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, December 1, 1964, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Daane
Hickman
Mitchell
Robertson
Shepardson
Shuford
Swan
Wayne
Messrs. Ellis, Bryan, Scanlon, and Deming,
Alternate Members of the Federal Open Market
Committee
Messrs. Bopp, Clay, and Irons, Presidents of the
Federal Reserve Banks of Philadelphia, Kansas City,
and Dallas, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Messrs. Brill, Garvy, Holland, Jones, and
Mann, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Messrs. Partee and Williams, Advisers, Division
of Research and Statistics, Board of Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
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Messrs. Willis, Eastburn, Taylor, Baughman,
Parsons, Tow, and Green, Vice Presidents
of the Federal Reserve Banks of Boston,
Philadelphia, Atlanta, Chicago, Minneapolis,
Kansas City, and Dallas, respectively
Mr. Parthemos, Assistant Vice President of the
Federal Reserve Bank of Richmond
Mr. Geng, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held
on November 10, 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 operations and on Open
Market Account and Treasury operations in foreign currencies for the
period November 10 through November 25, 1964, and a supplemental
report for the period November 26 through 30, 1964.
Copies of the;e
reports have been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs said that the
gold stock would remain unchanged thi, week and the Treasury was
hopeful of avoiding any further reduction through the year end.
The
Stabilization Fund now had on hand $180 million in gold with prospective
sales of $75 million through December.
tunately, was fairly ominous.
The outlook for 1965, unfor
If the French continued to buy their
usual $34 million a month, this would mean sales of roughly $400 million
for the entire year to France alone.
In addition, the Spaniards had
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12/1/64
indicated they would like to buy about $200 million.
The Austrians
might also be in.
As a rough guess, Mr. Coombs commerted, in the absence of a
major improvement in the U.S. balance of payments, total gold sales
in 1965 might well exceed $1 billion.
As an offset, a few countries
might be selling relatively small amounts of gold to the United States,
and if
the Russians re-entered the London gold market the U.S. mignt
have a certain supply from the London gold pool.
On the basis of the
present outlook, however, he suspected that the U.S. was unlikely to
acquire much more than $250 million next year from Russian and other
sources, which suggested a net reduction in the gold stock of $750
million or more.
In the present very shaky state of confidence in
the gold and foreign exchange markets, a resumption of gold losses on
so sizable a
scale might have rather serious consequences.
On the exchange markets, Mr. Coombs continued, the flight
from sterling had been checked since the announcement of the $3 billion
credit package, but as yet there had not been any swing back.
He
remarked that once confidence in a currency was lost, it was not an
easy task to rebuild it and much would depend not only on what the
British Government did during the coming weeks but also on what it
said.
Perhaps the most serious aspect of the sterling crisis,
Mr. Coombs said, was the risk that a sterling devaluation might have
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12/1/64
unleashed a heavy speculative attack on the United States dollar.
In 1949, when the British devalued by 30.5 per cent and brought down
33 other currencies with them, the dollar was able to ride through
the storm without difficulty.
Today the story would be quite different
and, in his view, that further underlined the necessity for moving
as fast as possible to eliminate the U.S. balance of payments deficit
and restore the strength of the dollar.
In response to a question by Mr. Daane, Mr. Coombs said the
figures he had given on possible changes in the U.S. gold stock did
not take into account the effects of increases in IMF quotas, which
might result in additional losses of about $1/2 billion.
These losses,
of course, could be explained as not reflec,:ing any concern about the
dollar.
They would, however, raise the total figure.
Mr. Mitchell observed that from a long-range standpoint the
fact that the U.S. had achieved a strong current account position was
highly reassuring.
He agreed with a statement he had heard that the
condition of tne current account was remarkable, given the present
domestic situation in the U.S.
Mr. Hayes commented that despite the situation on current
account there still was a serious problem in connection with the
over-all balance of payments because of the size of capital outflows.
Mr. Mitchell responded that in his judgment it was important for
Committee members to keep in mind that the balance of payments
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problem was one of capital flows,
and not of the competitiveness of
U.S.
Coombs had given a disturbing
goods in world markets.
Mr.
report on the prospects for the dollar and the U.S. gold stock.
It
was appropria:e for him to bring these prospects to the Committee's
attention, and he (Mr. Mitchell) agreed that the situation was
serious.
However, he thought the Committee should be cautious in
deciding how to deal with the situation; in
his judgment the remedy
lay not in general monetary policy but in measures addressed
specifically to the problem of capital outflows.
Mr. Hayes said that in the reasoned judgment of many people
here and abroad there were grounds for concern not only about sterling
but also about the whole international
financial structure.
Mr. Daane asked whether there were any technical reasons for
the failure of a reflow to Britain to deve op after the events of
Mr.
the past week
Coombs replied that the basic explanation
the factor of confidence.
Many people
lay in
on the continent were maintaining
large short positions in sterling and were borrowing pounds to mee
their immediate needs on a day-to-day basis.
It
was impossible to
say how long they would continue to act in this way; perhaps until it
became apparent that the actions on Bank rate and import surcharges
were beginning to take effect.
Britain was moving into a period of
seasonal strength in their balance of payments, and this would be in
their favor.
If
they could get through the year-end without any
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further break in confidence, a reflow might develop.
Recent develop
ments relating to leads and lags in payments, hedging by foreign
traders, outflows of funds because of lack of confidence in sterling,
and so forth, all could be reversed quickly under favorable circum
stances.
Mr. Coombs replied affirmatively tc Mr. Balderston's question
as to whether the recent flow of funds from London to the continent
involved the dollar.
Mr. Balderston then asked about the extent to
which the use of dollars in transmitting these funds caused European
central bank claims against the U.S. to increase.
Mr. Coombs replied
that the funds initially went into the Eurc-dollar market and then,
after a brief lag, to European central banks.
These banks had taken
in a substantial amount of dollars--several hundred million.
This
had put pressure on the dollar and had created a serious problem.
There was no doubt that the U.S.
had a large stake in
the package of
credits to Br:tain.
Mr. Coombs added that Britain planned to repay $500 million
of the $675 million now outstanding in drawings on its swap with the
System after they made their $1 billion drawing tomorrow on the
International Monetary Fund.
Meanwhile they were drawing on the
credits advanced by continental European countries.
Since only $200
million of their IMF drawing would be in dollars, the net effect would
be to mop up dollars that had been flowing to the continent.
12/1/64
In response to a question by Mr. Shuford, Mr. Coombs said
that the Treasury gold stock had been reduced by $75 million last
week because of a transfer to the Stabilization Fund in anticipation
of orders for gold.
If the transfer had not been made the Fund's
holdings would have been $105 million rather than $180 million.
Mr. Bryan noted that the "free" gold stock of the U.S. at
present was at the low level of $2.3 billion.
He recalled earlier
discussions in which it had been suggested that legislation be recom
mended at a time when the dollar was not in danger to remove the
requirement of gold cover against Federal Reserve notes.
He wondered
now whether the U.S. would not have its hand forced in this connection.
When the level of free gold was so low it became obvious in financial
markets that the dollar was highly vulnerable.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
November 10 through Novembe:: 30, 1964,
were approved, ratified, and confirmed.
Mr. Coombs recommended renewal for another three months of
the $100 million standby swap arrangement with the Netherlands Bank,
which matured December 15, 1964.
He noted that this swap arrangement,
and the one with the Bank of France, were the only ones remaining on
a three-month basis.
However, he did not recommend proposing an
extension of term to the Netherlands Bank at this time.
12/1/64
Renewal of the swap arrangement
with the Netherlands Bank for a further
period of three months, as recommended
by Mr. Coombs, was approved.
Mr. Coombs then noted that drawings, on the swap line with
the Netherlands Bank in the amounts of $30 million and $5 million
would fall due on December 16 and December 21, respectively.
He
recommended their renewal for another three months; in both cases
these would be first renewals.
Renewal of the two drawings on the
swap arrangement with the Netherlands
Bank was noted without objection.
Mr. Coombs then noted that the original $50 million swap
arrangement with the National Bank of Belgium would reach the end of
its six-month term on December 22.
As the Committee members would
recall, he said, when the increase in the Belgian swap line from $50
to $100 million was negotiated on October 22, it was agreed that
both the first $50 million and the second $50 million would be
consolidated on December 22 into a single twelve-month swap arrangement
for $100 million, with $50 million of this amount to be fully drawn
at all times on a six-month maturity basis.
In reply to Mr. Shepardson's question concerning the fully
drawn $50 million, Mr. Coombs said that unlike all other swap
arrangements the original arrangement with the Belgians had been
fully drawn on both sides from its initiation, at their request.
He
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personally would have preferred the more usual type of arrangement.
In this special case the "temporary" factor came into play in
connection with disbursements,
which were repaid within three months.
The drawing was not recorded as such except insofar as funds actually
were disbursed.
Consolidation of the two swap
arrangements with the Bank of Belgium,
as recommended by Mr. Coombs, was
approved.
Mr. Coombs reported that a $13 million swap with the Bank
for International Settlements against Swiss francs would mature orce
more on December 10.
By that time this swap arrangement would have
been on the books for a total of 18 months, and he thought the tine
had come to liquidate it.
Liquidation of the $13 million
swap with the B.I.S., as recommended
by Mr. Coombs, was noted without
objection.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Mark t
Account cover:ng open market operations in U.S. Government securities
and bankers' acceptances for the period November 10 through November 25,
1964, and a supplemental report for the period November 26 through
November 30, 1964.
Copies of these reports have been placed in the
files of the Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
12/1/64
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The market has once again demons.rated its extra
ordinary capacity to make orderly adaptations to sharp
and sudden changes in the environment in which it
operates. Market participants were aware, during the
few days before Britain's November 23 Bank rate change,
that sterling was under pressure. The feeling that the
Bank rate would not go up--a feeling that had nourished
the early November rally in the bond market--was already
being questioned by some in the market, and a move to
6 per cent on Thursday, November 26, would not, I think,
have come as a complete surprise. The move to 7 per cent
on Monday, however, did come as a complete surprise. The
market immediately underwent an adjustment that ranged
to 1/2 point in prices of Treasury bonds and 10-15 basis
points in Treasury bills. Market attention was then
focussed on the discount rate. The market felt that a
move to 4 per cent would come before the end of the year,
and the only question was precisely when. After Monday
afternoon's announcement of the rate increase at five
Reserve Banks, the market underwent a further, although
smaller, adjustment on Tuesday. The market was partic
ularly soft on Wednesday in response to the news that
sterling had come under strong attack despite the Bank
rate move, although it recovered when the news of the
$3 billion aid package was announced. During the past
two days prices have continued to move lower and yields
higher. Three- and six-month Treasury bills were auctioned
yesterday at average rates of 3.87 per cent and 4.03 per
cent, respectively, up 11 and 9 basis points from last
week's averages, and up 30 and 29 basis points from the
averages set in the auction held the day before the last
meeting of the Committee. Yields on ,onds, on the other
hand, have moved up only moderately. Intermediate-term
issues are some 10-15 basis points above the levels at
which they were trading before the rate changes, and
longer-term issues are up about 4-7 basis points. These
adjustments seem to me very moderate under the circum
stances, and the market's move to the new rate levels
had been orderly and without any trace of panic.
I usually avoid indulging in guesswork in these
statements as to what might happen under this or that
set of conditions in ensuing weeks. On this occasion,
however, I thought it might be helpful to the Committee
if I were to do a little guessing about the way in which
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12/1/64
rates might behave over the next few weeks if the Committee
should decide to leave its posture with respect to reserves
about unchanged. Bearing in mind that we are approaching
the peak of seasonal pressures on bill rates with the
dividend date on the 10th and the tax date on the 15th of the
month, I would anticipate that three-month bills would move
in the 3.90-4.0 per cent range. After the passage of those
seasonal pressures, and particularly when we move into
the New Year, the rate would probably move back down into
the 3.80's, perhaps centering around 3.85 per cent. I
have difficulty seeing how it could be much lower, since
dealer financing costs would probably average in the neighbor
hood of 4.10 per cent. Indeed, if it were desired to keep
the bill rate around 3.80 per cent, I think free reserves in
the neighborhood of $200 million would be required in
December, and perhaps $100 million or thereabouts in January.
With bill rates in the 3.90-4.0 per cent range during
December, I would anticipate some slight further upward
pressure on intermediate and long rates, although if the
bills were to move back into the 3.80's in January, some
thing around the present level of long rates might well
be sustained. This, I repeat, is only guesswork. The
market situation is still very fluid and can change quickly
in response to any number of events, including any further
developments in sterling or in our military position in
Viet Nam. But I thought it might be helpful to cite for
the Committee a few concrete numbers that represent what
seem to me to be the rate levels most likely to flow from
an unchanged reserve posture if that should be the decision
of the Conmittee.
Mr. Stone added that the reserve outlook now was highly
uncertain from day to day in view of the large flows connected with
foreign operations.
For example, people at the Desk came in last
Friday morning not knowing whether free reserves had gone up $250
million overnight as the British drew on the newly enlarged swap or
whether reserves would have to be supplied.
Again, there might be a
reserve withdrawal tomorrow of anywhere from $1/4 to $1/2 billion as
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the British drew on the IMF and repaid part or all of their drawing
on the System.
Under these circumstances the Desk had to play by ear
from day to day, making the best adjustments to developments that it
could.
Mr. Swan asked what figures Mr. Stone had in mind when he
referred to the possibility of keeping the reserve posture unchanged.
Mr. Stone said he had been thinking in terms of a free reserve level
of about $50 million, although under present
might be expected to fluctuate rather widely.
circumstances the figure
He suspected that if
free reserves were kept to $50 million or less during the next two
weeks the bill rate would move up close to 4 per cent.
To keep the
bill rate in the 3.90-3.95 range probably would require free reserves
on the high side of $50 million during the next few weeks of peak
seasonal pressures and the occurrence of tax and dividend payment dates.
In January, however, a lower free reserve figure probably would be
consistent with a bill rate in that range.
Mr. Mitchell asked whether Mr. Stone was saying in effect that
in order to limit the decline in Treasury bond prices to 1/2 point the
free reserve target would have to be raised.
Continuing, Mr. Mitchell
observed that che Chairman had noted in his press conference on Monday
that the discount rate action was not directed at reducing the
availability of funds.
In his opinion, for the higher discount rates
to have a minimum impact on credit availability it would be necessary
to raise the free reserve target.
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Mr. Stone replied that he intended only to indicate what rate
levels would be likely to develop if
the Committee wanted to make no
change in reserve posture.
Mr. Mitchell then asked what level of aggregate member bank
borrowing the Committee might reasonably expect to attain.
Mr.
Stone said that a strong saw-toothed pattern in borrowings
seemed to be emerging.
In
bank settlement period,
country banks tended to withhold their excess
the first
week of the two-week country
reserves from the central money market and borrowings by city banks
tended to be heavy.
In the second week co ntry banks would sell
Federal funds and borrowings by city banks would decline.
Thus, it
was necessary to look at borrowings on a t:o-week average basis.
It
would be his guess that with an unchanged reserve posture member bank
borrowings probably would average around $400 million during the coming
period of peak seasonal need, and would decline after seasonal pressures.
had abated.
first
Within the two-week period they would be higher in the
week and lower in
Mr.
the second.
Daane said he had been present at a recent meeting involving
a number of senior representatives of securities houses.
He gathered
that they would expect a marked impact on rates in the intermediate
maturity area and considerable impact on long-term rates if bill rates
moved into the 3.90-4.0 per cent range.
situation closely.
They were watching the market
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12/1/64
Mr.
Stone agreed that if
bill
rates moved up to that range there
probably would be effects on longer-term yields.
He cited instances of
transactions yesterday in which some banks had shortened their port
folios by selling securities in
the 1968-1970 area and buying one-year
bills, in the process gaining about 1/8 point in yield when the returns
on bills were figured on an investment-yield basis.
Mr. Mitchell inquired whether the Desk had bought any coupon
issues recently and Mr.
Stone replied in
the negative.
At the time
of the Bank rate action last Monday, he said, the technical position
of the bond market had been good.
relatively
dealers had held a
However,
large amount of Treasury bills--about $2 billion--in their
trading positions and they had had additional amounts out under long
term repurchase agreements.
both Monday and Tuesday.
adjusted
in
It
Treasury bill
auctions were scheduled for
seemed clear that if
the bill
an orderly fashion to the events that occurred,
were better than even that the adjustment in
would be orderly.
market
the odds
the coupon market also
It seemed equally clear that if the bill market
adjustment was not orderly,
neither would be that in
the bond market.
Accordingly, the Desk had addressed its attention to the bill market.
It
also seemed desirable to stay out of the bond market for a time to
avoid giving the impression that the Desk had aborted an adjustment
that otherwise would have occurred.
completed.
That adjustment now had been about
Therefore, it was now appropriate to begin acquiring some
coupon issues in meeting indicated reserve needs,
and he planned to do so.
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Mr. Mitchell then asked whether Mr. Stone thought a free
reserve target of $250 million would be consistent with a relatively
modest adjustment of short-term rates from their levels prior to the
discount rate action--perhaps of 15 basis points.
Mr. Stone responded that to keep the bill rate in the neighbor
hood of the implied level of 3.75 per cent probably would require free
reserves in the $200-$300 million range over the next few weeks.
January, it might require a range of $100-$200 million.
In
Continuing,
Mr. Stone observed that the bill rate would tend to gravitate toward
the discount rate unless the free reserve target was raised.
At
present levels of free reserves and country bank excess reserves, city
banks would be borrowing in volume at the discount window,
Federal funds rate would stay close to the discount rate.
exert an upward pull on the bill rate.
and the
This would
Also, dealer lending rates
would then ave:age a few basis points above the discount rate.
But
dealers would not hold bills yielding 3.75 per cent if the carrying
cost was , per cent or more.
The key to the situation lay in this level
of borrowings; if they were high the Federal funds rate would be at the
discount rate most of the time and the bill rate would move up.
Mr. Daane commented that he could see the logic of the free
reserve-bill rate relationship Mr. Stone had suggested would hold in
the December period of seasonal pressures, but he was skeptical about
the proposition that in January free reserves of $100-$200 million
would necessarily be consistent with a bill rate in the neighborhood
of 3.75 per cent.
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Mr. Hickman asked whether the present free reserve target could
be retained if the Committee was willing to allow the bill rate to
move up to a level just below the discount rate.
Mr. Stone replied
that he thought a free reserve target of $50 million plus or minus
$100 million over the next few weeks would lead to a bill rate in the
3.90-4.0 per cent range.
In the past few days, he noted, dealer lending
rates at New York banks had been at 4-1/8 - 4-1/4 per cent on new
loans, with one bank posting a rate of 4-3/8 per cent.
At these lending
rates dealers would not carry bills yielding much below the discount
rate.
Mr. Hickman then asked whether a free reserve target of $200
million would not lead to a large run-up in the money supply, and
Mr. Stone replied that that would depend on the strength of credit
demands.
Mr. Ellis said he also was disturbed about the possible conse
quences of free reserves in the $200-$300 million range.
He noted that
what the Committee was dealing with was a progression, in which suc
cessively higher free reserve levels would be associated with
successively lower ranges for bill rates.
He did not think it was
necessary to let free reserves rise to the level that would keep the
bill rate at 3.75 per cent; there was some intermediate level of free
reserves--perhaps centering on $100 million--that would be consistent
with bill rates in the range 3.85-3.90 per cent.
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12/1/64
Mr. Deming commented that in his opinion it was futile under
present circumstances to attempt to guess the precise level of free
reserves that would be required to produce a particular bill rate.
The real concern of the Committee, he thought, was to establish a
target for the next two weeks in terms of the bill rate.
Accordingly,
he proposed that the Committee direct its attention to the appropriate
bill rate target.
Mr. Stone agreed that it was not possible to make accurate
forecasts of the underlying relations.
If the Committee set a target
for bill rates, some level of free reserves would emerge as a residual.
Thereupon, upon motion duly
made and seconded, and by unanimous
vote, the open market transactions
in Government securities and bankers'
acceptances during the period
November 10 through November 30, 1964,
were approved, ratified, and confirmed.
Chairman Martin then called for the staff economic and financial
reports, supplementing the written reports that had been distributed
prior to the meeting, copies of which have been placed in the files of
the Committee.
Mr. Brill presented the following statement on economic
conditions:
It is far too soon to expect any observable impact on
the domestic economy from last week's international finan
cial crisis. The most that can be said is that no sense of
panic has been evident in the financial and commodity markets
that tend to mirror current psychology of domestic business
12/1/64
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leaders and investors. Security markets have responded
in a generally mild and orderly fashion, both to the
crisis and to the official rate actions, and adjustments
in markets for internationally-traded commodities have
been moderate.
Since a run on one bank tends to bring into question
the solvency of the rest of the financial community, it is
natural at this juncture to inquire into the vulnerability
of the United States to a global loss of confidence of the
sort experienced by the British. Of course, the basic
international positions of the two countries are quite
different, as Mr. Reynolds will explain in a moment, and
fortunately our election results have been conducive to
confidence in the stability of public policy, in contrast
to the British experience.
Nevertheless, there are emerging problems that could
well bring into question the fundamental strength of the
U.S. economy.
It is the near unanimo.s view of the staff,
as indicated in the "green book"l/ and in the various draft
directives submitted to you, that our current economic
situation is one of "underlying strength, obscured by the
Partly because I enjoy the role of
effects of strikes."
"devil's advocate" but also with some underlying strength
to my own convictions, let me express certain reservations
about this appraisal.
My first reservation relates to prospects for
continued price stability. We are now getting some pass
through of earlier price increases in basic nonferrous
metals tc the finished goods level, without significant
The 0.4 per cent
offsets in other industrial commodities.
increase in the industrial materials price index in
October has not been followed by much further rise, but
neither has it been offset by a decline. Stability in
the over-all index of wholesale prices has been maintained
only by a decline in some agricultural prices. Obviously,
one month's experience is not enough to warrant the cry of
"inflation," but it isn't an encouraging development,
particularly since the nonferrous area continues under
upward plessure.
1/
"Current Economic and Financial Conditions," a report
prepared for the Committee by the Board's staff.
12/1/64
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Moreover, the true test of whether wage pressures
will upset price stability is still to come, in settle
ments for industries where productivity gains have been
much smaller than in automobiles. The heavy overhang of
unemployment among teenagers and younger men generally,
and the loss of production-line jobs in manufacturing
industries, have diverted union demands toward job security
and pensions rather than money wage increases, and as far
as one can observe productivity has continued to rise
generally and unit labor costs to remain stable. It's a
fragile stability, however, with much of it resting on the
Administration's efforts to contain the steel settlement
to reasonable dimensions.
But along with increasing threats to price stability,
we have ircreasing indications of declining strength in
some key final demands. Business investment in fixed
capital has been a major factor in contributing to rising
productivity as well as to rising aggregate demands. The
outlook for future investment is much less optimistic,
however, as indicated first by the McGraw-Hill survey and
as now confirmed by a more recent Government survey.
Recognizing that businessmen generally underestimate
future capital spending during upswings, the McGraw-Hill
staff made extensive efforts to determine what sort of
correction factor would be appropriate to apply to their
latest survey findings. On the basis of their inquiries
they reached the conclusion that any upward adjustments
this time should be minimal, since many respondents
reported that in overshooting this year they had sub
stantially completed their capacity expansion programs.
This conclusion is not inconsistent with the course of
new orders for nonelectrical machinery, which have not
risen since last spring. And results of the latest
Government survey, as yet still preliminary and confidential
until released next week, suggest that the McGraw-Hill
estimate is close to the mark; i.e., that spending for
fixed capital will be showing much less thrust in 1965
than it has this year.
Consumer investment in housing is also a relatively
weak area of economic activity. While housing starts
bounced up in October, if allowance is made for the
volatility of this series the best one can say is that
the downdrift from last year's peak may have been arrested
but no significant rise has occurred or is in prospect.
12/1/64
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Neither is there much impetus to be expected from
fiscal policy. Federal expenditures for goods and services
haven't risen much this year, on balance, and there appears
to be a dedication to keeping future spending close to the
present level. Given a rapid recovery in revenues despite
reduced tax rates, it won't be long before we are concerned
again with "fiscal drag."
The vehicle now in favor for
preventing it, namely, a reduction in excise taxes, seems
to me to be the most difficult type of tax reduction to
achieve politically and the least sure in terms of economic
impact.
If this less than sanguine appraisal is near correct,
what we are left with to sustain risirg activity is consumer
and State and local spending and business inventory accu
mulation. Consumer spending for durable goods has been
held back in recent weeks by the auto strikes, and spending
for nondurables by unseasonable weather. With the advent
of some snow, Christmas, and new GM cars in the salesrooms,
retail sales should resume and maintain their strong upward
course for some time. The latest buying plans survey is
strong and any concern over consumers' contribution of
sustained expansion must relate to later in 1965, not to
the near-term future.
Business spending for inventories is another matter,
however. It is an important component of the current
production picture, but this is about as undersirable a
source of aggregate demand as one can get, since a rapid
acceleration in the rate of inventory accumulation result
ing from strikes and strike threats, such as we are
experiencing now, is conducive to price increases and has
a built-:n backlash once the occasion for it has passed.
In summary, I find almost as many signs of underlying
wea.ness as of strength, and among the weaknesses, the
not unfamiliar paradox of emerging price pressures at a
time of emerging slowup in aggregate demand. Either
development could limit the possibility of improving our
balance of payments, for while price increases would have
their impact on our trade balance, a reduced rate of
economic growth here would decrease incentives for long
term capital i:flows and for retention of domestic
investment capital. In other words, we can't afford,
internationally, either inflation or a slackening in
expansion.
12/1/64
-21
In light of this appraisal, it would seem to me
that the appropriate stance for policy would be one of
maintaining domestic investment incentives through
relatively stable long-term interest rates, while
keeping the availability of banking funds to the
minimum consistent with this. Certainly, there is
no need for additional encouragement tc the financing
of speculative inventories, nor does there appear
to be any need for encouraging a more rapid rise in
consumer credit. But neither would it be appropriate
to put financial roadblocks in the path of business
fixed capital outlays or of local government capital
outlays that contribute to the efficiercy of our
productive system. Effecting such allocation of
credit flows through a general policy tool is
difficult, but "Operation Twist" seems to have worked;
now we apparently need "Operation Supertwist."
Mr. Hickman noted that in a chart presentation to the Committee
at a recent meeting the staff had projected a substantial availability
of long-term funds and moderate demands for them, implying some down
ward pressure on long-term rates over the ccming period.
He asked
whether this was still the prospect; if so, it would assist in the
"Operation Supertwist" to which Mr. Brill had referred.
Mr. Brill said that, if anything, such a development appeared
more likely now than it had at the time of the presentation.
This
was because the staff's projection for capital expenditures had been
larger than it would now make in light of the more recent surveys
of capital spending plans.
Mr. Hickman then asked whether there would not be a fairly
comfortable availability of long-term capital if the bill rate did
not move much above its present level.
Mr. Brill replied that he
-22-
12/1/64
thought that would be the case unless investors were induced by
arbitrage opportunities to move out of the long-term area.
Mr.
Ba.derston asked whether Mr.
Brill would comment regarding
the probable impact of the recent change in Regulation Q on bank
purchases of municipal securities and mortgages.
He noted that
after
the Regulation Q change in January 1962 the rate of growth in time
deposits at commercial banks rose from 12 to 18 per cent.
However,
in November of this year time deposits were growing at an annual
rate of 18-1/2 per cent.
all
In
1962 bank's had bought four-fifths of
municipal issues and one-sixth of the supply of mortgages.
Did
Mr. Brill foresee banks continuing to be active in these two areas?
If
so, was there some chance that mortgage rates would remain low?
Mr.
Brill replied that "Operation Twist" undoubtedly would be
aided by the Regulation Q action; at the minimum, that action might
prevent some diversions of bank funds away from municipals and
mortgages.
However,
there was some question as to whether banks might
already have invested so heavily in
those areas that there was not
much room for increasing further the rate of such investment,
particularly in
light of the rates of return they could expect and
the rates they would be paying on time deposits.
the cushion had been completely exhausted,
smaller than it
Q ceilings.
but it
He did not think
undoubtedly was
had been at the time of earlier increases in Regulation
-23-
12/1/64
Mr. Holland made the following statement concerning financial
developments:
Mr. Stone has already outlined the yield changes
that occurred in various categories of market securities
in initial response to last week's official rate actions.
Insofar as commercial bank rates were concerned, only
two banks have thus far raised the prime loan rate, with
out confirming action as yet by other of the nation's
large institutions. Savings deposits rate increases
centered in New York City, where banks have been hard
pressed by mutual savings bank competition this past
year. Time CD rates were increased promptly by a number
of banks around the country, but by no means generally,
and most announced increases seemed defensive in nature,
bespeaking no aggressive intentions to capture large
additional amounts of deposits, given the current flat
yield curve.
Contributing to these comparatively orderly reactions
were a general awareness of the continued large flow of
savings, the modest current supply of new capital offerings
apart from Treasury and Government-sponsored issues, last
week's relatively easy money market, and assurances that
the step was not intended to have as its counterpart a
reduction in the availability of credit.
Now that the first market adjustments are behind us,
the more important financial questions concern the
responses that such rate changes night engender in broad
credit and capital flows, both domestically and inter
nationally. Comments on international flows I leave to
my colleague, Mr. Reynolds. In the domestic arena,
financial flows prior to the discount rate change can
be characterized as somewhere between moderate and
vigorous. Business and financial loans at city banks
picked up in November, with loan demand significantly
strong from borrowers in the metals and petroleum
industries. Banks acquired Treasury securities from
time to time during the month, reflecting a larger than
usual amount of Treasury financing to be paid for in
November, but parts of such holdings were in the nature
of underwriting positions that were gradually being
worked back down.
12/1/64
-24-
The combination of these influences seemed to be
pushing average bank credit and deposits up at over a
9 per cent annual rate during the month. The bulk of
such deposits, however, were being sequestered in time
deposits and in a substantial nonseasoral rise in
Government deposits with private demand deposits down
slightly on average and total money supply up only at
between a 1 per cent and 2 per cent annual rate, on
first estimates. This extreme pattern of deposit
distribution does not seem likely to held. Likely
rundowns of Government deposits in late November and
December could easily serve both to lower total bank
deposit end credit expansion and raise the portion
representing the money supply.
Perhaps, therefore,
it is not misleading to think of the performance of
the banking system prior to the discount rate increase
as being represented by the average annual rates of
growth of total bank deposits and money supply for the
year to date, namely, about 7-1/2 per cent and 4 per
cent, respectively. Through the first three quarters
of ]964, bank credit was accounting for a somewhat
smaller share of total credit extended than earlier
in the expansion, and the money supply was rising a
bit slower than the revised 5 per cent rate of growth
in real GNP.
How much will such monetary and credit expansion
be affected by the higher discount and time deposit
rates now in effect? The plain fact is that the current
situation is sufficiently unique so that past experience
A precise answer can only
gives no dependable guide.
But the direction of influence
be given by events.
of such rate increases can be fairly well foreseen,
and open market operations in coming weeks need to be
shaped with that in mind.
If member bank borrowings were to be kept around
their fall average of $350 million, mostly by city
banks, bank reserve adjustment actions would be likely
to keep crowding the constellation of money market rates
up close around the 4 per cent level. This is because
major banks, before paying the Reserve Banks 4 per cent
for very much money, are likely to drain any short-run
alternative sources of funds available at cheaper prices.
Such rate consequences of continued sizable member bank
borrowing are doubly likely between now and the cresting
of seasonal rate pressures around the third week in
12/1/64
-25-
December, for in this period nonbank needs for funds
are large and the money market becomes particularly
dependent upon banks as residual lenders.
The hazards of such a short-run rate development
are twofold:
first, the possible triggering of a
second round of sympathetic and expectational increases
in longer term yields; and, second, the attraction of
funds away from longer term uses, either directly or
through arbitrage or swapping operations, in response
to the centripetal pull of high yields available in
the central money markets. The latter is an especially
treacherous development, for it can create a comfortable
sense of availability in the money market at the very
time when longer-term credit availability throughout
the economy is being dampened. This happened to a
degree last March, you will recall, as banks particularly
dumped longer-term securities and bought bills in
the wake of the previous British Bank rate increase.
Presumably yield pressures will relax a bit after
the turn of the year, as the supply of nonbank funds
swells seasonally, but any resulting ease in money
markets could still restrain bank credit and deposit
growth, if it encouraged banks to sell assets rather
than CDs in an endeavor to pare down their 4 per cent
debt at the Reserve Banks.
As ycu can see, in my model the cutting edge of
open market policy at this juncture is the level of
borrowing imposed upon larger member banks. (I do
not cite free or excess reserves, because I think
excess reserve movements in the next two months are
going to be under such conflicting pressures as to
make them particularly hard to predict--being pushed
upward by usual seasonal pressures, but pulled down
by the tug of higher money market rates.) To keep
the half-point higher borrowing cost from cutting
into credit availability, a lower borrowing total
than the average for this fall would seem to be
called for currently, even though the usual seasonal
tendency is for somewhat higher borrowing in December.
How much lower cannot be said precisely, but the
answer will have to depend on signals of ample
availability of funds not just in the money market,
but, even more importantly, in the broader markets
for credit and capital. And the signals being
watched will have to include the quantities of money
and credit flows, both bank and nonbank, as well as
-26-
12/1/64
interest rates, if we are to guard against the possi
bility of a creeping contraction akin to what developed
in early 1960.
Mr. Reynolds presented the following statement on the balance
of payments:
While the timing and size of the System's interest
rate actions last week were dictated by the rise in
Britain's Bank rate, our own balance of payments indicators
had independently been suggesting for some months that
a move towards firmer credit conditions here might be
appropria;e. The over-all deficit on "regular transactions"
had not been increasing, but it had gotten stuck at an
annual rate of about $2-1/2 billion. Furthermore there
was little basis for expecting much improvement soon. A
few weeks ago, for example, a group of balance of payments
analysts within the Government tentatively projected a
deficit of nearly $2 billion for 1965.
Complete data for October, together with weekly
indicators through November 25, suggest that the seasonally
adjusted deficit will be somewhat higher in the fourth
quarter than it was in the third. This would not be
surprisin,, in view of the huge bulge this quarter in
new foreign security issues in this country, and it
probably would not represent any fundamental deterioration.
But one more quarter without improvement would intensify
the widespread feeling--both here and abroad--that the
deficit has continued too large for too long.
Furthermore, our payments position may to some
extent have benefited temporarily in recent months and
weeks from Britain's difficulties. Large increases in
the official reserves of foreign countries, and exchange
market reports, both suggest that recent outflows from
Britain have gone mainly to Continental Western Europe,
rather than to the United States. But we know that U.S.
commercial firms joined in selling sterling short last
week, and they may have done so in less obvious ways
earlier--for example, by changing leads and lags in
commercial payments. Also, some of the unusually large
rise in liquid U.S. liabilities to private foreigners
since mid-year may have resulted from foreign shifting
out of sterling into dollars. Such movements do not
reduce the over-all U.S. deficit calculated for "regular
12/1/64
-27-
transactions"; but they do reduce foreign official
claims on this country, and hence reduce the pressure
on our gold reserves.
Long-term lending to foreigners by U.S. banks
continued large in October for the fourth successive
month, at $110 million. This is an area in which I
continue to suspect that reduced credit availability
might have useful effects, although former commercial
bankers in this room tell me that most foreign lending
is much too profitable, or too closely related to other
profitable business, to be significantly affected by
general monetary measures.
During the current period of international financial
tension, it is helpful to bear in mind some similarities
and differences between Britain's payments problem and
ours.
Unlike Britain, we have been inproving our cost
price position relative to other industrial nations.
Unlike Britain, we have had a large and growing export
surplus on goods and services, and have been acquiring
at a rapid rate investments abroad which will continue
to fortify our receipts in years to come. Unlike
Britain, we have gold reserves that are as large, even
now, as the total of all foreign official claims upon
this country. On all these counts, our situation is
more comfortable than Britain's.
On the other hand, the United States has had a
large balance of payments deficit, however you measure
it, in each of seven successive years, and Britain has
not. On an "official settlement" basis, Britain
actually had a small cumulative surplus from the end
of 1957 through mid-1964, whereas the United States
had a large cumulative deficit amounting to about $17
billion if debt prepayments are counted as settlement
items, and $14 billion if they are not. This year,
our deficit on an official settlements basis has been
running a.: an annual rate of only about $1 billion,
which is considerably better than before; but it is
still a deficit, and it produces a corresponding
further deterioration in our international reserve
position.
While Britain's reserve position was precarious
at the end of 1957, and is precarious now, it has not
worsened on balance since then, whereas the U.S. reserve
position has worsened considerably, even though it
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12/1/64
is still much more comfortable than Br.tain's. What
has been chronic about the British payments problem
is the lack of elbow room, which makes cyclical swings
into deficit touch off speculative runs on the currency.
These runs have had to be stopped by drastic policy
actions, and the resulting "stop-go" policies have
frustrated private initiative to some extent and have
tended to reduce the long-run rate of economic growth.
What has been chronic about the U.S. payments problem
is the deficit itself, which needs to be eliminated in
the next few years if we are not to dr:ft into a much
more uncomfortable reserve position of the British
type.
Britain has now bought time, as in earlier crises,
by obtaining international credits, by throttling back
a little at home, and--this time--by making imports
more expensive. The speculative flight from sterling
has been much more acute this time than it was in 1961,
mainly because of clumsiness on the part of the new
Government coupled with doubts about its intentions,
but also because the current account deficit has opened
somewhat wider than it did in 1960. Also, both things
happened at the same time this year, whereas in 1960
61 they came a year apart. Therefore the prospects
for a short-run cure are more uncertain this time,
although on balance it seems reasonable to hope for
a partial reversal of the speculative flows and an
improvement in the current account balance on roughly
the 1961-62 pattern, accelerated by the import surcharge.
The United States also has been buying time--in
more sustained and less dramatic doses--by using its
large reserves and the credit standing they confer,
and by arguing plausibly that a balance of payments
adjustment by the world's largest industrial and
financial giant must be gradual if it is not to be
disruptive. We have to make sure that the gradual
adjustment continues. For this, we need above all to
continue to avoid inflation. We probably also have
to allow conditions in our credit and capital markets
to move a little bit closer to those in leading surplus
countries abroad. For both these purposes, the recent
actions seem helpful.
Chairman Martin then called for the usual go-around of
comments and views
on the economic conditions and montary policy,
beginning with Mr. Hayes, who presented the following statement:
12/1/64
-29-
Since our last regular meeting we have been face
to face with a major world financial crisis of a kind
that we have contemplated as a possible threat for
many years. The speedy arrangement of the $3 billion
credit for the Bank of England was an
impressive
demonstration that all the leading industrial countries
regard stability of the key currencies as a common
interest of great importance. While the pound sterling
was the immediate focus of the crisis, it seems
probable that failure to stem the heavy speculative
attack on sterling could easily have led to a series
of events culminating in serious danger to the dollar.
As long as the United States and the United Kingdom
remain in a fundamentally weak balance of payments
position, the stability of our whole financial system,
based on the dollar and--to a lesser extent--sterling
as key currencies, will remain undersirably vulnerable.
Hopefully the immediate crisis is past, and if this
is confirmed in the next few days and weeks we can
afford to play a relatively passive role for a while
and observe what kinds of financial and economic
adjustments will be made in response to the recent
discount rate changes on both sides of the Atlantic.
The domestic economic situation appears to be
about unchanged from three weeks ago. While current
business indicators have been sharply depressed by the
General Motors strike, the outlook for continued
expansion into 1965 remains bright. Prospects for
capital spending are still relatively strong, as are
consumer buying intentions, and even housing starts
have shown some improvement after several months'
deteriora:ion. Corporate profits, while vulnerable
to a squeeze in the event of a spread of overgenerous
wage settlements, have been at the highest level in
relation to GNP since the Korean war boom and will be
helped by the second phase of corporate profits
tax cut in 1965. As for prices, announcements of
increases continue to predominate, and the industrial
wholesale price index appears to be under somewhat
more upward pressure. However, it is too early to say
whether a pervasive spread of upward price pressures
is in the making; and it is somewhat reassuring that
business pricing expectations for 1965 seem to give
little indication of any developing inflationary
psychology.
12/1/64
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Our balance of payments position remains a cause
for considerable concern. The 1964 deficit may well be
around $2 to $2.5 billion, probably in the upper part of
this range. While much of this has been financed through
larger private foreign holdings of dollars, the outlook
is for growing pressure on our gold stock in the months
ahead. The beneficial effects on our balance of payments
stemming from large export surpluses continue to be
swamped by unusually heavy capital outflows, including
both capital issues and bank loans.
The general performance in the bank credit area
remains about unchanged. Although bank credit declined
in October (probably in part because of the pattern of
Treasury financing) the annual rate of growth of 7 per
cent so far this year is about the same as a year
earlier; and a sizable increase occurred at weekly
reporting banks in the first two weeks of November.
Money supply has grown so far this year at a slightly
slower rate than a year ago. A broader measure of
liquidity, total nonbank liquid assets, has shown
virtually no change in relation to GNP since the third
quarter of 1963.
Our policy determination for the next two weeks
should reflect the fact that the rise in U.S. discount
rates was essentially a precautionary move in response
to the British Bank rate action. The rise was undertaken
to avoid a possible shift of speculative pressures from
the pound to the dollar, and the joint move, together
with the changes in Regulation Q, should help improve
the balance of payments of both the United States and
the United Kingdom vis-a-vis the continent.
While the
domestic business and credit situation did not call for
a curtailment of domestic demand, or for any major change
inavailability of credit, the domestic outlook is none
theless strong enough to absorb the rise in short-term
rates that has occurred or may occur in response to the
discount rate action.
The balance of payments would doubtless be helped
further by a reduction of credit availability. Never
theless I think we should consciously refrain from
encouraging such a reduction for the time being. With
adjustments to recent changes still under way and with
continued uncertainties as to how things will work out
(including the effect of the increased Regulation Q
12/1/64
-31-
maximum on capital flows) we can well afford to set a
goal for the next two weeks of generally unchanged
availability of credit, as reflected by the tone of the
market. This may require on occasion a rise in free
reserves so as to cushion any tendency of the three
month bill
rate to push close to the 4 per cent level.
An objective expressed in these rather general terms
would, I believe, be preferable to either a specific
bill rate range or a specific range for free reserves
or borrowing. At the same time it implies granting
the Manager somewhat greater leeway than usual in
carrying out the Committee's wishes in response to
actual market developments as they unfold.
It seems to me that the second paragraph of the
directive should be revised to give effect to such a
policy, and the first paragraph should include a
reference to the recent sterling crisis as well as the
discount rate advances in Britain and the United States.
The draft prepared by the staff meets my views in regard
to the first paragraph, except that I would take out
the word "apparent" preceding the words "underlying
strength of the domestic economy."1/ I find the
second paragraph of the staff's draft a little hard
to interpret, and I suggest, as a simpler alternative,
the following:
"To implement this policy during the
current period of adjustment, System open market
operations; shall be conducted with a view to maintaining
about the same conditions of reserve and credit
availability as have prevailed in recent months."
Mr. Ellis said that perhaps the most obvious recent economic
development in New England had been a surge in consumer buying.
General Motors automobiles were now flowing into and out of the dealers'
showrooms.
Department store sales, seasonally adjusted, showed a
rather sharp rise in October and then went on to register an 8 per
1/
The draft directive prepared by the staff is appended to these
minutes as Attachment A.
-32
12/1/64
cent year-to-year gain for the four weeks ending November 21.
The
two days following Thanksgiving had launched a Christmas shopping
period in which sales were expected to set an all-time record.
However, Mr. Ellis continued, recent financial developments
were equally noteworthy.
Business loans at weekly reporting member
banks in the First District, having increased 15 per cent in a year,
were still expanding at that annual rate according to data for the
most recent weeks.
While private demand deposits had spurted
recently, their year-to-year growth at a 3.4 per cent rate had
brought loan-deposit ratios in the District to record levels.
For
Boston banks the fourth-quarter ratio would approximate 75 per cent
and for all District banks it was running at 71 per cent.
These
figures compared with the national average ratio of 68 per cent.
Mr. Ellis commented that it was still too early to see how
widely District banks were going to use the new leeway under Regulation
Q to raise rates on time and savings deposits.
It was clear, however,
that they were faced with loan demands strong enough to support an
increase in the prime rate.
One banker was quick to label press
reports of Chairman Martin's press conference as "the steel treatment,"
and to say that he was being told his costs would rise but he was not
expected to raise his prices.
Another regretted what he described
as "political pressure" being brought on the New York banks not to
raise prime rates.
12/1/64
-33
Mr. Ellis said that the assessment of the outlook by regional
economists at a recent conference held at the Boston Reserve Bank
did not agree with Mr. Brill's.
The balance of events since the last
meeting of the Committee seemed to him to confirm a strong upward
thrust of the economy.
There had been a rapid recovery in auto
production following settlement of the auto strike; an expansion in
steel ordering, and a sharp one-month recovery in private housing
starts.
Credit continued to play an expansionary role, judging from
the expansion of bank reserves, bank loans and investments, and the
money supply in the past few months.
In each of these series the
seasonally adjusted rate of growth since August had exceeded the
average rate for the preceding twelve months.
When coupled with a
5 per cent increase in velocity, the recent increase of over 4 per
cent in the money supply seemed clearly excessive when matched
against the expansion rate of real GNP.
In Mr. Ellis' judgment the dis:ount rate actions of last week
had had a salut.ory effect on expectations both internationally and
domestically.
He had come to this meeting prepared to suggest some
validating action in connection with reserve availability, but he
was willing to join in the search for no change, whatever "no change"
might mean in the changing world.
With an unchanged free reserve
position, bill rates evidently would move toward 4 per cent.
The
Committee had to choose between no change in free reserves on the one
12/1/64
-34
hand and altering its targets to emphasize a ceiling level on bill
rates on the other hand.
Mr. Ellis' own preference was to accept
the market's pressure to move the bill rate up to 3.90 per cent and
above, and to instruct the Manager to accept rates in the 3.90-3.95
per cent range.
He would accept Mr. Holland's suggestion that member
bank borrowings should not move too much abcve recent levels.
He
pointed out that while borrowings recently had been high, it was
customary for them to rise in December.
Accordingly, borrowings at
about $450 million would not be out of line with expectations.
Given these targets, he would expect free reserves to be around $100
million plus or minus $100 million, rather than be pushed up into
the $200-$300 million range.
Turning to the directive drafted by the staff, Mr. Ellis said
that he would omit the phrase that had been added in the first paragraph
to help explain the recent increase in the industrial price index,
which read "partly reflecting the carry-through of earlier advances
in nonferrous metals prices."
The increase partly reflected other
things also, and this language sounded like an invitation to disregard
it.
He would replace the next clause of the same sentence, which
began "and the recent moderation in monetary expansion" with the words
"and the continued expansion of bank credit and money supply."
The
language he proposed had the advantage of focusing on the record since
the Committee's last change in policy in August rather than on the
12/1/64
-35
possibility that growth in the money supply may have slackened for
one month.
Finally, he would not inject the word "continued" before
"moderate expansion in aggregate bank reserves" in the second
paragraph.
This word implied a judgment that the 5.4 per cent growth
rate in total reserves over the past three months constituted
"moderate" growth, a judgment he would question.
Mr. Irons observed that the economic situation in the Eleventh
District was little different from three weeks ago.
elements of strength, and some mixed trends.
There were
Activity in the oil
industry continued at a level a little lower than earlier, and the
industrial production index reflected a decline, perhaps partly
because of the auto strike.
Employment continued to move up and the
unemployment figures continued favorable relative to those for the
nation.
On the financial side, Mr. Irons said, the bank loan situation
in the District was sluggish, with smaller increases in commercial
and industrial loans than a year ago.
It was hard to make an over
all assessment of bank liquidity positions; some banks were a bit
more liquid than earlier but it appeared that others were not.
Borrowings at the Reserve Bank had not been particularly high on most
recent days.
The larger banks had been moving back and forth between
the Federal funds market and the discount window, buying funds when
they were available and borrowing from the Reserve Bank when they were
not.
12/1/64
-36
So far there had been no particularly startling reactions in
the District to the events of last week, Mr. Irons observed.
District banks had raised the prime rate as yet.
mainly in
No
Interest was centered
the changes in Regulation Q, with some country banks who
did not want to raise rates on their savings deposits reacting
unfavorably.
It
was their feeling
that the Regulation Q action would
help New York banks but generally would hurt country banks.
With respect to general monetary policy, Mr. Irons thoughtthat
recent developments in the market had been rather satisfactory in view
of the nature of the actions that had been taken last week.
He was
not sure that the market's adjustments had been completed; further
adjustments might be in
the offing.
He was inclined to think that
this was an occasion on which the Account Manager should be given a
considerable amount of leeway and should not be bound by precise figures,
because one could not be sure how the relationships between availability
and cost would work out.
Mr.
Irons thought that at present the Committee should give
primary consideration to interest rates.
He noted that bill rates
would be under upward seasonal pressure from now until the end of the
year and that they also would be subject to the uncertain effects of
the discount rate action.
two weeks the bill
He would be satisfied if during the next
rate was at a fairly neutral level against the
12/1/64
-37
British bill rate on a covered basis, as had been the case recently.
He hoped this could be accomplished in the next two weeks with a U.S.
bill
rate in
the 3.80-3.85 area,
and if
the job could be done with
the bill rate in that neighborhood he would not want to see the rate
forced up to 3.90 or 4.00 per cent.
He proposed that the target
range of 3.80-3.85 be used as a guide to operations for the next two
weeks, and that reserve availability be allowed to come out where it
might.
Continuing, Mr.
Irons observed that recent official actions
had been substantial and significant.
He thought it
would be well
to allow time for adjustments to work themselves out before deciding
to take any definite position on policy.
again in
in
two weeks,
this interval.
The Committee would
..eet
and he favored an attitude of watchful waiting
He would expect member bank borrowing to be in
the
$350-$450 million area if only on seasonal grounds, and as long as
borrowings did not go very far above that level he would not be
concerned.
Mr.
Swan reported that total employment in
the Pacific Coast
States was down slightly from September to October but nonagricultural
employment was up fractionally.
in October at 6.1 per cent.
The unemployment rate was unchanged
Retail sales continued strong and expecta
tions were for excellent sales in the Christmas season.
12/1/64
-38
The recent changes in Regulation Q had been of particular
interest in the Twelfth District, Mr. Swan said, because of the high
proportion of total deposits at District banks that were in the form
of time and savings deposits.
As the Committee knew, some larger
California banks had announced increases in rates on time CDs issued
to public bodies and corporations.
These banks did not go all the way
to the new ceilings, increasing rates on CDs with maturities of a year
or more to 4-1/4 per cent.
At the same time they announced that for
the time being there would be no change in the rates paid on savings
accounts, which would remain at 3-1/2 per cent.
However, the actions
of these banks were followed by increases to the limits permitted
in rates on both savings and time deposits by several small banks in
the Los Angeles and San Francisco areas.
Also, a number of banks in
Phoenix, including two major banks, raised rates on savings deposits
to 4 per cent, an event which might in turn have some impact on
California banks.
One bank in Los Angeles had announced an increase
in the prime rate yesterday.
It was possible, Mr. Swan said, that there would be further
increases in rates on time and savings deposits at District banks.
At the same time, there was considerable concern about the effects of
such rate increases on costs and profits, particularly in view of the
feeling that the supply of mortgage funds would continue to be quite
ample.
There was little or no expectation of significant increases in
-39
12/1/64
interest rates on mortgages.
If banks did increase the rates paid
on deposits it seemed quite improbable that savings and loan
accociations would feel that they could make similar increases in
order to maintain the pre-existing differentials against commercial
bank rates.
Before the Regulation Q action there had been growing
discussion of a possible reduction in the rates paid by savings and
loan associations from 4.85 or 4.90 per cent to, perhaps, 4-1/2 per
cent.
One could not say whether reductions would have been made,
but in any event such discussion had stopped since the change in
Regulation Q and there was little likelihood now of their occurring.
The situation was still fluid, but his guess was that increases in
time and savings deposit rates would be announced by a significantly
larger number of banks in the District.
Mr. Swan observed that he had found helpful the discussion by
Mr. Stone and others of possible relations between levels of free
reserves and bills rates over the comiag period but he was impressed
by the various uncertainties existing at the moment.
While Committee
members probably all agreed they would like to see the adjustments to
recent actions occur with a minimum impact on availability, he thought
this would be rather difficult to accomplish.
It seemed to Mr. Swan that for the next two weeks the bill rate
was the most significant variable and the one that should be used as
the immediate guide to policy.
The expected seasonal pressures on
12/1/64
-40
bill rates complicated the situation.
He would not favor rolling
these pressures back, but at the same time he would be concerned by
a further increase in the bill rate to the neighborhood of 4 per cent
and by any attempt to explain such a rate level in terms of seasonal
pressures.
He would favor bill
rates in
the 3.80-3.90 per cent range
for the next two weeks, and would hope that they would not exceed
3.90 per cent if at all possible.
Member bank borrowings might be
relatively high, but as had been suggested this could be expected
as a result of seasonal pressures.
should be treated as a residual,
if
they came out in
He agreed that free reserves
and he would not be at all
concerned
the $100-$200 million range.
As to the directive, Mr. Swan said, he had considerable
difficulty with
the clause in the second paragraph of the staff draft
that read "while permitting such further adjustments of money market
conditions to recent official rate act ons both here and abroad as
are consistent with minimum impact on over-all credit and availability."
He though
the reference to "further adjustments" implied an expecta
tion of further
increases in
should be avoiced.
interest rates
which, in his opinion,
He also had some question about the phrase
Mr. Hayes had suggested, calling for "maintaining about the same
conditions of reserve and credit availability as have prevailed in
recent months."
If
reserve availability was intended to refer to
free reserves, the language would involve a contradiction; a con
tinuation of the recent level of free reserves would imply reduced
12/1/64
-41
credit availability.
He would prefer language calling for money
market conditions that were consistent with, minimum impact on over
all credit availability, and including a quantitative reference tc
a bill rate target in the range from 3.80 to 3.90 per cent.
Mr. Deming reported that economic conditions in the Ninth
District has shown little change recently.
The military base phase
out was affecting some small towns in the District but it would have
little effect on the District as a whole.
There had been no par
ticularly significant developments in banking during the past three
weeks, except for the fact that Minnesota banks were concerned about
a State law limiting interest rates on time and savings deposits
to 4 per cent and were readying promissory notes as a substitute
for time certificates of deposit.
Mr. Deming remarked that while the actions taken by the Federal
Reserve System
last week were directed primarily to the balance of
payments situation they were not incompatible in his judgment with the
domestic economic situation.
In the absence of international grounds
for those actions, reasonably persuasive arguments could have been
made in terms of domestic considerations for some reduction in credit
availability.
It was not possible to say as yet what cost-availability
relations would follow the actions taken, and the Committee was faced
with the alternatives that Mr. Ellis had described.
On the basis of
the earlier discussion today it seemed to Mr. Deming that if one
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12/1/64
interpreted no change in availability as meaning no change in free
reserves the bill rate would approach 4 per cent and there would
be some spillover into the longer-term market.
He was not prepared
at this time to accept the risks entailed in such rate developments.
He agreed that the bill rate should be used for target purposes in
the next two weeks, and he favored rates reasonably close to the
3.80-3.90 per cent range.
In his opinion the Committee should be as
careful as possible to let the dust settle during the period until its
next meeting.
Mr. Deming thought the staff's draft directive needed modifica
tion.
For one thing, he would strike the last phrase of the second
paragraph, which read "as are consistent with minimum impact on over
all credit availability," on the ground that it was not clear.
would delete the word "such" in the phrase
further adjustments."
He
while permitting such
With respect to the first paragraph, he
questioned the phrase, "in the wake of the recent sterling crisis"
because he was not convinced that the crisis had been passed.
And,
like Mr. Ellis, he was disturbed by the phrase "recent moderation
in monetary expansion" and by the language of the clause concerning
wholesale price developments.
Mr. Scanlon reported that the level of economic activity in
the Seventh District appeared to be rising again following settlement
of strikes in the auto industry.
Production of steel had risen
12/1/64
-43
further and order backlogs of major producers of machinery and
business equipment continued to increase.
Increases in initial
claims for unemployment compensation in Michigan, Indiana, and Illinois
in October were believed to result from the strike in the auto
industry.
Analysts in the steel industry reported that delays were
being experienced now in delivering virtually all kinds of steel.
Efforts to build inventories apparently were widespread and the
easing of demand in some lines caused by the auto strike was past.
Mr. Scanlon commented that some improvement in farm income
was expected in 1965, following the decline this year.
Cattle feeding
was expected to be more profitable than the very unfavorable results
this year, primarily because of lower prices of feeder replacements.
Profits prospects also were improved for hogs.
Prices of feed
grains were expected to average above the 1964 level and soybean
prices were expected to remain close to the relatively high level of
this year, but production of these crops in 1964 (to be marketed
largely in 1965) was below the high levels of last year.
Mr. Scanlon said that November data indicated that loans at
weekly reporting member banks in the District rose relative to the
comparable period a year ago.
The largest increases were in business
and real estate loans; consumer loans increased only slightly, most
likely reflecting the decline in sales of new cars.
The largest
-44
12/1/64
increase in loans to business firms was to durable goods manufacturers,
probably to finance additions to steel inventory.
The net. deficit position of large Chicago banks increased in
November, Mr. Scanlon said, but was smaller than in the same period
last year.
Compared with a month earlier, these banks had large
increases in loans and Treasury bills and sold large amounts of CDs.
The large Chicago banks were following a policy of watchful waiting
on changes in prime rates.
Mr. Scanlon believed there had been a
tendency in recent weeks for the banks to move some borrowers above
the prime rate, but it was probable these borrowers were actually
never entitled to prime rates to begin with.
As to policy, Mr. Scanlon found it extremely difficult to
arrive at language for the directive.
In the light of Mr. Stone's
comments it seemed to him that for the next two-week period the
Committee should make the bill rate its prime target and, as Mr. Stone
had stated it,
let the free reserve figure emerge as residual.
Like
Mr. Irons, Mr. Scanlon believed the Manager should be given sufficient
latitude to meet any undue market pressures during this adjustment
period.
He would hope this could be done with a short-term bill rate
in the 3.80 to 3.90 per cent range.
Like others, Mr. Scanlon had difficulty with the second
paragraph of the staff's draft directive.
He would prefer to make
the changes in this paragraph that had been suggested by Mr. Deming.
12/1/64
-45
Mr. Clay said it appeared reasonable to assume that financial
markets were in a state of flux at present and that time would be
needed for adjustments to work themselves out following the dramatic
monetary policy actions a week ago.
Accordingly, the immediate
Committee decisions probably needed to be made on a short-run basis
today, although it was important to bear underlying long-run considera
tions in mind.
In recent days, Mr. Clay observed, the international phase of
System monetary policy decision-making had taken priority.
It was
essential, however, that the System not push money market rates any
higher than necessary for international payments purposes and that
reserve availability be maintained as fully as possible within that
money market range.
Just what that appropriate level of rates for
international purposes should be was not readily apparent.
Moreover,
that determination could not be made apart from the requirements of
monetary policy for the domestic economy.
Accordingly, it seemed
reasonable to him to suggest that an effort be made to maintain Treasury
bill rates in approximately their present position for the period
immediately ahead, as represented by a 90-day Treasury bill rate of
3.75 to 3.90 per cent, and to supply member bank reserves freely
within that range of bill rates.
This approach to policy would provide
time to assess the situation more fully and to permit further re
adjustments to financial markets to take place in alignment with the
12/1/64
-46
present level of Treasury bill rates.
In the interim, further
information, and possibly clarification, would become available on
financial developments, on the domestic economy, and on the inter
national situation.
It was questionable whether the actions taken last week could
be carried out without reducing credit availability, Mr. Clay said,
even though that might not be true during the early period of un
certainty and readjustment in the financia. markets.
After the period
when short-term interest rates were under upward pressure beyond what
appeared to be an appropriate level, operations should be conducted
in longer maturities in order to maintain reserve availability.
The
success of such operations with the present configuration of the yield
curve was by no means clear.
The market response would be highly
dependent upon the predominant expectations in the financial markets
as to the future course of longer-term interest rates.
The staff draft of the economic policy directive was satisfactory
to Mr. Clay except for the vagueness of the language added at the end
of the second paragraph.
It appeared appropriate to him to add a
phrase indicating the approximate range of fluctuation for the 90-day
Treasury bill rate that the Committee had in mind.
Mr. Clay suggested
that the range be considered as 3.75 to 3.90 per cent.
Mr. Wayne reported that four items relating to the Fifth
District seemed to have some general significance.
In October, activity
12/1/64
-47
in the textile and furniture industries, measured by man-hours, rose
considerably from a high level.
Coal production continued strong,
with some mines operating six days per week and some employers reporting
difficulty in finding workers.
In a special survey of 40 manufacturers
on prices paid for raw materials and equipment, a little less than half
reported prices up slightly in the past few weeks and a little more
than half expected prices to be up slightly in the next few weeks.
For
the District as a whole, employment and man-hours were up significantly
in October compared with small decreases in the whole country.
Nationally, perhaps the most significant recent development
had been the ending of several large strikes--at the Ford Motor Conpany,
the Allis-Chalmers Company, and in the paper industry on the West
Coast.
Over the past month these strikes had curtailed business
activity and, by reducing personal income and the demand for raw
materials, had probably restrained price increases.
As these firms
resumed full activity, and in the absence of further strikes, upward
pressure o.. prices might be increased.
The industrial component of
both the monthly and weekly indexes of wholesale prices had risen
0.5 per cent in the past two months.
The daily price index declined
slightly for almost a month following October 21, but regained all of
the loss in one week and went on to new high levels.
There had been
a few price reductions recently, but there had also been important price
increases, led by aluminum.
It was possible that most of the slack
12/1/64
-48
in the price structure, in the form of unlisted discounts, had been
eliminated, so that the price indexes might reflect more fully the
upward pressures from now on.
In this respect, the moderate firming
of credit in the past two weeks was appropriate.
Policy developments in the past three weeks had, of course,
been dominated by the sharp increase in the British Bank rate and its
repercussions, Mr. Wayne observed.
Initial market reaction to the
whole series of developments could be described only as surprisingly
mild.
In fact, except for the rise in yields on Treasury bills, it
was hardly detectable.
The rise in the discount rate was made to
provide insurance against a large outflow of funds.
Apparently there
had been no such outflow thus far and so the insurance had not been
used.
For the present, Mr. Wayne said, he would like to see Treasury
bill rates stay about where they were for two reasons.
First, higher
rates were not likely to have much effect vis-a-vis the British at the
moment and if conditions stabilized they might increase the difficulties
with which the British had to contend.
Second, by not pushing rates
higher now some room would be left for maneuver without again raising
the discount rate if an outflow of funds should develop.
So, to carry
through on the insurance operation Mr. Wayne suggested that for the
next two weeks, as an interim measure, the Committee place primary
emphasis on the bill rate and aim to keep it, roughly, between 3.75
12/1/64
-49-
and 3.90 per cent, with the level of free reserves being considered as
a residual.
He favored a directive which would implement such a policy.
Clearly, he said, there should be no further change in the discount
rate at this time.
Mr. Robertson then made the following statement:
We have lived through some very eventful days since
the Committee last met. The latest sterling crisis has led
to a number of dramatic official actions, and the full
implications of such actions, both for the international
monetary mechanism and for the domestic economy, are yet
to be seen.
One consequence is very much in the hands of this
Committee, and demands that we be particularly careful
at this meeting. Otherwise, we can fall into a trap of
our own making; and, in fact, tighten monetary policy
while proclaiming to the world that we are not.
I am of the opinion that we snould not tighten
credit conditions at this juncture. In this respect I
find myself in agreement with the sense of the Chairman's
remarks to the press last week. I stated my basic
reasons for this conviction at our last meeting, and our
staff reports this morning serve to reinforce those views.
What is the appropriate open market policy to achieve
relatively unchanged over-all credit availability in the
wake of recent events?
This is one time when we cannot wait for the dust to
settle and markets to adjust by their own devices, for
that very adjustment is proceeding under greater pressure
as a result of our actions last week. By raising dis
count rates we have raised the cost of the last few
hundred million dollars of reserves that banks are
compelled to borrow from the Reserve BanK, under our pre
sent open market posture, in order to support the existing
level of bank deposits. If price means anything--and I
am enough of a believer in the market process to think
it does--then banks are being squeezed harder and credit
availability cannot help but be affected adversely.
If we want to keep over-all credit availability about
unchanged, what we have to do today is to inject some off
setting ease, through open market operations, that will
12/1/64
-50
correspondingly reduce bank dependence on the discount
window. Precisely how much higher free reserves, or
lower bank borrowing, it would take to roughly counteract
the higher cost of what borrowing remains, I do not pre
tend to know. From what the staff has said this morning,
however, it seems clear that it will take a significantly
easier reserve position to accomplish that than has been
our aim this fall, and perhaps a still easier one after
the December seasonal pressures than before. I urge,
therefore, that the Manager be instructed to try to provide
sufficient reserves so that member bank borrowings will
not average over $250 million between now and the next
meeting, and to be prepared to make reserves still more
ample if any signs appear that banks are contracting
credit counterseasonally in the process of adjusting to
he changed money market climate.
With this view as to policy, I would have the Manager
resolve uncertainties on the side of ease during the next
two weeks of peak seasonal pressures.
Mr. Robertson added that he could accept the draft directive
submitted by the staff.
Mr. Shepardson remarked that on balance over-all economic
conditions appeared to be still moving forward at a satisfactory rate.
Granting that some indicators were not favorable, most were rising.
As already had been noted, financial markets were in a period of
adjustment at present and it was difficult to predict developments.
In his judgment, however, recent rates of expansion in bank credit and
the money supply were a little higher than desirable, and were it not
for the uncertainties in the present situation he would not want to
see reserve availability increased.
Given the present uncertainties,
however, and the possibility that interest rate increases might be
greater than desirable if the Committee employed a free reserve target,
12/1/64
-51
he would agree with those who had advocated using a bill rate target
-get
for the next two weeks.
His preference would be for a bill rate is
the range of 3.80-3.90 per cent.
He concurred in Mr. Deming's proposals
for modifying the directive drafted by the staff.
Mr. Mitchell commented that the System had been forced by
events and by its own convictions to grasp the scepter of leadership
and in his judgment it should not now relinquish leadership to the
market because of difficulties in deciding or an appropriate course
of action.
He favored no reduction in credit availability and no
In older
significant change in the pattern of long-term interest rates.
to achieve those ends he thought it would be necessary to have a
significantly higher level of free reserves, and Mr. Stone's earlier
remarks were consistent with that view.
Since it was customary for the
Committee to express its targets in terms of free reserves he thought
it should do so now, although in some respects a target expressed in
terms of borrowings might be preferable.
Mr. Mitchell favored a free
reserve target for the next two weeks in the range of $250 to $300
million.
He would expect the bill rate to be in the range 3.65-3.85 per
cent, and was inclined to favor a level of bill rates somewhat lower
than others had indicated.
Under such conditions he thought the bond
market would become more tranquil.
Mr. Mitchell said he found the first paragraph of the directive
acceptable either as drafted by the staff or with the modifications
-52
12/1/64
that
been proposed,
had
pargraph.
In
but he could not say the same for the second
his judgment the language of element 4 of the "trial"
directive that had been distributed before this meeting would make an
appropriate second paragraph for the regular directive if certain
changes were made in the quantitative statements regarding free reserves
and bill rates.
Each Committee member had his own preferences with
respect to these quantities,
but with one possible set the paragraph
would read as follows:
To implement this policy, and recognizing that a
larger than usual degree of flexibility in operations
will be needed in this period when financial markets,
while under strong seasonal pressures, are still
adjusting to official rate actions here and abroad,
System open market operations over the next two weeks
shall be conducted with a view to permitting a higher
level of free reserves than has prevailed recently,
perhaps in the order of $250 to $300 million. Such
reserves shall be permitted to move outside this range
in order to moderate any tendency for the 3-month
Treasury bill rate to move below 3.60 or above 3.85
per cent, or to prevent any serious constriction or
excess in the availability of Federal funds or dealer
financing.
Mr. Daane said it
seemed obvious to him that the general pos ure
of policy should be kept unchanged.
Within that context he found him
self in agreement with a number of those who already had spoken; in
particular, he shared the concern that had been expressed about any
further increases in bill rates, because of their possible effects on
financial markets generally.
In his judgment the Committee should defend
against upward pressures during the next two weeks and let the reserve
12/1/64
-53
figures fall where they might.
He would not try to narrow down the
bill rate target any further than this, and he did not think it was
feasible to forecast the relations between bill rates and free reserves
during the coming period with sufficient accuracy to use a reserve
target.
Mr. Daane said he would amend the second paragraph of the
directive to read:
"To implement this policy. System open market
operations shall be conducted with a view to accommodating moderate
expansion in aggregate bank reserves and to moderating further adjust
ments of money market conditions to recent developments here and
abroad."
He preferred this language because it represented a positive
stance instead of the permissive posture of the staff's draft language.
Mr. Hickman said that in his opinion recent monetary policy
had been appropriate and should be maintained unless, or until, there
were clear signals that it had become inappropriate.
Notwithstanding
last week's dramatic developments with respect to Bank rate and the
discount rate, he felt the Committee should m intain its recent posture,
providing the reserves needed for balanced and orderly growth.
Opinions, of course, differed as to the appropriate rate of
expansion of the reserve base, Mr. Hickman continued.
His own preference
would be a 3 to 4 per cent increase in the money supply and a 5 to 6
per cent increase in bank credit, rates far below those experienced
last summer.
For the time being, he would prefer to see the 91-day
12/1/64
-54
bill rate in the range of 3.85 to 3.95 per cent, with rates below
3.90 per cent most of the time.
A higher level of short-term rates
than this probably would cause the entire structure of interest rates
to rise markedly.
In his judgment, Mr. Hickman said, an appropriate near-tern
policy objective could possibly be accomplished with free reserves of
about $50 million, plus or minus $100 million.
While he was prepared
to defer on this matter to the judgments of others who were better
informed, he was concerned that a level of free reserves in excess of
$100 million would mean a greater degree of credit availability than
in the recent past, and not the same degree.
Accordingly, he would
prefer a free reserve target of $50 million but would allow the Manager
wide latitude in this connection.
In any event, he attached less
importance to the level of free reserves than to the goals to be ach:eved
by monetary policy, namely, sustainable growth in money and credit and
domestic money rates compatible with rates abroad.
Mr. Hickman said it might be desirable and, in fact, necessary,
to move towards still less ease or to outright restraint if commodity
prices continued to rise as in October and if the money supply con
tinued to advance as in early November.
He would prefer to wait a
few more weeks to see if the Committee's policy resulted in lower growth
rates in the money supply and bank credit.
move towards less ease.
If not, he would prefer to
12/1/64
-55
Mr. Bopp reported that economic conditions in the Third
District continued to improve.
For the first time in years, save for
an aberrant month in 1961, the unemployment rate in the Philadelphia
area (seasonally adjusted) had dropped to the national level.
Through
out the District, unemployment rates were fluctuating around a downtrend
that began early in 1963.
Business failures in the District had
followed a similar pattern, and capital spending by manufacturers was
expected to rise in the Philadelphia area in 1965 by about 16 per cent
over 1964 totals.
The basic reserve position of reserve city banks in the District
indicated an increase in reserve pressure, Mr. Bopp said.
This pressure
was reflected in increased borrowing at the discount window, which
reached the highest level since the end of 1963 during the past three
weeks.
Loan activity at weekly reporting member banks continued to
expand, while total deposits (adjusted) were up.
Mr. Bopp remarked that the important international events of
the past
two weeks had brought the System to a new phase of the experiment
in which it had been engaged for the past four years.
Up to this point
the Committee had had some success in balancing the twin objectives
of domestic expansion and external equilibrium.
It had achieved this
success by subtle use of techniques which had made the most of a difficult
dilemma.
The question now was whether this experiment could be equally
successful in the next stage.
As the Chairman had stated to the press,
-56
12/1/64
there was no need at this time to reduce the over-all availability of
funds.
It remained to be seen whether the same degree of availability
could be continued in the face of the new level of rates, or whether
the two were so incompatible that one or the other would have to give
way.
For the second paragraph of the directive Mr. Bopp favored use
of the language of element 4 of the trial directive, as Mr. Mitchell
had suggested.
However, he would specify a range for three-month Treasury
bill rates of 3.70-3.85 per cent, rather than the 3.75-3.90 per cent
range given in the draft of this element.
Mr. Bryan said that no special comment was needed on the economic
situation in the Sixth District at this time.
Most measures continued
to move up in a fashion similar to those for the country as a whole.
The major exception appeared to be greater strength in the District than
nationally in construction and lending activity.
As far as national policy was concerned, it seemed to Mr. Bryan
to be something of a tragedy for the richest nation in the world to
find itself in a situation in which it had to follow others rather than
lead.
But that was a fact, and it was necessary to recognize it.
At
the moment it would appear that there were a number of significant
questions to which the Committee did not have the answers.
economic outlook appeared
The domestic
to be good, but nevertheless there were
serious questions about the effects of increasing interest costs,
12/1/64
-57
particularly for longer-term funds, on many marginal ventures.
Moreover,
it was not clea:: to what extent the present interest rate adjustments
reflected real underlying forces or merely expectational factors.
Mr. Bryan said he would remind the Committee that free reserves
always were a residual; the significant point was that they were more
of a residual at present than they usually were.
He thought Mr. Stone
and others had made the point well that, if an effort were made to
maintain bill rates in the range the Committee apparently desired, it
was not possible to say at this particular time where the free reserve
figures would come out even within a moderately wide range.
Accordingly,
while he felt that under ordinary circumstances it was not desirable
to specify objectives in terms of interest rates, he believed that a
rate objective had to take precedence now, and that reserve availability
should be permitted to fall where it would.
He strongly suspected that
free reserves would come out at a relatively high level, as Mr. Mitchell
and others had surmised.
For a variety of reasons, Mr. Bryan said, he
would favor a range of 3.75-3.85 per cent for the bill rate in the
next two weeks.
He would not go as high as a 3.80-3.90 per cent range.
Mr. Shuford remarked that the strikes in the automobile industry,
as reflected in the statistics for recent months, made it difficult
to come up with any meaningful analysis of the current economic situation.
Nevertheless, he continued to feel, as the staff had reported, that
underlying economic activity was at a high level and rising further.
12/1/64
-58
No serious imbalances had yet appeared
in
the upswing and average prices
had been remarkably stable.
During the past year, Mr. Shuford said, there had been fluctua
tions in the growth rates of total member bank reserves and money but
on the average the rates of expansion had seemed to be appropriate.
Bank reserves and the money supply rose very rapidly last summer, but
more recently their rates of expansion had moderated.
The average 5
per cent annual rate of increase in the money supply since April probably
was higher than would be consistent with the objective of longer-run
growth without inflation.
But the lack of any growth in reserves and
money during the past eight weeks was a development that would be
undersirable if continued for any great length of time.
Mr. Shuford agreed with those who thought it was too early to
evaluate fully the implications of the recent increases in money
market interest rates.
It was his opinion that the Committee should
not move to further tightness in the money market or to significantly
higher short-tem rates until there was time to study the domestic and
international effects of the recent actions.
Those actions probably
would reduce the rates of expansion in bank reserves, bank credit, and
money.
In his judgment some reduction from the growth rates experienced
last summer and early fall was desirable from a domestic standpoint,
but if possible within the framework of international necessity these
monetary variables should continue to increase moderately.
12/1/64
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As had been noted, Mr. Shuford continued, the Committee was
faced today with the problems of cost and availability.
He shared
the view that bill rates should be used as the guideline for the next
two weeks and that borrowings and free reserves should be allowed to
fall where they would.
He favored bill rates in the 3.75-3.85 per cent
range, and he would not want to have them so high as to cut back on
reserve availability.
Mr. Balderston said it was fortunate that the interval between
this meeting and the next was only two weeks.
He agreed that it was
desirable to let the dust settle and to give the markets time to settle
down.
The Committee might ask the Account Manager to hold bill rates
in some reasonable range, but he would not favor specifying a quantitative
target in the directive.
As to the language of the staff draft,
Mr. Balderston said that for years he had been impressed by the de
stabilizing impact of strikes and threats of strikes.
Accordingly, in
the phrase of the first paragraph which read "obscured partially by the
effects of recent and threatened work stoppages," he would substitute
the word "destabilized" for the word "obscured."
He approved the
suggestions that had been made for the second paragraph to strike both
the word "such" and the final phrase, and he liked Mr. Daane's suggestion
that "moderating further adjustments" be substituted for "permitting
further adjustments."
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Mr. Balderston then said that he was concerned about the repcrts
at this meeting on the probable balance of payments deficit for the
current year, which evidently was going to be quite large.
It seemed
to him that there was an underlying problem of liquidity that should
give the Committee continuing concern, and that the members should not
be lulled into complacency by an improvement in the figures for any
one quarter.
The only favorable aspect of the situation was that the
1964 deficit was likely to be smaller than that of the previous year;
even if the current year's figure turned out to be as high as $2.5
billion there still would have been some improvement from the 1963
figure of $3.2 billion.
But if he were a foreigner holding dollars,
Mr. Balderston said, he would be concerned that a nation as powerful
as the United States could not so manage its affairs as to bring about
a solution to its balance of payments problem.
Chairman Martin commented that the Committee should never be
complacent about anything and he thought that Mr. Balderston's con
cluding remarks were wise.
Continuing, the Chairman observed that it
would be good if it were possible to make a clean separation between
the questions of cost and availability of money, but it was not; in his
own thinking, at least, he had never succeeded in disentangling the two
completely.
He thought the matter of timing was extremely important in
decisions on monetary policy but,
possible to time actions well.
unfortunately, it was not always
Sometimes the timing of an action turned
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out to be good because of developments that could not be foreseen, and
sometimes it was bad for the same reason.
It was his feeling that
the Committee's decision not to change policy at its last meeting had
proved to have been wise in view of the subsequent events.
the System had behaved well during the past three weeks.
He thought
Mr. Coombs
had performed yeoman service in connection with the British credit
arrangements, as had other personnel of the New York Bank; and in his
judgment the Committee had made an appropriate decision in the telephone
conference meeting last Tuesday.
Chairman Martin said that he thought the interest rate adjust
ments currently being made in markets reflected primarily psychological
and expectational factors rather than underlying market forces, and
that this situation was likely to continue for some time.
Mr. Stone
had given the Conmittee some informed guesses on the probable rela
tions of bill rates and free reserves, but no one could predict these
relations with confidence in the present market atmosphere.
Therefore,
he did not think it was feasible to call for specific levels of free
reserves at present.
In his judgment the Committee should concern itself
with the desired result for interest rates until market participants
had gone through the process of assessing costs, prices, and the business
outlook.
There were apt to be as many forecasts as there were forecasters,
but he would hazard the judgment that business conditions in the next
few months would be considerably stronger than many pessimists thought.
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The recent events had occurred at a fortunate time; and the Committee
would have an opportunity to assess developments over the next few
months.
It was possible, Chairman Martin said, that many banks would
raise their prime rates; a few already had announced such actions.
But
he personally had no strong convictions as to the likely course of the
market after all of the present psychological and expectational un
certainties were resolved.
As he had indicated, he thought the Com
mittee should concentrate on interest rates and let reserves take care
of themselves.
Any reserve additions would not necessarily be permanent,
and thoughtful bankers would know that they could not count on them
positively.
It was his impression from conversations with lending
officers of some banks that they were not of one mind about prospectsin
fact,
they were about as far apart in
their
thinking as they could be.
Chairman Martin said he agreed with the view that the Committee
should let the dust settle in the next two weeks.
He thought the
Manager of the Account had handled operations extremely well recentl ;
the System had played a residual role in markets and he believed that
it should continue to do so now.
Market rates should not be permitted
to rise to a level at which banks would say they were forced to raise
the prime rate to 5 per cent.
at present, in his opinion.
Such a development would be unfortunate
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The Chairman said it
was apparent that the Committee did not
seek any basic change in policy today.
He remarked that several useful
suggestions had been made for amending the first paragraph of the direc
tive.
He concurred in Mr. Mitchell's view that the language of element
4 of the trial
directive would be appropriate for the second paragraph,
although he personally would prefer a 3.75-3.90 per cent range for the
bill
rate.
He said this without a conviction that the Manager could
achieve precisely any named bill
rate target; the Committee had to allow
him a considerable degree of latitude.
Mr.
Hayes commented that in
light of the fact that the Manager
undoubtedly had obtained a clear idea of the Committee's general
objectives from the discussion today and in
ties existing at present,
light of the many uncertain
he would prefer to use general
language in
the directive rather than to specify numerical targets such as were
given in
element 4.
Moreover,
a step down a dangerous path.
in
his judgment quantification would be
He suggested
the following language:
"...operations shall be conducted with a view to cushioning the impact
of recent official rate actions on money market conditions and to
minimizing their impact on over-all credit availability."
This wording,
he thought, would have the same effect as the kind of quantified
instruction that had been proposed.
Mr.
Mitchell commented that in his judgment the language Mr.
had proposed was good, but it was not a substitute for specifying the
targets numerically.
Hayes
12/1/64
-64Mr.
Daane remarked that one problem with using the element 4
language for the regular directive was that it
did not meet the Chairman's
objective of not specifying a free reserve target; in fact, it put
primary emphasis, on free reserves.
the context of a free reserves
The bill
rate reference occurred in
target and said in
"shall be permitted to move outside this range in
part that free reserves
order to moderate any
tendency for the 3-month Treasury bill rate to move below 3.75 or above
3.90 per cent."
Mr. Swan said he felt strongly that the Committee should not
retreat to vague language at this time.
Virtually everyone had agreed
today that a bill rate target was appropriate for the next two weeks,
and in his opinion it was important that the directive reflect the
Committee's decision with respect to its primary target.
relatively wide ranges had been suggested for
Moreover,
target purposes, and tne
language of element 4 would instruct the Manager only to "moderate"
If such
any tendency for the rate to move outside the indicated range.
language was used the Committee certainly would not be tying the
Manager's hands.
Mr. Wayne said he thought it
clearly was the consensus
of the
Committee that its objectives for the next two weeks should be formulated
in terms of bill rates, and he did not disagree with the range of rates
that had been suggested.
He was disturbed, however, about the proposal
to include quantitative targets in the directive without first having a
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full discussion of the desirability of quantification as a general
matter.
He, for one, would be reluctant to have the Committee specify
numerical targets in its directive.
He had strong feelings on this
subject that went back to the period years ago when the System had
struggled to get a mandate from Congress with respect to the nature of
its powers.
The Committee could not spell out today the context in which
it would have to operate tomorrow, and today's mandate for freedom
could become tomorrow's shackles of slavery.
He objected to quantified
instructions because they placed the Desk in the position of being
almost completely obligated to seek the numerical results specified.
He was not impressed with the necessity for explaining the Committee's
objectives ex post facto to the academic community.
The Committee had
had a full discussion today, and the Manager clearly understood what
he was to attempt to accomplish.
Mr. Stone remarked that he certainly understood the range the
Committee had ir view for bill rates over the next two weeks.
He
thought it would be most unfortunate to introduce numerical targets
into the directive at this time for two reasos.
First, apart from the
international crisis, the next two weeks was a period in which market
rates would be buffeted by seasonal forces and the effects of the
crisis would be superimposed on fluctuations caused by these seasonal
pressures.
Secondly, one problem with the market during the past year
or two had been the tendency for rate fluctuations to be small.
This
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-66
tendency had resulted in part from the market's feeling that the
Committee had a narrow range of rate targets in mind.
The Account
Management had done its best in discussions with market participants
to convince them that the Committee understood the need for fluctuations
in rates.
The directive adopted today would be published in the Board's
Annual Report early next year, and if market participants learned then
that the Committee had set a narrow range for bill rates at this time
it would be extremely difficult in the future to convince them that
the Committee was not acting similarly.
Mr. Ellis remarked with respect to Mr. Stone's first point
that the expectation that various forces would be buffeting the market
in the next two weeks was exactly why the Committee thought it necessary
to specify its objective in terms of a range of bill rates today.
On
the second point, he was surprised that Mr. Stone would consider a
bill rate range of 3.75 to 3.90 per cent to be narrow; he would view
it as quite wide relative to the kinds of ranges the Committee had
discussed on earlier occasions.
The crucial question, he thought, was
whether the Comnittee was going to describe its objectives clearly and
specifically in the directive, or whether it was going to use vague
language.
Mr. Wayne commented that while a 3.75-3.90 per cent range, taken
by itself, was broad, only the upper end--perhaps 3.86-3.90 per centwas really at issue at the moment, and this was a narrow range.
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Mr. Daane said that he agreed that this was not the time to
begin using quantitative instructions in the directive.
The Committee
was concerned with the end result, and Mr. Stone had indicated that
he understood the sense of today's discussion.
To include numerical
targets in the directive would not contribute anything to the opera
tions of the Desk, and in his opinion it would be an unfortunate step.
Mr. Shuford said that he had serious doubts about the desir
ability of quantifying instructions in the directive as a general
matter, for reasons that he would not take time to go into at the
moment.
On the other hand, today the Committee had decided to aim
for bill rates in a specific range.
It could be argued that incorpora
ting these numerical targets in the directive for the next two weeks
would not necessarily imply approval of quantifying instructions as a
general principle.
On balance, however, it seemed desirable to stay
within the framework of the Committee's current pattern until a decision
had been reached on the basic question of whether or not the Committee
should quantify its instructions.
Chairman Martin said that in view of the strong feelings that
members had on the subject of quantification it might be best today to
follow the usual practice of writing the directive in non-quantative
terms pending further general discussion of the whole subject.
Mr. Young commented that language at the beginning of element 4
might be used for the second paragraph of the directive, and the
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-68
following language, specifying quantitative targets, might be replaced
with a non-quantitative statement, perhaps on the lines of Mr. Daane's
suggestion.
Several members commented favorably on Mr. Young's suggestion.
Following further discussion of the wording of the second paragraph,
the Secretariat was requested to prepare for the Committee's further
consideration new drafts of both paragraphs of the directive in light
of the comments that had been made on the original drafts.
The meeting then recessed and reconvened at 2:00 p.m. with the
same attendance except for Messrs. Daane, Coombs and Williams.
Mr. Young distributed a new draft of the directive.
In the
course of discussion certain revisions in this draft were agreed upon.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of Dew York
was authorized and directed, until
otherwise directed by the Conmittee,
to execute transactions in the System
Account in accordance with the follow
ing current economic policy directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in the reserve base, bank credit,
and the money supply for the purpose of facilitating continued
expansion of the economy, while fostering 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 fact that financial markets are currently
in a period of adjustment in the wake of the recent sterling
crisis and the discount rate advances and other responses in
Britain, Canada, and the United States. The policy also takes
into account the underlying strength of the domestic economy,
12/1/64
-69-
obscured partially by the effects of recent and threatened
work stoppages; the recent increase in average wholesale
prices of industrial goods; and the continued expansion of
bank credit and money. It also gives consideration to the
persistence of a sizable deficit in the U.S. balance of
payments.
To implement this policy, and recognizing that a larger
than usual degree of flexibility in operations will be needed
in this period when financial markets, while under strong
seasonal pressures, are still adjusting to official rate
actions here and abroad, System open market operations over
the next two weeks shall be conducted with a view to ac
commodating moderate expansion in aggregate bank reserves,
while moderating adjustments of money market conditions to
recent official actions.
It was agreed that the next meeting of the Committee would be
held on Tuesday, December 15, 1964, at 9:30 a.m.
Thereupon the meeting adjoined.
Secretary's Note: Following adjournment, the members
of the Committee discussed further the question of the
format of the current economic policy directive and certain
related matters, including the conduct cf deliberations at
meetings, reviews of District developments, and procedures
with respect to the policy record entries.
It was understood that the Committee would continue to
explore new forms for the directive on a trial basis, look
ing toward a decision on this subject by the time of its
next organization meeting in March 1965. It also was
understood that the Committee would undertake to experiment
along the lines of certain proposals contained in a memo
randum from Mr. Robertson dated November 19, 1964, entitled,
(A copy of
"A Further Suggestion for Directive Writing."
this memorandum has been placed in the files of the Committee.)
Specifically, it was understood that:
(1) The staff would no longer be asked to draft elements
1 and 2 of the "trial" directives, but would prepare on an
experimental basis and distribute before each meeting a selected
list of the major economic and financial topics that in its
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-70-
judgment were of central importance in the determination
of monetary policy at that time.
A brief analysis would
be given on each topic, marshalling the relevant information
and giving the staff's interpretation of its significance
for current policy formulation. Alternative interpretations
might be presented if the staff was divided in its views.
(2) The Committee's usual go-around of comments and views
on economic conditions and monetary policy would be organized,
at least in part, around this list
of major topics, with
members noting their points of agreement and disagreement
with the staff's interpretations. All speakers would be free
to add or subtract topics from the staff's
list
and to comment
on District developments in connection with these topics or
independently of them to the extent they considered appropriate.
This discussion, as reflected in the minute record for the
meeting, would be used as a basis for drafting the policy record
entry for that meeting.
(3) In addition to preparing drafts for the regular
directive, the staff would continue to draft language corre
sponding more or less closely to elements 3 and 4 of the trial
directives, to be used by the Committee as a basis for its
further discussions of possible new forms for the directive.
It was suggested that the staff might experiment with differ
ent versions, perhaps varying them from meeting to meeting or
submitting alternatives for Committee consideration at one
meeting; and that the staff might also prepare background
statements on the probable "linkages" among the different
variables cited in the drafts.
It was noted that Messrs. Brill, Sherman, and Young had
submitted certain proposals to Charman Martin in a memorandum
dated November 16, 1964, entitled, "A Suggested Program for
(Copies of this memorandum were distributed
FOMC Meetings."
to the Committee subsequent to this mee:ing, and a copy has been
placed in the Committee's files.) Among other things, the
memorandum proposed that a brief written review of recent
developments in each Federal Reserve District might be pre
pared at the Reserve Banks prior to each meeting and distributed
Most members thought
to the Committee through the Secretariat.
on
District develop
any
comments
for
be
preferable
would
it
in
the course of the
ments to be made orally at the meetings
go-around rather than in written statements.
12/1/64
-71
There was further discussion of the proposal that the
policy record entry for each meeting be submitted for the
Committee's approval at the following meeting.
The possibility
was noted that there might be insufficient time prior to the
next meeting for preparing and distributing a draft entry
and revising it on the basis of comments received.
In this
connection it was suggested that establishing a firm cut-off
date for comments on each draft entry might help to make the
proposal feasible.
Secretary
Attachment A
CONFIDENTIAL ,(R)
November 28,
1964.
Draft language for current economic policy directive for consideration
by the Federal Open Market Committee at its meeting on December 1, 1964
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. internaticnal payments, and seeking to avoid the emergence of
inflationary pressures. This policy takes into account the fact that
financial markets are currently in a period of adjustment in the wake
of the recent sterling crisis and the discount rate advances and other
responses in England and the United States. This policy also takes
into account the apparent underlying strength of the domestic economy,
obscured partially by the effects of recent and threatened work stop
pages; the recent increase in average wholesale prices of industrial
goods, partly reflecting the carry-through of earlier advances in
nonferrous metals prices; and the recent moderation in monetary
expansion from the high rates of summer. It also gives consideration
to the persistence of a sizable deficit in the U.S. balance of payments.
To implement this policy, System open market operations shall
be conducted with a view to accommodating continued moderate expansion
in aggregate bank reserves, while permitting such further adjustments
of money market conditions to recent official rate actions both here
and abroad as are consistent with minimum impact on over-all credit
availabilty.
Cite this document
Federal Reserve (1964, November 30). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19641201
@misc{wtfs_fomc_minutes_19641201,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Nov},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19641201},
note = {Retrieved via When the Fed Speaks corpus}
}