
10 per cert from fiscal 1964 to fiscal 1965 in the N.A.S.A.
distribution of funds to prime concractors in
the District
Of
course, it remained to be seen what implications this would have
for actual programs.
Mr. Swan said that recent gains in business loans at
weekly reporting banks in the District had been somewhat smalle
than a year ago, but the September quarterly interest rate
reflected interest rates at banks somewhat higher than in the
previous quarter and than a year ago.
The new survey of lending
practices indicated somewhat firmer lending policies by banks,
although not uniformly nor in all measured characteristics,
Borrowings from the San Francisco Bank were up in the two weeks
10/20/64
-40-
ending Octoter 7 but they dropped rather sharply in the week of
October 14.
Mr. Swan observed that he had no particular disagreement
with what had already been said on policy.
It seemed to him that.
there had not been much change in the business situation during
the last three weeks.
The uncertainties that had been noted at
the previous meeting still remained, and recent political and
other developments abroad had created some new uncertainties.
The deficit in the balance of payments, although still serious,
now appeared to have been smaller in the third quarter than it
was in the second, and the covered differentials between domestic
and foreign short-term interest rates were somewhat more favorable
to the U.S. now than they had been for scme time.
Treasury had a refunding operation ahead.
Also, the
For all of these
reasons, Mr. Swan said, he would not favcr a change in policy
at this point.
In looking ahead, Mr. Swan continued, a factor relevant
to the level of bill rates seemed worth commenting on.
These
rates typically came under rather substantial upward seasonal
pressure between now and the end of the year.
This was shown
in a rough way by the fact that in 11 of the last 13 years--that
is, in all years since 1950 except 1957 and 1960--the monthly
average bill rate had been substantially higher in December than
10/20/64
in October.
-41
It was true, of course, that free reserves were lower
in December than in October in 7 of the 11 years, but they were
higher in December in 4 years.
He thought this seasonal pattern
in bill rates had some implications for the pressures at the dis
count window and on the bill rate that the Committee might expect
over the next few months.
Mr. Swan remarked that he would accept the first paragraph
of the directive as drafted by the staff.
He did not feel strongly
about the reference to the auto industry settlements, but was
agreeable to its elimination.
On the assumption that no change
in policy was to be made today, he would favor renewing the
second paragraph of the directive without change.
Mr. Deming reported that conditions in the Ninth District
generally were about the same as in the nation.
However, because
agriculture was so important in the District, a weak agricultural
situation had more impact there than in the country is a wnole
District banks also were showing less expansionary tendencies than
were evident at the national level; patterns of change in Distrct
banking were about the same as last year.
Mr. Deming saw no reason to change the Committee's policy
at the present time and, therefore, he would keep the second para
graph of the directive unchanged.
He thought Mr. Ellis' point
about potential inconsistencies within this paragraph had merit,
10/20/64
-42
but to eliminate the last phrase in the absence of a decision to
change policy might create more problems in the long run than it
would resolve,
Mr. Deming favored deleting the phrase on the
automobile industry settlements from the first paragraph.
Otherwise
he would accept the draft as submitted.
Mr. Scanlon reported that economic activity in the Seventh
District continued to rise and the gap between output and "capacity"
appeared to have narrowed further in most major industries.
However,
relatively few industries were operating at "capacity" and in those
industries capacity was, of course, being increased.
As he had
reported at the previous meeting, firms in nost industries indicated
that they could handle additional orders in their present facilities.
Employment conditions in the District remained favorable,
Mr. Scanlon said.
Initial unemployment compensation claims declined
in September, continuing a recent trend, and were at a low level.
Most of the large Midwest firms reported that the local labor
supply w.s adequate relative to their needs.
Several steel firms,
however, had indicated recently that they were unable to find
sufficient workers in the immediate region and were forced to
recruit production personnel from quite a distance.
Mr. Scanlon remarked that bankers in the major cattle
feeding areas in the District reported that loan demand was
developing less rapidly than normal for this time of year because
10/20/64
-43
of the lower prices and smaller number of feeder cattle being
purchased.
This might be only a temporary situation.
Farm real
estate prices continued to move up and country bankers expected
that trend to continue.
District banking figures showed a continuation of the
rapid expansion ofcommercial and industrial loans that had been
evident since early August, Mr. Scanlon continued.
The net in
crease in business loans over the past six weeks was slightly less
than in the same period last year, but a larger share was accounted
for by manufacturers of metal products and other durable goods.
These firms usually paid down bank loans in October and November.
The large District banks had also reported sizable increases in
other loan categories that tended to reflect increased credit
demand from business and consumers.
But their lending to
securities dealers and finance companies had been reduced.
Mr. Scanlon said the quarterly survey of interest rates on
commercial and industrial loans showed no significant change in
interest rates.
It did, however, indicate a sharp rise in the
proportion of loans with maturities of more than one year.
Th
increase was largely because of the larger size of those loans
the number of term loans increased only slightly.
The total amount
of term loans reported was far greater than in any survey since
June 1959.
10/20/64
-44-
The major District banks had not been under severe reserve
pressure.
Although borrowings at the discount window had risen,
the total deficit position had not increased greatly and had been
covered mainly by purchase of Federal funds.
It was Mr. Scanlon's opinion that deposit growth had been
proceeding toc rapidly with the money market conditions that had
prevailed recently.
It seemed clear that if the rate of increase
in deposits was to be slowed, given present levels of credit
demand, interest rates would have to be permitted to rise further.
However, in view of the considerations that had been mentioned he
questioned whether any action should be taken today insofar as
monetary policy was concerned.
As to the directive, Mr. Scanlon said, he could accept the
draft language for the first paragraph, but it seemed to him that
somewhere down the line it was going to be difficult to reconcile
the figures the Committee was seeing with the continued use of the
phrases "moderate growth" and "moderate expansion" in the absence
of a change of policy.
Mr. Clay said that economic activity in the Tenth District
had been adversely affected this year by a decline in farm income.
Drought conditions during the summer and lower prices for wheat
and cattle were important factors reducing farm income below the
1963 level in the tirst two-thirds of the year.
Accordingly, cash
10/20/64
-45
receipts from farm marketings averaged 6 per cent below comparable
1963 receipts.
Farm income in the District should make a better showing
for the last third of the year, Mr. Clay observed.
The principal
factor should be increased cash receipts from larger farm marketings
of wheat and cattle and improved meat animal prices.
This favorable
development would be limited somewhat, however, by a reduction in
output from fall harvested crops by one-fourth below last year's
levels because of the summer drought.
A second factor increasing
farm income in the latter part of the year would be the certificate
payments under the 1964 Government wheat program.
On balance,
District farm income in the last third of the year should surpass
the year-ago level, although it would remain significantly below
late 1962 and early 1963 levels.
Nonfarm employment in the District continued to run counter
to the rational trend, Mr. Clay continued
While the nation had
recorded substantial advances in nonfarm employment, the District
had been. marked by a modest, yet continuous, downtrend in
seasonally adjusted nonfarm employment from the peak
in January this year.
established
This decline was traceable to a decrease
in construction employment dating from November 1963 and a drop
off in manufacturing employment beginning in February this year.
10/20/64
-6
These developments were concentrated in three States, with nonfarm
employment in the remainder of the District showing little change
this year.
Nationally, Mr. Clay said, even though the third quarter
increase in GNP was smaller than that in the second quarter, the
advance in .inal purchases was one of the larger ones of this
expansion period.
current data,
it
On the basis of this information and other more
was apparent that the response in
personal con
sumption and in business capital investment to the combination of
national economic policies was providing the basis for the continu
ation of over-all expansion.
As an over-all appraisal, the factors
to be considered in the formulation of monetary policy today were
not perceptibly different from three weeks ago.
All factors con
sidered, it appeared appropriate to pursue the same monetary
policy, with the same money market objectives, as was adopted by
the Ccmmittee at that time.
Mr.
Clay said the staff draft for the first
paragraph of
the economic policy directive appeared quite satisfactory to him
preferably without the reference to the automobile industry labor
settlement.
The second paragraph of the current directive should
be readopted in its present form, he thought.
Mr. Clay did not
favor a change in the Federal Reserve Bank discount rate.
-47-
10/20/64
Mr. Heflin reported that the generally healthy state of
Fifth Dist--ict business continued.
The statistical picture
remained strong, and most important industries again showed
moderate growth.
In August, the latest checkpoint, nonfarm
employment reached a new high, and factory man-hours rose but
remained slightly below the record level.
Bank debits increased
in September but not quite enough to match the July all-time
high.
In construction the current growth trend might be leveling
out, however,
as employment declined in August and contract
awards dropped to the lowest level since February.
Plans had
been announced recently for the construction of several new
textile plants to be more efficient and more highly automated
than any now in operation.
One textile leader expressed the
opinion that, after 30 years of plant liquidation, the industry
had now turned the corner and would be expanding capacity in the
years immediately ahead.
Mr. Heflin observed that the Richmond Bank's latest survey
showed more diversity of opinion regarding the general business
outlook, and somewhat less optimism, than had appeared in several
previous reports.
Manufacturers, however, again indicated -n
balance further gains in new and unfilled orders, shipments, and
employment.
Few outside the textile industry reported higher
prices or wages.
Over the past six months of the Bank's survey,
10/20/64
-48-
increases in prices received were reported on average by 11 per cent
of the manufacturing respondents, and were matched by an equal
number of reported declines.
Reports of higher wages, however,
had averaged 20 per cent of returns, with wage declines too scarce
to be significant.
Mr. Mills commented that his statement would stick to facts
as he saw them and would not attempt to theorize about future
developments.
He then made the following statement:
A number of public statements emanating from both
official and private quarters have expressed concern in
varying degree about developing inflationary pressures.
The rapid increase in the prices of nonferrous metals,
the upward-cost trend in labor wage settlements, and the
strength in consumer spending have all been cited as
reasons why monetary and credit policy should shift more
positively toward restraint than has been the case.
Despite relatively easy reserve conditions, the money
market apparently has taken the "open-mouth policy
statements" to heart and, in consequence, short-term
money rates have held firm and are predicted to move
higher. These developments offer an opportunity for the
Federal Reserve System to espouse by policy actions the
currently publicly expressed sentiments regarding
inflationary potentials. To do so would represent a
refreshing and welcome return to free market principles,
by virtue of which the interest rate structure becomes
the product of the interaction of market forces rather
than the creature of official policy decisions.
There are those who still believe that the economy
needs the stimulus of a relatively easy monetary and
credit policy, particularly as a means to ward off the
possibility that economic conditions will run down in
1965 and consequently should be bolstered up in advance
of such a possibility in order to forestall a business
recession. Contrariwise to this reasoning, a stimulative
monetary and credit policy that was maintained into the
future very likely would aggravate the inflationary
10/20/64
-49
pressures that are becoming apparent and, in so doing,
produce a situation that would require stern measures of
credit restraint at some future date, with consequent
damaging results to the economy. On balance, it is pref
erable to adopt a more restraining credit policy than that
presently operative as a means of curtailing any further
growth of inflationary pressures. Moreover, an effect of
a slightly more restraining credit policy will be to dis
courage commercial bank lending abroad and in that way
serve as a deterrent to the outward movement of dollars
at the further expense of this country's adverse balance
of payments. Although monetary policy should not be used
as an instrument to influence bank lending and investment
policies any more than bank examination procedures should
be used to supplement official monetary policy, neverthe
less, a less easy Federal Reserve System monetary and
credit policy, by reducing the availability of credit,
would oblige commercial banks to be more careful in their
choice of loans and investments. In that indirect way,
monetary and credit policy would exert a favorable by
product influence toward the bettermen: of commercial
bank credit practices.
Mr. Mills added that, to reduce his thinking to concrete
terms, he would accept Mr. Ellis' proposal to keep free reserves
in the positive range from zero to $50 million.
Mr. Robertson said that in view of the fact that the
domestic and international situations were unsettle
clearly a time to avoid rocking the boat.
this was
He thought the Committee
should continue the policy that had been adopted at the last few
meetings and wait and see.
As to the directive, he would accept
the staff draft for the first paragraph, deleting the reference
to settlements in the automobile industry, and he would make no
change in the second paragraph.
10/20/64
-50
Mr. Shepardson said that while he recognized that this
probably was not an opportune time to make a significant policy
change, he still was concerned about increasingly adverse pressures
that would, it seemed to him, compel more significant action in the
future.
Mr. Shepardson did not think the Committee ought to make the
change in the second paragraph of the directive that Mr. Ellis had
proposed.
However, he was not sure whether the clause in this
paragraph which read "with a view to maintaining about the same
conditions in the money market" referred to the conditions actually
prevailing or to the targets that had been intended.
He thought
the targets had been missed, and he hoped that if this clause was
retained it would be interpreted as not applying to conditions
that reflected inadvertent slippage.
Mr. Shepardson said he assumed the reason for omitting the
phrase referring to the auto settlement from the first paragraph
was that the settlement had not yet b, en completely attained.
It
seemed to him, however, that enough settlements already had been
reached, particularly when one included the issues already agreed
upon in the General Motors negotiations, to justify including the
reference.
He found the settlements that had been made so far to
be disturbing.
10/20/64
-51
Mr. Mitchell said he would vote for no change in policy, and
he was agreeable to deleting the reference to the wage settlements
from the first paragraph.
He thought the point with respect to these
settlements was whether they had set a pattern that other industries
would find they could not afford without price increases.
To his
knowledge, no one had argued that the automobile industry itself
could not afford them.
Mr. Mitchell remarked that there was a great deal in what
Mr. Ellis had said about the potential inconsistency within the
second paragraph of the directive.
However, he doubted that the
appropriate remedy was to be found in the change suggested. Accord
ingly, he would favor continuing this paragraph as it was.
Mr. Mitchell concluded with some observations on the chart
presentation at this meeting, which, he thought, had been quite
useful.
Mr. Daane said he would like to second Mr. Mitchell's
appreciative remarks about the staff review.
It
seemed to him that
what underlay all of the recent discussion about the directive was
a desire for better analysis rather than for better words.
He
thought it was highly useful to look ahead at possible future
developments, and later to compare these projections with actual
developments, and he hoped that this kind of analysis might come
out of the discussions on the format of the directive.
10/20/64
-52
As far as policy was concerned, Mr. Daane said, it seemed
perfectly clear to him that "even keel" was called for, not only
because of the prospective Treasury refunding but also because of
the uncertainties and unsettlements abroad and at home.
he would underscore the word "even."
Indeed,
He thought the Committee
should not rock the boat in any way and should give the market
every possible indication that policy was, not being changed.
Therefore, he would not agree with Mr. Irons that occasional net
borrowed reserves were no cause for concern; he would be concerned
about anything that could be misconstrued as indicating a change in
System policy.
He thought the "tone and feel" of the market was
a meaningful target for the Committee's operations and he would
like to see the tone and teel kept as even as humanly possible.
Mr. Daane concluded by saying that he was skeptical that the
present uncertainties would fade by the time of the next meeting,
but he thought there was little point in trying to forecast what
the Committee might do at the next meeting or in coming months.
Mr. Hickman said that one of the important effects of the
work stoppages in the auto industry was to obscure temporarily the
question as to whether there was overexuberance in the economy.
September production figures, as the Board's staff had noted, were
adversely affected by developments in the automobile industry to
the extent of four-tenths of one index point.
Retail sales also
10/20/64
-53
presented a mixed picture partly as a result of the introduction
of new cars, which boosted the late September figures and depressed
early October results.
Monthly scores for business activity in October would be
incomplete at the next meeting of the Committee, Mr. Hickman
noted.
Some of the figures would probably indicate a slight
interruption cf the upward movement of business.
More importantly,
the inevitable upward rebound would probably be registered in the
figures for November, which would not become available until
December.
Thus, it might be mid-December before the Committee
would have solid evidence as to what was really happening in the
economy.
One of the factors the Committee should begin to think
about, Mr. Hickman remarked, was the small but persistent rise in
labor costs per unit of output in manufacturing that had occurred
over the past four months.
Since selling prices had remained
steady, the implication was that profits had declined.
If
settlements ir the automobile industry were not isolated within
that industry and closely related industries
profits must fall.
prices must rise or
If the latter should happen, ther
would be
adverse effects on stock prices, business investment, and consumer
spending.
-54
10/20/64
Against this background of fragmentary economic information,
current domestic and international political uncertainties, and a
Treasury refunding to be announced later this month, Mr. Hickman
said he could only recommend at this time that no substantive change
be made in the second paragraph of the directive.
The staff's
rephrasing of the first paragraph was acceptable to him and he
would prefer to include the reference to the wage settlements in
the automobile industry.
He hoped that the new program for
reporting reserve positions by a sample of banks would result in
tolerably accurate estimates of free reserves.
Mr. Hickman also pointed out that the latest data on
monetary variables suggested that a bill rate of 3.60 per cent
bid might not be consistent with a free reserve level of $50 million
under present conditions of strong credit demand.
In the latest
week, for example, the bill rate had been very close to the
Committee's target but the preliminary free reserve figure was
$186 million.
In view of the substantial increases in the money
supply that had occurred in recent months, as well as in the first
half of October, it might be desirable to think in terms of a
seasonally adjusted bill rate of 3.60 per cent, which under
present
circumstances might imply an actual rate for 91-day Treasury bills
of, say, 3.65 per cent.
Such a pattern, Mr. Hickman believed,
would be consistent with the Committee's current intent.
He would
10/20/64
-55
seek to avoid a free reserve figure very far from the $50 million
level, and he certainly would not want to see the figure fall
below zero at the present time.
Mr. Bcpp said that economic conditions continued to be
good in the Third District.
Unemployment claims remained well
below the totals reached in any recent year, and labor market
classifications in the District showed the best pattern since the
inception of the present rating scheme in 1955.
Help-wanted
indicators for the Third District also had been moving upward for
over a year.
Electric power consumption in the District's manufacturing
industries continued to keep pace with the rise in the nation's
manufacturing output, Mr. Bopp said, although construction contract
awards, residential and nonresidential, had dipped below the totals
reached in 1963 in both the Third District and the nation.
Depart
ment store sales in the District exceeded 1963 levels by 8 per cent
for the year to date.
This came closer than usual to the national
performance; the comparable national figure was now between 10 and
11 per cent.
Total loans and investments (adjusted)at weekly reporting
member banks dropped between September 16 and October 14, Mr. Bopp
continued.
Business loans were off slightly, as were investments.
Both these decreases were, however, in line with the District's
10/20/64
-56
experience last year during approximately the same time period.
On a cumulative basis for the year, total loans and investments
were well above last year.
The deficit in the basic reserve
position of reserve city banks declined slightly for the three
weeks ending October 14.
Borrowing by reserve city banks also
declined slightly on an average daily basis, and country bank
borrowing was still light.
It seemed to Mr. Bopp that there were four major develop
ments to watch in evaluating the present and prospective business
environment:
prices, unemployment, bank credit, and the balance
of payments.
Although price pressures had been evident in some
areas--especially in nonferrous metals and in some steel productsthe over-all wholesale index remained little changed.
It was
possible, of course, that prices might soon begin to rise at a
faster pace if businessmen started accumulating inventories more
rapidly and production ran into more bottlenecks.
So far as
Mr. Bopp could tell, however, inventory policies were still quite
conservative and any pickup in accumulation started from a very
favorable position.
As far as bottlenecks were concerned, his
analysis suggested that the likelihood was not strong that the
economy soon would be pressing hard against capacity.
This was
because additions to capacity seemed likely to proceed at least
as fast as additions to output.
10/20/64
-57
Meanwhile, unemployment had shown little change and con
tinued uncomfortably high.
Bank credit had been increasing at a
rapid pace and would bear watching.
A survey of the District's
larger banks suggested, however, that little beyond a normal
upswing would develop in loan demand during the next three to
six months.
On the international front, it seemed too early to
Mr. Bopp to take any action on the basis of early October figures
for the balance of payments.
He continued to be encouraged,
however, by the narrowing of the third quarter deficit relative
to that which occurred in the second quarter.
On balance, Mr. Bopp felt that the present degree of ease
continued to be appropriate to domestic business and to the balance
of payments.
The staff draft for the first paragraph of the
directive, omitting the reference to the auto settlements, seemed
appropriate.
He was sympathetic with Mr. Ellis' suggestion for
the second paragraph but if no change in policy was tc be made he
would let this paragraph stand as it was.
He did not favor a
change in the discount rate.
Mr. Patterson reported that little or no evidence of a
slowdown in the rate of economic expansion had developed in the
Sixth District.
The District continued to show slightly, but not
spectacularly, greater advances than the nation generally,
10/20/64
-58
according to comparable available statistics.
For the area as a
whole, there was a slight loss in manufacturing employment in
August, most of which took place in Georgia when the auto model
changeovers brought temporary layoffs at the Ford and General
Motors assembly plants.
Potentially, Mr. Patterson commented, the chief weakness
in the District seemed to lie in construction.
Contracts were
drifting downward month by month although current projects were
supporting a stable level of employment.
Most of the downward
drift in contracts was explained by a drop in nonresidential,
nonbuilding contracts.
Any judgment of the degree of consumer acceptance of the
new model cars was complicated by the short supplies of the General
Motors dealers.
American Motors and Ford dealers, according to the
results of a spot survey made in Atlanta by the Bank's Research
Department, were selling approximately 15 to 20 per cent more
cars than at a comparable date last year.
Plymouth dealers
complained that they could not get delivery on enough cars to
meet current demands, and General Motors dealers feared a permanent
loss of sales to competitors.
They reported, however, that potential
customer response in their showrooms had been quite good.
types of consumer buying were apparently holding up well.
Other
10/20/64
-59Mr. Patterson remarked that nature's behavior had been far
more spectacular than the behavior of the economic indicators.
So
far this year, various parts of the Sixth District had been struck
by four hurricanes.
Hilda, the third largest hurricane to drive
into Sixth District territory this fall, swept across southern
Louisiana on October 3 and 4, blowing down most of the sugar cane
crop and damaging the cotton crop.
Early estimates, implying a
halving of the $80 million cane crop, had been revised sharply
upward as harvesting activity gained headway.
A recent telephone
survey of the major lenders financing Louisiana cane growers showed
that most growers would be able to repay their operating and
mortgage debts and those who could not would be carried by the
creditors.
A fourth hurricane, Isbell, blew across the southern
tip of Florida on October 14, causing some damage to vegetable
crops, although the amount of damage was no, yet known.
Else
where in the District, weather had been favorable to crops, and
harvesting continued apace.
Mr. Patterson said the only tightening of credit that could
be detected from District banking figures was a failure of holdings
of Government securities to rise as much this September as in the
comparable months of past years.
During September member banks on
an average were in a net sales position in respect to Federal
funds.
During the first three weeks of September they were in a
10/20/64
-60
free reserve position, but in the final week of the month their
borrowings exceeded their excess reserves for the first time since
the week ended August 12, and they were in a net Federal funds
purchase position.
Apparently, their reserve positions eased in
early October, however.
Loans continued to expand.
Mr. Shuford reported that economic activity in the Eighth
District, which had begun to pick up in early summer, continued to
From August to September manufacturing out
rise during September.
put rose substantially and the limited available data on payrolls
in the major labor markets indicated that there also had been a
gain in employment.
At weekly reporting banks, business loans
and deposits had been increasing at rapid rates since August.
Mr. Shuford favored no change in policy for the various
reasons already mentioned.
At the same time, he shared the con
cern some had expressed about recent rates of growth in reserves,
money, and bank credit.
Since May, the annual rate of expansion
in bank reserves and money supply had been about 6 per cent, which,
he thought, was greater than was sustainable over an extended
period without increasing inflationary pressures, given the
strength of the economy.
The Committee was certainly going to
have to deal with this situation, and perhaps take steps to bring
these growth rates--which he, like others, did not regard as
"moderate"--more into line with the wording of the directive.
10/20/64
-61
Mr. Shuford said the staff draft of the first paragraph of
the directive was satisfactory to him, with or without the reference
to the automobile settlements.
He leaned slightly toward including
this reference, but did not consider the question of great importance.
He recognized that the last clause of the second paragraph was poten
tially inconsistent with the first, but since the Committee
apparently would make no change in policy today, he would leave the
second paragraph as it was.
Mr. Shuford favored no change in the
discount rate.
Mr. Balderston commented that it was clear that the Committee
did not want :o make a formal change in policy during the next three
weeks.
However, he would like to call to the Committee's attention
a matter that gave him great concern--the possibility that the
Committee might be abdicating its main responsibility, to preserve
the stability of the dollar.
Against the background of recent
growth rates for GNP and industrial production- 5.2 and 6 per cent,
respectively, over the last 12 months--the figure; for growth in
money supply and total bank reserves from June to
date gave cause
for real concern as to whether the Committee had permitted its
policy to get off track for an entire third of a year.
Even though the Committee might not charge its general
policy for the three weeks ahead, Mr. Balderston said, he would
like to suggest again that it set its target in the zero to
-62
10/20/64
$50 million range for free reserves as Mr. Mills had suggested, and
that it should not be fearful of a drop in free reserves below the
zero level, as Mr. Irons had suggested.
The fear of net borrowed
reserves, Mr. Balderston believed, could cause the Committee to
fail to do its duty.
He did not think that the health of the bond
market should be put above the Committee's duty; the state of the
bond market was the Treasury's responsibility.
For weeks now,
fear of seeing free reserves penetrate the zero line had prevented
accomplishment of the objective the Committee had intended in its
August decision.
Chairman Martin asked whether Mr. Balderston was being
critical of the Manager.
Mr. Balderston replied that he was not;
in his judgment the Manager had followed Committee instructions
with respect to free reserves.
Mr. Balderston thought the fault
lay with the Committee.
The Chairman then invited Mr. Stone to comment on any
problems he had encountered in operating under the instructions
issued at recent meetings.
Mr. Stone said he had felt that the Committee preferred to
avoid the emergence of a net borrowed reserve figure for a week,
and particularly for two successive weeks.
When figures behaved
as erratically as the reserve figures did, he thought the objective
of avoiding negative free reserves induced a bias in operations
10/20/64
-63
toward higher figures--a bias that was inescapable, although he
tried to keep it as small as possible.
If the Desk came into a
Wednesday with a projection of, say, S10 million free reserves
for the statement week, the likelihood was good that the week's
figure finally would turn out to be negative.
Therefore, he
usually tried to come into Wednesday with a free reserve figure
reasonably close to the $50 million mark, or perhaps even above
$50 million if the tone and feel of the market suggested that
the estimate was too high.
In response to a question by Mr. Robertson, Mr. Stone said
he had considerable confidence in the ability of the bond market
to adjust to net borrowed reserves, although the publication of
such a figure would stimulate a good deal of discussion in the
market.
Mr. Robertson then asked if the Desk had taken any
action designed specifically to protect the "health of the bond
market," and Mr. Stone replied that the Desk's operations were
not addressed to protection of the bond market at
all.
Mr. Hayes remarked that he thought one factor underlying
the reluctance of some members to having negative
curve
figures
eventuate had been the possibility that such figures would upset
the bond market.
Mr. Daane commented that as one who had favored avoiding
negative free reserves he could say his reasons were not based
solely on a concern for the bond market.
If the Treasury was
-64
10/20/64
engaged in a Major financing at a time wher the market was in an
uncertain condition, any development that changed expectations was
likely to have a considerably greater effect than he thought the
Committee would want to see for either domestic or international
reasons.
What he had been saying this morning was that at this
juncture, with the unsettlements in the international picture and
with the market looking to the System for clues as to its policy
posture, it would be unwise, in his judgment, to do anything that
might suggest modification of System policy.
It was for this
reason that he wanted to avoid negative free reserve figures at
present.
Mr. Hayes said it seemed to him that the Committee had
created its oWn problem to some extent, by operating for so long
with excessive concern over the possible appearance of negative
figures.
He agreed with Mr. Balderston that it would be desirable
to get away from this situation.
At present, however, the
Committee was confronted with the fact that the market would put
a rather serious interpretation on negative free reserves
and he
was not advocating a change now in view of the Treasury refunding.
Mr. Hickman said he shared this view.
He thought net
borrowed reserves would be undesirable now, in view of the re
funding and of the various uncertainties that existed.
After the
10/20/64
-65
refunding, however, if the Committee felt confident about the
economic outlook, he might well favor a net borrowed reserve target.
Chairman Martin said he thought the Committee's position
right along had been that it did not favor negative free reserves
but that it would not be critical of the Manager if they occurred
inadvertently.
that the
Mr. Stone had spoken honestly when he indicated
effort to avoid a negative figure led to some, perhaps
subconscious, upward bias in his operations.
It was true that
there had been a rather large miss on the upside in the most
But there was a problem at present in
recent statement week.
operating under an instruction to maintain the "same conditions
in the money market."
He doubted whether the Committee could
cut matters as finely as it had tried to do in recent discussions
of free reserve targets.
The Manager had been given a diff:cult
assignment, and in the Chairman's judgment lie had done an
excellent job in trying to meet the wishes of all
members.
The
Chairman agreed that the fault lay with the Committee, it had
created the problem itself.
Mr. Shuford commented that he shared Mr. Bilderston's
view on the matter of negative free reserves, and he
also agreed
that the Committee had got itself into this situation.
He had
participated in the daily telephone conference for the past three
weeks, and did not recall any specific mention of the problem of
10/20/64
-66
avoiding negative figures; it had been his feeling that the Desk
was operating in terms of the tone and feel of the market.
There
were disturbing gyrations in the numbers, particularly over the
Columbus Day holiday, but Mr. Stone had explained that this was
an annual problem, and that one almost had to ignore the figures
for that week.
Mr. Stone had spoken candidly today in indicating
that he had been leaning against having negative free reserves
eventuate.
Mr. Shuford thought he was justified in doing so in
view of the discussion at the last three Committee meetings; the
Manager had been following the instructions given him.
Mr. Stone commented that the past week had to be considered
an aberration.
Float had soared over the holiday weekend and, as
of Wednesday, it would have required sales of about $1 billion to
bring weekly average free reserves down to ;50 million.
He was
sure that no member of the Committee would have wanted the Desk to
make such sales.
In the preceding week, however, on Tuesday
morning free reserves were estimated at barely above zero.
Because
the market was acting in such a way as to cause him to believe that
the estimates were wrong, he had been prepared to take the risk of
skirting zero quite closely.
Mr. Bopp noted that the Manager had reported in his
memorandum to the Committee dated October 16 that in 15 of the
first 38 weeks of 1964--or in roughly 40 per cent of the weeks--the
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first published free reserve figure differed from the final figure
by $40 million or more, and in 9 weeks the differences were at
least $60 million.
Thus, revisions often were of the same order
of magnitude as the margin for error allowed the Manager.
(A
copy of the memorandum referred to by Mr. Bopp has been placed in
the files of the Committee.)
Mr. Swan said it seemed to him that it was legitimate for
anyone to be critical of the Committee for the policy decisions it
made.
However, he did not think it was legitimate to criticize the
Manager for not having carried out the policy change decided on at
the August 18 meeting.
The emphasis then had been on accomplishing
an extremely nild and gentle change, and it seemed to Mr. Swan that
the Manager had tried to do exactly that.
Mr. Irons commented that in his earlier remarks he had not
meant to imply that he favored a deliberate attempt to produce nega
tive free reserves.
The Committee had been narrowing its target
range steadily, and had now gotten it down to a point where the
Manager could hardly avoid a mistake.
With a target of $50 million
and an instruction not to go below zero, the Manager was given very
little margin for error on the downside, although he did have some
on the upside.
This kind of instruction was unfair to the Manager,
and the Committee had to expect that a negative figure would result
some time.
In his judgment free reserves were not good figures to
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use for targets in any case; and the Committee was attempting to
play them too finely.
He was not advocating negative free reserves,
but he thought the Committee was putting the Manager in an impossible
situation with the type of instructions it had been giving him.
Mr. Daane said that he had consistently thought it unwise
to try to narrow the margin in instructing the Manager, and his own
disposition would be to give him wider latitude than, say, a zero
to $50 million range.
However, it was still true that a negative
free reserve figure now probably would be construed as a change in
System policy, and in his judgment this was something the Committee
could not afford in the present conjuncture of domestic and inter
national affairs.
In a way, he felt just es frustrated by the
situation as Mr. Balderston evidently did, but he believed negative
free reserves should be avoided if the Committee did not want to
signal a change in policy.
Chairman Martin said the Committee had wanted to make a
gradual change in policy, with the emphasis on "gradual," and that
was what had caused the difficulty.
The change made had in fact
been quite gradual, and eventually it had been almost obliterated.
The Chairman continued by observing that there seemed to be
little difference in views on policy at this meeting.
With respect
to the directive, a majority seemed to prefer omitting the bracketed
reference to the settlements in the automobile industry from the
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-69
first paragraph, and a majority appeared to favor making no change
in the second paragraph, despite the feeling by some that Mr. Ellis'
comments on this paragraph were valid.
Mr
Hayes noted that Mr. Brill, in commenting on the outlook,
had said the greatest threats to stability lay in excessive wage
increases and accelerated inventory accumulation.
If the Committee
was concerned about these threats he thought it should give some
recognition to that fact.
One possible way of doing so was to
include a phrase such as the following in the list of factors which
the Committee's policy was said to take into account:
". . .the
relative stability in broad commodity price averages that continues
to obtain despite recent developments affecting prices, wages, and
inventory policies that could, if they spread, disturb that
stability."
In his judgment the staff's draft did not accurately
reflect the Committee's concern with existing threats to price
stability.
Mr. Mitchell said he would reiterate that he would be
concerned about wage settlements only if it became clear that the
auto industry settlement had become a pattern for other industries.
wage
refer
then
In his opinion it would be appropriate to
settlements in the directive, but it was not appropriate at present.
Mr. Haye
replied that since the auto industry announcements
there had been a change in the whole character of comments on the
10/20/64
-70
price outlook made at Committee meetings.
certainty tha
While there was no
they would set a pattern for other industries,
the terms of the auto wage contracts had stimulated a great deal
of concern.
Mr. Daane said that if the directive was to include refer
ences to all significant factors of concern to the Committee, there
were a great many political and economic uncertainties around the
world that should be mentioned.
in the offing.
There also was a Treasury financing
The consensus today, he thought, was for an even
keel policy against the background of the financing and of these
other factors.
Mr. Hayes commented that it was customary to include some
reference to Treasury financing operations in the second paragraph,
and he thought this should be done in the d:rective to be adopted
today.
Chairman Martin suggested that the Committee vote on the
draft directive as prepared by the staff, except for deletion of
the bracketed reference to the settlements in the automobile
industry from the first paragraph and addition, after the word
"policy" in the second paragraph, of the phrase "and taking into
account the forthcoming Treasury financing."
10/20/64
-71Thereupon, 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
following current economic policy directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in the reserve base, bank credit,
and the money supply for the purpose of facilitating continued
expansion of the economy, while fostering improvement in the
capital account of U.S. international payments, and seeking to
avoid the emergence of inflationary pressures. This policy
takes into account the further expansion in economic activity,
tempered by a work stoppage at a major automobile company;
relative stability in broad commodity price averages, even
though additional price increases have occurred in some ma
terials markets; and indications that the vigorous money supply
expansion of recent months continued in the first half of
October. It also gives consideration to current estimates
that the deficit in the U.S. balance of payments in the third
quarter continued at a high rate, although not quite as high
as in the preceding quarter.
To implement this policy, and taking into account the
forthcoming Treasury financing, 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 the next meeting of the Committee would be held
on Tuesday, November 10, 1964, at 9.30 a.m.
Chairman Martin then noted that the Committee had discussed
and at the
the directive proposals of Messrs. Ellis, Mitchell, Swan
meetings of July 28 and September 29.
It had been contemplated that
the discussion would be continued at this meeting, and the group
working on the proposals had prepared a four-part outline for the
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10/20/64
discussion.
Also, Mr. Hayes had circulated a memorandum entitled
"The Ellis-Mi:chell-Swan Proposal Revisited
October 15, 1964.
under date of
(A copy of this memorandum has been placed in
the files of the Committee.)
The Chairman said that he had studied this matter quite
actively over the weekend.
He had been impcessed with Mr. Hayes'
memorandum, which gave a clear statement of the negative case on
the proposals.
However, the memorandum did not make a positive
contribution to the solution of a problem with which the Committee
had been concerned for a long time.
Perhaps there was no acceptable
solution.
It was possible, the Chairman observed, that most members
felt they could live with the present directive insofar as internal
However, the directive
operations of the Committee were concerned.
also was a public document, and there had been many criticisms to
the effect that the information the System disseminated on its
policy actions was poor.
In his opinion the Committee had a long
way to go if it was to develop a directive that would explain its
actions and objectives adequately.
The Chairman felt that the Committee could debate the various
aspects of the directive for a long time.
However, he said, perhaps
the best way of coming to grips with the question of whether it
could improve the directive, and of bringing the Committee's best
10/20/64
-73
thinking to bear on the subject, was to experiment.
Accordingly,
he proposed that the staff be asked to continue to draw up drafts
of directives that might have been issued if the new format
actually was being used, and that Committee members engage in in
formal trial deliberations on these directives after adjournment
of the meetings, to see whether it was possible to get majority
agreement on language.
They might begin by planning to devote the
afternoon to this purpose on the day of the next meeting,
November 10.
It could be learned by this means whether a new
approach was feasible, or whether the task was hopeless and the
present directive format should be retained.
Such a trial program obviously would be quite a burden on
everyone involved, the Chairman observed, but it would be a good
way to get a clear basis for a decision.
new directive format to a vote without
in his judgment, be a mistake.
To put the question of a
such experimentation would,
Hopefully, by the time of the
Committee's organization meeting in March 1965 enough experience
would have been gained through such trial deliberations for the
Committee to reach a decision on the format of the directive.
In the past, Chairman Martin said, he had
beena proponent
of the thesis that it was best to retain the present short form of
the directive because that was the simpler course.
But he now felt
10/20/64
-74
that the Committee had an obligation not to follow this course
unless it had convinced itself that it could not do better.
Mr. Hayes said that the difficulties that the Committee had
experienced at this meeting and the previous one in trying to get
agreement on language concerning a single substantive issue demon
strated to him that it would be a serious mistake to attempt to
reach agreement on a long, detailed text.
It was mainly for this
reason that he opposed the suggested elements 1 and 2 in the
proposed new format; he thought the Committee would simply bog
down in debate on language.
One of the advantages of the present
directive format was that there was a reasonable chance that the
Committee would be able to reach agreement.
Mr. Daane commented that the Chairman's proposal, as he
understood it, was simply to try to reach such agreement on language
in the new type of directive.
If Mr. Hayes was right that the
Committee would bog down in discussion--and he (Mr. Daane) sus
pected that he was--this would be learned in the course of the
trials.
Chairman
Martin said he hoped everyone would approach this
trial with an open mind.
He thought the Committee should try to
develop a better statement on how it assessed the economic situation
in arriving at its policy decision at each meeting, whether it was
done in the directive or in the policy record.
10/20/64
-75
Mr. Hayes said he felt the "green book" would serve this
purpose,
There had been several suggestions that this book be made
available to the public, and he thought such a procedure, which
would not involve any change in the directive, was worth exploring.
Mr. Swan commented that while he thought the green book was
an excellent compendium, in his judgment it did not substitute for
a Committee assessment of the economic situation incorporated in
the directive or in the policy record.
Mr. Deming asked whether it would be possible to have the
staff drafts of the "trial" directives delivered by the Friday
preceding each meeting instead of late on Monday, as had been the
practice so far.
Mr. Brill said that an entire week's data on
banking developments would be missed it the staff tried to get the
drafts to Committee members by Friday.
It night be possible, how
ever, to mail or telegraph the drafts to the Reserve Banks during
the weekend before the meeting.
It was agreed that the Chairman's suggestion for experimenting
with the new directive format would be followed.
Mr. Robertson said he had prepared a statement on the
directive proposals that he would distribute to the Committee and
10/20/64
-76
staff after the meeting.
(A copy of this statement has been placed
in the files of the Committee.)
Thereupon the meeting adjourned.
S cretary
Secretary
Cite this document
Federal Reserve (1964, October 19). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19641020
@misc{wtfs_fomc_minutes_19641020,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19641020},
note = {Retrieved via When the Fed Speaks corpus}
}