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 15, 1964, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston
Hickman
Mills
Mitchell
Robertson
Shepardson
Shuford
Swan
Wayne
Treiber, Alterrate for Mr. Hayes
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, Koch,
Mann, and Ratchford, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Governors
Mr. Partee, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
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12/15/64
Messrs. Sanford, Eastburn, Baughman, Parsons,
Tow, and Green, Vice Presidents of the
Federal Reserve Banks of New York,
Philadelphia, Chicago, Minneapolis,
Kansas City, and Dallas, respectively
Messrs. Sternlight and Brandt, Assistant
Vice Presidents of the Federal Reserve
Banks of New York and Atlanta, respectively
Mr. Eisenmenger, Director of Research, Federal
Reserve Bank of Boston
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on November 24, 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 December 1 through December 9, 1964, and a supplemental report
for December 10 through 14, 1964.
Copies of these reports have been
placed in the files of the Committee.
Supplementing the written repocts, Mr. Sanford said that the
published gold stock figure would remain uncnanged this week.
Treasury sales of gold to foreign central banks this month would be
larger than first anticipated--some $125 million, as compared with
$75 million reported at the Committee's December 1 meeting.
Swiss National Bank,
which bought $26 million last week in
The
connection
with the liquidation of the Treasury's and System's sterling-Swiss
12/15/64
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franc swaps of June 1963, purchased another $25 million yesterday
(December 14) and was scheduled to purchase $25 million in January.
In addition, the first of seven monthly $30 million sales of gold
to Spain would occur this month.
Barring off setting increases, the
Stabilization Fund's gold holdings would amount to no more than
$30 million by year end.
Eventual disclosure of renewed U.S. gold losses, Mr. Sanford
said, might reinforce the current uneasiness in various world
financial markets.
It might also increase further the recently
stepped-up activity in the London gold market, where the fixing
price had advarced from $35.1002 to $35.1216, and where the gold
pool reserve was being whittled away.
The gold price was reduced
slightly to $35.1179 yesterday, and to $35.1138 today, to counter
the market effect of a recommendation by the National Planning
Association for an increase in the price of gold.
Turning to the foreign exchange market, Mr. Sanford reported
that the pound sterling's performance had been less than robust.
The market remained extremely cautious, and the good reaction that
followed the Bank of England's request last Tuesday (December 8)
for credit restraint petered out quickly as pre-weekend selling once
again took hold of the market.
Over the first two weeks of December
as a whole the spot rate had drifted downward from $2.7931 to $2.7900
or a trifle more.
As a result, the Bank of England had intervened
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on various occasions either to support the rate or to bid it up,
in the process losing some $280 million in spot operations so far
this month.
In order to bolster its reserves, the Bank of England
had made net drawings since December 3 of $150 million under its
swap facility with the System, thus raising its System swap
commitments to $325 million.
During the period beginning November
30, the United Kingdom drew $1 billion from the International Monetary
Fund and $155 million from other countries participating in the $3
billion assistance package.
Of the total, 180 million had been used
to bolster reserves and the balance to repay short-term credits.
In the forward sterling market, Mr. Sanford continued, rates
also had been under pressure with the discont for three-month for
ward sterling at one time having been slightly more than 3 per cent
per annum.
Here also there had been official British intervention
to firm the rate and thus to avoid any possible movement of covered
funds out of London.
Intervention in the fcrward market in part
had taker the form of swap operations, in which the Bank of England
simultaneously bought forward sterling and sold spot sterling
(acquired spot dollars).
Some $170 million of swap transactions
had been undertaken in this process, and by their very nature
these operations had served temporarily to offset reserve losses.
However, at times they also had depressed the spot rate, and con
sequently had necessitated use of the alternative technique of
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outright purchases of forward sterling, which had amounted to some
$120 million.
With sterling having just weathered a strong attack,
Mr.
Sanford commented,
it
was going to take a certain amount of
time for the market to quiet down.
Sterling was expected to im
prove after the year-end pressures had passed.
was one of leads and lags,
The main problem
and the immediate task of those who
managed the market was to hold a determined, firm line until the
leads and lags began to operate in
favor of the United Kingdom.
He understood that, at the week-end meeting at Basle, satisfaction
with the United Kingdom's short-run program had been expressed while
indications of the needed longer-range policies were awaited.
As to the continental currencies, Mr. Sanford reported that
the intake of dollars by the central banks so far in December had
been less than in November.
Exchange rates: however, had remained
at or near the respective ceilings.
Mr. Swan referred to Mr. Sanford's ,tatement that sterling
should strengthen after the year end, and asked whether the expected
shifts in
seasonal forces were of sufficient significance to cause
improvement.
Mr. Sanford replied that there would be considerable
pressure on sterling until the end of the year because of the need
on the part of people holding pounds for funds to be used in
various kinds of overseas operations.
Once those needs had been
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met the seasonal pressures would evaporate.
This in itself would
be a matter of some consequence and would constitute an element of
strength.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
December 1 through 14, 1964, were
approved, ratified, and confirmed.
Mr. Sanford recommended renewal for another 12 months of
the $250 million standby swap arrangement with the Bank of Canada,
which matured on December 28, 1964.
Renewal of the swap arrangement
with Bank of Canada for a further
period of 12 months, as recommended
by Mr. Sanford, was approved.
Mr. Saaford then noted that two $150 million standby swap
arrangements, with the Swiss National Bank and with the Bank for
International Settlements, would mature on January 20, 1965.
The
facility with the BIS had been used tc the extent of $100 million
to absorb previous dollar accumulations of the Swiss National Bank.
He recommended renewal of both of these arrangements
for a further
period of six months.
Renewal of the swap arrangement
with the Swiss National Bank and the
Bank for International Settlements for
further periods of six months, as
recommended by Mr. Sanford, was approved.
Mr. Sanford then reported that two identical $10 million
equivalent three-month sterling-Dutch guilder swaps with the BIS,
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12/15/64
of which one was for System account and one for Treasury account,
would mature for the first time on December 28.
He did not at
this time envisage the possibility of acquiring in the market the
Netherlands' guilders needed to liquidate these swaps, and con
sequently he thought they probably would have to be renewed.
Also,
it was probable that another System guilder commitment, a $5 million
equivalent drawing of guilders under the swap arrangement with the
Netherlands Bank falling due January 18, 1965, would have to be
renewed.
Renewal of the System's sterling
guilder swap with the BIS, and of the
drawing on the swap with the Netherlands
Bank, were noted without objection.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U.S. Government securities
and bankers' acceptances for the period Decenber 1 through December 14,
1964.
A copy of this report has been placed in the files of the
Committee.
In supplementation of the written report, Mr. Stone commented
as follows:
At the time the Committee last met the market had
undergone an orderly adjustment of prices and rates in
the wake of the dramatic events of the preceding week.
As I reported then, rates on Treasury bills were in the
neighborhood of 30 basis points above the levels of mid
November, while intermediate and long-term rates were up
by around 12 and 5 basis points, respectively.
12/15/64
The market was still in a highly uncertain state, however,
and it seemed possible that a new round of expectational
rate increases might get underway. Given the Committee's
decision on that day, and given also the prospective
withdrawal of $0.5 billion of reserves the next day
because of the Bank of England's repayment on its swap
drawing, we moved into the market in size on December 1
and 2, making heavy purchases of Treasury bills and
lesser purchases of coupon issues. By the close of
business on December 2, the rate on three-month Treasury
bills was 3.84 per cent, down 5 basis points from the
high two days earlier, while prices of Treasury bonds
were up by 1/4 point or more. Furthermore, by that
time the $65 million Pacific Gas and Electric issue,
which investors had resisted the day before at 4.50
per cent, had been sold out; and a $40 million utility
issue offered on the morning of December 2 at 4.49
per cent had also been sold out by the close of tha:
day.
The improvement in market atmosphere that followed
the System's operations of December 1 and 2 was strongly
reinforced by the statement of the President regarding
bank lending rates that appeared in the press the next
morning, and by the action of the First National Bank
of Boston, and later of other banks, in rescinding
their posted increases in the prime rate. Prices of
bonds continued to move higher through much of the
period as investment demand developed, and a number of
issues reached price levels that equalled or even
exceeded those prevailing before the British move.
In the bill market, rates moved still lower after the
President's statement, reaching the neighborhood of
3.75 per cent as increased investment demand pressed
against short supplies of many issues.
With the close approach of the tax and dividend
dates, however, rates turned around and moved back up.
In the auction of December 7, a week ago yesterday,
the average issuing rate for three- and six-month
bills turned out to be 3.82 and 3.94 per cent, but
with corporate and bank demand having diminished in
the face of the dividend and tax dates, dealers
found themselves, taking up record awards of almost
$1.1 billion bills at rates that scaled all the way
up to 3.87 per cent for the three-month issue and
3.97 per cent for the six-month bills. The unsold
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portion of these bills would, of course, have to be paid
for the following Thursday, which happened to be a heavy
corporate dividend date--on which dealers would have to
refinance up to $0.5 billion of securities coming back
to them from corporations that had earlier acquired the
securities under repurchase agreements. The market also
would have to face another auction the following Monday
(yesterday), and in addition would have to refinance
yet another $0.5 billion or thereabouts of securities
due to come back to them from corporate repurchase
agreements today, the tax date. It was against this
background of heavy seasonal pressures, and the prospect
that those pressures would have pushed bill rates well
into the 3.90's (with consequent upward movements in
intermediate and long rates), that we made repurchase
agreements at 3.85 per cent last Thursday. Even so,
the average rate for three-month bills came out at
3.86 in yesterday's auction, with some awards being made
at rates as high as 3.88 per cent.
Once the current seasonal pressures have passed,
investors may well regard these rate levels as quite
attractive; and, as I suggested at the last meeting,
the market might settle down with the three-month bill
moving around in the 3.80's.
It is perhaps well that the Committee de-emphasized
free reserves at the last meeting, since the figures would
have proved virtually uncontrollable even if we had
sought to conduct operations in terms of that statistic.
The figures will very likely continue to behave erratically,
since the estimation of reserve factors is always particularly
difficult over the four weeks that are ahead.
As indicated in our written reports, Federal funds
have been readily available at the discount rate and
frequently below. Member bank borrowings have been on
the low s:de. The relatively low level of borrowings is
attributable in part, as the staff's comment on question 6 1/
indicates, to the level of the bill rate in relation to
1/
The staff's prepared comments on certain questions considered
by the Committee at this meeting are given at a later point
in these minutes.
12/15/64
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the discount rate. Also important in this regard, however,
is the somewhat higher level of aggregate free reserves
last week, the lower level of country bank excess reserves
during the past two weeks, and particularly the significant
recent improvement in the basic reserve position of the
New York banks. This improvement occurred in good part
through a reduction in their loans to dealers as the
latter liquidated a substantial part of their bill
positions in the days following November 23. The New
York banks generally have been sellers of Federal funds
over the past two weeks instead of large buyers, as
they customarily are. This of course had reduced the
need for discount window accommodation both in New York
and elsewhere. How long it will be before these banks move
back into their usual basic deficiency position remains
to be seen. But activity at the disccunt window is
likely to remain relatively light until they do; and
even then, for the reason the staff points to in its
answer to question 6, borrowings may not move to their
former levels.
Treasury financing prospects for the next several
weeks include the necessitous borrowing of perhaps
$1 billion to $2 billion cash and the active possibility
As matters now
of an advance refunding operation.
appear, the Treasury is likely to raise cash through
the sale of additional June tax anticipation bills,
probably announcing this operation just before year
end--at the same time that they may announce an
advance refunding. The sale of additional bills would
tend to offset any downward tendency in bill rates that
might result from the depletion in supply of short-term
coupon issues through the advance refunding.
It also
raise some additional
appears likely that the Treasury ..ill
cash after the turn of the year by continuing to sell
$2.2 billion of three- and six-month bills each week as
against weekly maturities of $2.1 billion.
Mr. Mills remarked that in following the operations of the
Account and in interpreting market developments in the period since
the Committee's previous meeting, at which he had not been present,
it seemed to him that operations had been aimed largely at producing
an interest rate structure that would instill confidence in the
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financial community.
-11
This course had been followed despite the fact
that there typically was a tightening of interest rates in December.
The question in his mind was whether by interfering to prevent such
a tightening this year the Committee was creating an unnatural
situation that would require correction at some early date.
By
and large, and within reason, some tightening of interest rates and
some effort to limit the reserve supply would have been preferable,
in his opinion, to supplying reserves at a rate that created a
surplus and that led to almost a sloppy market.
In addition, as
the new year began, if economic developments were as had been
indicated, a more drastic reversal of operations might be required
than would have been the case if seasonal developments had been
allowed to produce their usual effects.
Mr. Stone responded that the instructions of the Committee
at the previous meeting, as he understood them, were to focus on
interest rates, particularly the bill rate, in the conduct of
operation; and to keep the rate on three-month Treasury bills
roughly in the 3.75-3.90 per cent range.
As he had indicated in
his statement, shortly after that meeting the bill rate moved
down to about 3.75 per cent, but it then rose from that level in
response to seasonal pressures.
Accordingly, there had been some
reflection of seasonal forces in the market.
Mr. Mills observed that bill rates would have been higher
than they were if free reserves had been lower.
As he read the
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12/15/64
directive issued at the previous meeting--and this brought up the
whole question of the Committee's directives--it called for
accommodating moderate growth in reserves and for maintaining
certain conditions of stability in the money market, but it made
no direct mention of a target for bill rates such as might have
come up in casual discussion around the table.
Mr. Stone replied that he had operated on the under
standing that it was the Committee's intent that a bill rate
target should be used.
With respect to the suggestion that
unnatural market conditions might have been created by the
Desk's operations, Mr. Stone noted that, as mentioned in his
statement, he had suggested at the previous meeting that the
three-month bill rate probably would settle down in the 3.80
per cent range after the period of seasonal pressures had passed
if the Committee made no substantial change in its reserve
posture.
The bill rate was in that range now, and in his
judgment its current level was quite compat:ble with the kind
of reserve posture the Committee had been maintaining recently.
On the whole, he thought there was nothing artificial in current
money market conditions.
Nor did he think conditions in the long-term market were
artificial, Mr. Stone continued.
The market was confident that
the economy would continue to generate a substantial flow of
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12/15/64
savings and that the demand for long-term funds in 1965 was not
likely to be substantially greater than in 1964 and might possibly
be smaller.
The expectation for long-term interest rates was that,
if anything, they were likely to go down in 1965.
Recently, Mr. Stone said, the Federal funds rate frequently
had been below the discount rate.
This was closely related to the
low level of borrowings, and both of these developments, in turn,
were partly a consequence of the level of the bill rate relative
to the discount rate.
Also, the New York banks, which typically
borrowed $400 to $600 million net every day, had a basic reserve
excess and had been net sellers of Federal funds in the past
two weeks.
Ccmmercial banks in New York, as well as some other
banks, had worked themselves into a basic reserve surplus position
in order to be able to accommodate the expected heavy demands for
funds over the tax and dividend dates.
In other recent years
they had done :his by selling assets, beginning about two weeks
in advance of those dates.
This year, however, they did not have
to sell assets because they lost dealer loans as dealers worked
down their trading positions.
Dealers had sold a tremendous
volume of bills to the private sector recently, in addition to
their sales to the System Account.
In reply to a question by Mr. Swan, Mr. Stone said this
situation had been reversed in the past few days as dealers re
acquired inventories in recent auctions and borrowed from the
New York banks in considerable volume.
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12/15/64
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period December 1 through 14,
1964, were approved, ratified, and con
firmed.
Chairman Martin then called for the staff economic and
financial reports, supplementing the writter reports that had been
distributed prior to the meeting, copies of which have been placed
in the files of the Committee.
Mr. Koch presented the following statement on economic
conditions:
Domestic economic activity has rebounded sharply
from the effects of the work stoppages in the auto industry.
The November industrial production index was almost a
full point above the record September high, despite some
impact of the Ford strike early in the month. The index
is no doubt showing a further rise in December and is
about 7 per cent above a year ago. The manufacturing
workweek rose to 40.9 hours in November, due in part to
heavy overtime in autos, but also reflecting some further
increases in overtime in quite a few other industries,
particularly in the durable goods area. Because of the
temporary curtailment of activity in October, the fourth
quarter increase in GNP is likely to be only about half as
large as in earlier quarters this year, but chances are
very good that this shortfall will be made up in the first
quarter of the new year.
One dramatic aspect of recent demand developments
has been the step-up in inventory accumulation by
manufacturers. Stocks of manufacturers rose $600 million
in the third quarter, following increases that averaged
only $125 million per quarter in the first half of 1964.
They are anticipated to increase $1.2 billion in the
fourth quarter. The greater accumulation since midyear
12/15/64
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has been due in large part to resumption of accumulation
of inventories of steel and other ma:erials, although
accumulation of goods in process and finished goods has
also stepped up since midyear.
Manufacturers anticipate a further rise in stocks
of $600 million in the first quarter of 1965. In viewing
longer-run prospects for inventory accumulation, two
points are relevant:
first, much of the current step-up
in manufacturers' inventory demands represents a hedge
against a possible steel strike; and, second, businesses
have now had several years of satisfactory experience in
operating with relatively low stock-sales ratios and most
of then still
report that their present ratios are "about
right."
Turning to the price area, the weekly wholesale
industrial price figures in November and early December
suggest a continuation of the October rise, although at
less than half the rate. The rise continues to be focused
in the nonferrous metals area, with price changes outside
this area continuing to be selective and largely offsetting
in their effects on the general price indexes.
Prospects are improving, moreover, that pressures
will abate in some nonferrous markets. In copper, for
example, world production has been recovering from last
summer's strikes and current output is higher than last
spring when inventories apparently were being accumulated.
The gap between tin production and consumption is being
filled by increased sales from the stockpile, and tin
prices have dropped sharply from the very high levels
reached in October.
On the labor front, the decline in the over-all
unemployment rate from 5,2 to 5.0 per cent from October
to November cannot be considered highly significant. The
rate remains in the relatively narrow range in which it
has varied since late spring, as increases in employment
have only matched increases in the labor force. Unit
labor costs in manufacturing rose in September and
October, but this movement, like those in many other
statistics recently, was no doubt materially affected
by the work stoppages in the auto industry. In November,
unit labor costs may have returned to about their September
level.
Although labor unrest appears to be increasing and
dock and rail strikes are threatening, concern about
the spreading of wage increases continues to focus on the
12/15/64
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steel industry. Here there are some factors suggesting a
large settlement and others suggesting a more modest one.
Those suggesting a large settlement include the struggle
for political power within the union, the relatively large
earlier auto settlement, the high current demands for steel,
and the small settlements in steel in 1962 and 1963,
settlements that consisted only of fringe benefits. Factors
suggesting the possibility of a more moderate settlement
are the changed attitudes of both management and labor in
the industry regarding the likelihood of being able to
pass on cost and price increases to buyers in the current com
petitive market environment, and the importance to the
administration and the general public of a settlement near
the guidepost and without a strike.
Settlements in steel as well as in other industries
have appeared in recent years to be strongly influenced
by longer-term competitive aspects and by concern over
the threat of substitution from other sources of supply,
both domestic and foreign. Sales of Japanese steel in
the U.S. market, for example, are still on the rise,
and Japanese producers are likely to intensify rather
than diminish their sales efforts here in the months
ahead. Union demands in collective bargaining have
emphasized increases in fringe benefits rather than in
money wages, reflecting a heightened desire to protect
job security and future income rather than just current
income. On balance, these developments suggest a fairly
generous steel settlement but one far less costly than
the disruptive ones in the mid- and late-1950s.
In sum, economic activity in the near-term future
is likely to be brisk, as auto restocking and precautionary
steel buying continue and as business capital expenditures
rise furtner. The current vigorous expansion still
poses the potential threat of a destabilizing thrust
on the upside, but this threat may well lessen sharply
with a steel settlement, unless it is a large one.
Prospective declines in auto production following the
current stock rebuilding and in steel production following
the wage settlement could well lead to a slowdown in the
expansion, although at this juncture one cannot see what
new elements may have entered the picture by then.
The most common current economic forecast is that
1965 will be a prosperous year, but not good enough to
absorb the increase in the labor force, expected to be
larger than in 1964, let alone reduce the present number
12/15/64
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of unemplcyed unless more stimulus than is currently
anticipated comes from either the private sectors of the
economy or the Government.
With this possible outlook
in mind and recognizing the inevitable lags in the im
pacts of monetary policy, domestic ecoromic considerations
still
seen to me to call for a continuation of the existing
degree of credit availability and of approximately current
costs of Longer-term credit and capital.
Chairman Martin noted that a memorandum dated December 7,
1964,
entitled "Proposal
Dealers in U. S.
for Obtaining Financial Statements from Nonbank
Government Securities," had been addressed to the
Committee by the Steering Group of the Government Securities Market
Study, of which Mr.
Koch was a member.
(A copy of this memorandum,
together with certain attachments, has been placed in the files of
the Committee.
this memorandum
developments,
Mr.
in
the first
The Chairman suggested that the Committee discuss
before proceeding to the report on financial
and he invited Mr.
Koch to comment.
Koch observed that the proposal,
five pages of the memorandum,
which was summarized
grew out of the 1959
1960 study of :he Government securities market by the Treasury and
the Federal Reserve that followed the 1958 episode of speculative
boom and collapse.
The recommendation of that study for collection
of better information on dealer positions, transactions, and
financing already had been implemented.
The Steering Group then
had turned to a second recommendation, that more uniform balance
sheet and income statements be obtained from nonbank dealers, and it
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12/15/64
had developed the proposal for financial statements described in
the memo andum.
Mr. Koch described the proposal as a first and exploratory
step in meeting the problem.
He said the Steering Group had
encountered considerable difficulty in taking even this first
step; that it hoped to learn more about the problem as experience
under the new program was accumulated; and that this might well
result in further recommendations.
The proposed financial statements would serve several
objectives, Mr
Koch said.
First, it was hoped that iproved and
more uniform financial statements would encourage sounder financial
reporting and practices by dealers.
Their financial reports at
It was
present generally were skeletal and disparate in nature.
difficult
to achieve uniformity in
differences in
statements because of the wide
the scope of activities
in which the various
dealers engaged and because some dealer organizations were
partnerships and some were corporations.
Good accounting practices were particularly important in
this industry, Mr. Koch observed, because dealers typically
operated with small capital and narrow equity margins.
same time,
At the
the smooth and sound functioning of the Government
securities market was vital both to the financing operations of
the Treasury and to the open market operations of the Federal
12/15/64
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Reserve.
Although great reliance in ensuring the financial
solvency of dealers still would have to be placed on the integrity
of the dealers themselves, the Steering Group felt that the
development of uniform financial reports could play an important
contributory role.
Initially, the proposal called for annual
statements, but later the statements might be requested more
frequently.
it might also be appropriate to institute surprise
audits at some future date.
A second purpose of the program was to provide better
aggregate statistical information of a financial-statement type
for the industry.
There had been many requests for such informaticn
from interested groups, including committees of Congress.
Finally,
some dealers have complained recently that various System operatiors
and Treasury debt management techniques had been impairing the
functioning of the market and their ability to earn adequate profits.
Better information on dealer capital, incomes, and expenses would
be useful
in evaluating such complaints.
Mr. Koch observed that the program proposed had been dis
cussed with the Secretary of the Treasury, and Mr. Dillon had made
two suggestions.
First, he thought it would be desirable to have
a letter to the dealers announcing the inauguration of the program
from Chairman Martin and himself as well as one from Mr. Hayes as
proposed in the memorandum.
Secondly, he strongly urged that the
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program be started with financial reports as of the end of the
current calendar year.
In response to an invitation to comment by Chairman Martin,
Mr. Stone said that he fully endorsed the proposal.
He observed
that dealers were agreeing to supply the information requested
with a certain amount of reluctance, but he would expect this
reluctance to be overcome once the program was under way and the
dealers could see its value.
In the ensuing discussion Mr. Robertson remarked that he
thought the proposal was a real step forward.
Mr. Mitchell com
mented that while he did not disapprove of the program proposed
he considered it inadequate for the purpose and regretted that
it was not more responsive to the problem.
Thereupon, the recommendations of
the Steering Group for obtaining financial
statements from nonbank Government
security dealers, as set forth in the
memorandum of December 7, 1964, were
approved.
Secretary's Note: The following letter
was sent to nonbank dealers in Government
securities over the signatures of
Secretary Dillon and Chairman Martin on
December 24, 1964:
Dear Mr.
The Treasury-Federal Reserve program for improving
available
information on the Government securities
the
market has now been underway for nearly five years.
You will recall that in January 1960 Chairman Martin
and then Secretary of the Treasury Anderson wrote you
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12/15/64
to initiate a program for "collection of data covering
transactions volume, dealer positions and borrowing,
including financing under repurchase agreements, and
balance sheet and income statement information."
The data on transactions volume, oealer positions
and dealer borrowing collected since 1960 have proved
to be of real value to the Treasury and the Federal
Reserve, as well as to interested students.
We want
to express our appreciation for your cooperation and
public-spiritedness in providing these data which have
proved so useful.
Now the time has come to move ahead on the second
stage of the information program, the collection of
nonbank dealer financial reports, including both
balance sheets and income statements.
We expect that
this additional information, to be collected on a
confidential basis but with the prospect of publication
in consolidated summary form after
some reasonable
benefit to us in
trial
period, will be of significant
appraising developments in the Government securities
market. The accompanying letter from Mr. Hayes and
its attachments give the details of the projected
program and our staffs will of course be available
to work with you in implementing it.
Chairman Martin observed that it mi;,ht be desirable to
institute meetings with the dealers early next year to give them
another opportunity to discuss their problems directly with System
people.
Mr. Partee then made the following statement concerning
financial developments:
Domestic financial markets appear now to have
settled down in the wake of the official rate actions
Sensitive yields have declined in
of November 23.
both short- and long-term markets, and in the latter
case are back to about where they were just before the
12/15/64
-22-
discount rate increase. Partly this readjustment has
been in response to official pronouncements, to market
estimates of Federal Reserve policy, and to the failure
of any prime bank rate increase to carry through. But
the resilience of long-term markets also reflects basic
supply-demand relationships, including particularly
the absence of any significant current or prospective
rise in financing volume.
In shorter-term markets, despite some backing down
in the past two weeks, yields remain appreciably above
the November 20 level--generally 15 to 20 basis points
higher. As a result, the yield curve is even flatter
than before; taking bills on an investment yield basis,
the Government list is essentially flat in yield from
6 months on out at about 4.10 per cent. The question
is, how sustainable is such a yield curve?
Under present circumstances, it seems to me that
there is a good chance that long-term yields will
hold where they are, or even drift lower, despite
the upward adjustment we have had in short-term rates.
Basic to this proposition is the expectation that
aggregate long-term financing demands will not
rise in the period ahead. There could well be some
increase in corporate financing as capital expenditures
continue upward, although no such tendency is yet
evidenced by the new issue calendar, which is
seasonally slack over the turn of the year. But the
net expansion of mortgage debt has already fallen
off somewhat this year from its late 1963 peak, and
a further decline is to be expected as the drop in
housing starts last spring is reflected more fully
in the mortgage figures.
The flow of savings available for long-term
investment has continued large throughout this
expansion, and most market observers expect such
flows to remain high in the period ahead. The
prospects for this have been enhanced by the Regulation
Q action, which both improves the ability of banks to
compete for time deposits and savings funds and
virtually eliminates any possibility of a move toward
lower rates by savings institutions generally at the
turn of the year. The potential for larger savings
flows, especially to banks, appears to underlie the
recent marked decline in municipal yields to the
lowest levels since the spring of 1963. Any developing
12/15/64
-23-
slack between supplies of and demands for longer
term funds, of course, could be taken up by Treasury
debt-lengthening; a decision to undertake an advance
refunding in January would present a near-term test
of the absorptive capacity of the capital markets.
The sustainability of the present flat yield
curve is also enhanced by uncertainties about the
course of the economy in 1965. If we are at or
close to a cyclical peak in interest rates, borrowers
would not want to accelerate their long-term financing
needs, nor would lenders want to do much shortening of
their investment portfolios.
Growing investor uncertainty about the strength
of economic prospects may be indicated by the recent
behavior of the stock market, which has declined
3-1/2 per cent over the last three weeks. International
financial uncertainties and the increase in official
rates here and abroad may have triggered the decline,
but a more basic factor probably is the growing aware
ness that corporate profits appear to be leveling out.
Manufacturers' profit margins, in fact, have inched
downward quarter by quarter this year on a seasonally
adjusted basis, although there will be fillip to after
tax earnings with the second two-point cut in the
corporate tax rate in January. This has long been
discounted in the market, however, and the new
indications of an essentially flat earnings perform
ance, despite a possibile uptick stemming from near
term inventory accumulation, may well not be bullish
enough to sustain the relatively high price-earnings
ratio of 19 reached in mid-November.
Turning to recent credit market developments,
the figures now confirm that total bank credit
expansion in November was exceptionally large, both
on a daily average and month-end basis. Much of
the unusual size of the increase was accounted for
by Treasury financings, which had the effect of
boosting both Government portfolios and security
loans more than seasonally toward month-end.
Business lending also picked up, but only to a
pace about in line with the year as a whole, and
other loans, except for those to security dealers,
continued to expand at the rate of recent months.
In the first two weeks of December, judging from
reports for New York City, business loan demands
12/15/64
-24-
strengthened significantly, partly due to hedging against
possible prime rate action, but the rise in total credit
was considerably less than in other recent years.
Most of the increase in lendable funds in November
resulted from a contraseasonal expansion in Treasury
balances, and also from an acceleration in time and
savings deposit growth. The former reflected the
Treasury cash financing, unusual for November, and
the latter a continued enlargement of savings inflows,
related it.large part to the shortfall in new car
sales in both October and November. Demand deposits
rose only moderately on balance, expanding in the first
half and contracting in the second, and the money supply
increased $500 million, at the lower end of the $500
$800 million range of increases over the past 4 months.
Very tentative indications are that there was only a
moderate further rise in the first half of December.
The November expansion brought the growth rate of the
money supply for the year to date to 4.2 per cent,
with currency up 6 per cent and demand deposits
3.8 per cent. (The last figure is slightly revised
from the 3.5 per cent reported in element 3 of the
trial directive.)
Meanwhile, the banking system has reacted to the
higher discount rate in a predictable manner. In the
first two weeks of December, both exce.s reserves and
borrowings declined from the averages of earlier two
week settlement periods, with a little larger decline
in the latter contributing to somewhat higher average
free reserves. Banks have been pressing to utilize
excess reserves, and the flow of Federal funds has
been large, often at rates below 4 per cent. So
long as rates on both bills and Federal funds remain
well below the discount rate, banks will tend to make
marginal reserve adjustments through these markets
and borrowings will be restricted. This, of course,
means that a higher free reserve figure on average
is likely to continue to be associated with current
market rates. Maintenance of these rates, in turn,
depends basically on the availability of nonborrowed
reserves as required to support current bank credit
expansion.
In summary, there has been an orderly, and on
the whole balanced, adjustment to the November
official rate actions. The yield structure which
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12/15/64
has evolved seems sustainable in the current context,
although the adjustments in investor attitudes and in
initial allocations of funds are still provisional and
tentative. Expansion in bank credit and in money appears
to be continuing, and there is no evidence of any sig
nificant change in earlier trends as yet. Under the
circumstances, domestic market conditions would appear
to call for a policy of continuing open market opera
tions aimed at stabilization of rates and flows. With
seasonal fluctuations in funds flows so large at this
time of the year, and with the balance of pressures on
short-term rates about to reverse, it would seem that
such policy must be couched primarily in terms of desired
market conditions rather than in terms of either a
specific marginal reserve target or any precise yield
expectation for 3-month bills.
Mr. Reynolds presented the following statement on the balance
of payments:
The year end is typ.Lcally a period of large seasonal
and erratic movements in international transactions. This
year, the difficulties of interpreting the data are com
pounded by uncertainties about the effects of Britain's
problems, related policy actions, and the threat of a
U.S. port strike. Also, we have just encountered a purely
statistical puzzle: the "flash" report by large banks on
their foreign liabilities in November indicates a consider
ably larger over-all payments deficit in that month than
has been suggested by weekly reports.
point
In the circumstances, there seems to be little
outcome.
in speculating in detail on the fourth-quarter
It seems clear that the seasonally adjusted deficit will
be larger than it was in the third quarter, and that this
result will be mainly explained by the bulge in new foreign
security :ssues. Whether Britain's difficulties have
temporarily been producing an improvement in our figures
is hard to tell; to the extent that uncertainty about
sterling has generated wider uneasiness about the whole
exchange rate structure, it may have produced adverse as
well as favorable capital flows.
The deficit for the full year will probably work
out at about $2-1/2 billion on "regular transactions"
and perhaps $1 billion on "official settlements"--about
$1 billion smaller on either measure than in 1963.
12/15/64
-26-
These guesses do not allow for the possibility that
Britain may request a waiver of $138 million of year
end debt service payments to the United States.
Perhaps the most striking data that have become
available in the past two weeks are the merchandise
trade figures for October. You will recall that a
surge of exports in September was tentatively ascribed
to anticipation of the port strike, which was then
postponed. But now it turns out that exports did not
fall back very much in October, and for September
October combined, they were 7 per cent above the first
half-year's rate and 12 per cent higher than a year
earlier. Even if some of this gain reflects chance
or anticipatory bunching of shipments, it seems clear
that exports were rising again in the autumn, after a
dip in the spring that had reflected the ending of
unusually large grain shipments, a decline in exports
to Japan, and some temporary leveling off in Western
European demand, notably in Italy. The renewed autumn
advance shows up in shipments to all areas except the
U.K. Imports, meanwhile, did not change in October,
and were only a little higher that last spring.
Over the two years to September-October, imports
rose--rather unevenly--by 12 per cent, or about as much
as GNP. Exports over the same 2-year period increased
by an extraordinary 28 per cent. The resulting improve
ment in the trade surplus has been a major element of
strength in our balance of payments position.
Two main forces have been at work here: an
unusually favorable cyclical position abroad, and a
basic improvement in the U.S. competitive position.
The cyclical upswing has been unusual both in its
strength and in its world-wide character. Taking the
2-year period as a whole, activity has been expanding
vigorously in all industrial countries--the United
States and Canada as well as Europe and Japan. As
in 1955-57, the boom has lifted the earnings of non
industrial countries as well, and after some lag they
have sharply increased their imports.
The European economies have generally been at full
stretch in this period. Their wholesale price levels
are now generally 10 to 20 per cent higher than they
were in 1960, whereas ours has not changed significantly.
In recent months, prices have continued to rise in
Europe. Only Italy and France have succeeded in slowing
12/15/64
-27-
their price-cost advances, although Germany continues to
hold hers to modest proportions, and most other countries
feel that they are beginning to bring the advance under
control. Thus, basic competitive trends have continued
to move in our favor, although they may not move as
rapidly in this direction from new on.
Prospects for short-run demand changes are more
difficult to assess. It seems most unlikely that the
nonindustrial countries as a group can continue to
increase their imports at recent rates. Australia,
for instance, had a 50 per cent increase in imports
over the past year, and is now trying to rein in; so
is South Africa. Some major Latin American countries
are now encountering renewed balance of payments dif
ficulties. In Europe, the shift in British policy
towards internal restraint, and the import surcharges,
will have major dampening effects. Against this,
there may be some acceleration of demand expansion in
the months ahead in some continental European countries,
notably Italy; and German business conditions continue
buoyant as before. Outside Europe, Japan is apparently
increasing its imports again, and Canadian demand con
tinues to expand. On balance, I would expect further
expansion in U.S. exports during 1965 at a rate that
will be fairly satisfactory by historical standards
but considerably less rapid than during the past two
years.
U.S. imports seem likely to be swollen in the next
few months by strong inventory demand, notably for steel.
Therefore, we should probably not expect further gains
(And the threatened
in the trade surplus early in 1965.
dock strife will, of course, distort the monthly figures.)
But some improvement in the trade surplus for the year
1965 as a whole over the year 1964 now seems more likely
than it did a short time ago. And if price stability
can be maintained in this country, the longer-run trade
prospects are also favorable, in my view.
Mr. Deming asked what the pattern of the balance of payments
deficit for 1964 would be when figured on an official settlements
basis.
Mr. Reynolds replied that for the first three quarters of
the year it had been running at an annual race of about $1 billion,
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12/15/64
and there was no obvious reason to expect a substantial change in
the fourth quarter.
But any fourth-quarter estimate now could be
only a guess since current figures were not collected on that basis.
The weekly reports would have provided a clue to developments under
ordinary circumstances, but as he had noted the November flash
report by large banks, which gave no breakdown of liabilities as
between official and private foreigners, appeared inconsistent
with the weekly reports.
Also, large shifts between foreign private
and official holdings of dollars might, have been occurring because
of uneasiness about the pound sterling.
Accordingly, it was neces
sary to await the more detailed fourth-quarter figures before esti
mating the deficit for that quarter on an official settlements basi..
Mr. Shepardson referred to Mr. Reynolds' comments on the
outlook for U.S. exports, and asked whether allowance had been
made for a possible decline in agricultural exports.
been high this year, Mr. Shepardson noted,
drought conditions abroad.
These had
partly because of
Also, if he correctly read the in
dications; of current negotiations on Common Market farm policy,
they implied a significant reduction in U.S. agricultural exports
to Europe.
Mr. Reynolds replied that in assessing the outlook he had
assumed that the decline in farm exports as a result of the ending
of the drought abroad and the lack of further Russian purchases of
12/15/64
-29
grain had run its course.
He had not allowed for any further drop
in connection w.th policy decisions by the Common Market on the
ground that the nature and effects of the decisions that would be
taken were still
uncertain.
Mr. Mitchell commented that Mr. Reynolds' expectations for
U.S. foreign trade seemed somewhat different from those implied in
the staff statement made in response to question 4.
Mr. Reynolds
agreed that he saw some prospects for improvement that were not
suggested by the staff statement.
In part this reflected the fact
that his own views were toward the optimistic end of the range of
staff opinion.
But perhaps the more important explanation was that
he and other members of the staff had not fully absorbed the implica
tions of the figures for October when the response to the question
on the balance of payments was prepared.
On the whole, however,
his current expectations did not differ greatly from those implied
by the staff statement.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Treiber.
He noted that, in accordance with the understand
ing the members had reached in the afternoon following the December 1
meeting, the Committee would adopt a new procedure in the go-around
today; members were invited to address their remarks at least in
part to some or all of the questions and responses that had been
12/15/64
-30-
prepared by the staff and distributed before this meeting.
The staff materials to which the Chairman referred were as
follows:
(1) Production, sales, and invent.ories--Taking into account
the effects of recent and threatened work stoppages, is the
strength of current economic activity showing any signs of
diminishing or increasing?
After being dampened by work stoppages earlier in the
fall, economic activity currently is receiving a temporary
stimulus from strenuous efforts on the part of auto producers
to bring retail inventories back to a level commensurate with
the record level of sales and by apparently widespread efforts
on the part of steel consumers to build up their stocks of
steel in anticipation of a possible strike next May. These
two influences are augmenting business inventory accumulation
now and will probably continue to encourage inventory invest
ment into early months of 1965, although strikes threatened
by longshoremen and railroad workers might prove to be a
disruptive factor.
Aside from these temporary influences, trends in other
sectors of economic activity have shown little change from
earlier months. On balance, the underlying economic situation
appears to be one of continuing moderate growth. As the year
ends, business and consumer confidence remains at a high
level, with recent surveys showing both groups anticipating
rising levels of spending in the months ahead.
(2) Employment--Can the economy achieve a significant
further reduction in the margin of underutilized manpower in
the near-term future without strong upward pressures on
prices generally?
The current prospect for further expansion in
activity at about the same rate as in the past year does
not suggest any great likelihood of a significant
further reduction in the margin of unutilized resources
in the near future, because resources of manpower and
industrial equipment also are continuing to expand.
Employment gains since May have been matched by in
creases in the labor force, and the unemployment rate
has fluctuated in the narrow range of 4.9 to 5.3 per cent.
12/15/64
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Significant near-term reduction in unemployment would
require one or more of the following developments:
(1) a more rapid expansion in employment than has been
taking place recently. This could occur temporarily
early next year because of the inventory buildups
related to recent and threatened strikes. But in
autos and steel, employment in November and December
already is very high and overime work has been
increased to meet what may be a temporary peak load.
In construction, notwithstanding an unusual seasonal
rise in November, employment appears to have leveled
off. In trade and in public and private services,
employment gains have been strong but steady;
(2) a less than expected increase in the labor force.
But expectations are likely to be realized if
demands continue strong because the labor force
tends to respond positively to job opportunities;
(3) a decline in the rate of productivity advance.
This could occur but there is no evidence as yet
of any moderation in what has been a high and
sustained rate of advance. Substantial further
additions to plant capacity will be an important
factor tending to maintain the advance in
productivity.
So far, the supply of labor has been adequate to meet
expanding demands without any strong general upward pressure
on prices. In some industries, strong demands have required
considerable overtime work and active recruiting and training
programs. The balance of forces affecting bargaining has
been such that in some cases, notably in the auto industry,
settlements have been larger than the general rate of pro
ductivity advance in the private economy. In September and
October, labor costs per unit of output in manufacturing
rose, but only to the level of December 1963, and a signif
icant share of the rise is believed to reflect the work
stoppages in autos. The critical question, not yet resolved,
is whether the wage patterns developing in industries showing
high productivity increases, such as autos, will spread to
industries showing lower productivity increases.
(3) Price developments--Have upward price pressures been
getting stronger and more pervasive?
High rates of economic activity in the United States
and abroad have maintained strong upward price pressures in
markets for nonferrous metals. In some cases upward pressures
12/15/64
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have been intensified by political disturbances or strikes
that have limited production. There are reasonably good
prospects, however, that pressures in some of these markets
will ease in the near future.
Outside the nonferrous metal markets, price changes
continue to be selective. Industrial commodities as a
group rose only slightly further in November and early
December, following the October advance.
With prices of industrial materials increasing little,
and with labor costs per unit of output in manufacturing no
higher then a year ago, prices of finished goods have not
been subject to pervasive upward cost pressures. Wholesale
and retail prices of consumer goods (other than foods) have
been stable all this year. Prices of producers' equipment,
on the average, have been stable since spring, following a
rise of 1 per cent over the preceding 6 to 8 months. A
general steel price increase, of course, would seriously
threaten this pattern of over-all stability.
(4) Balance of payments--Have underlying influences recently
been tending to strengthen or to weaken the position of the
dollar internationally?
Continuing uneasiness about the pound sterling is
tending temporarily to strengthen the dollar in some ways
and to weaken it in others. U.S. trade figures are being
distorted to an unknown extent by anticipations of a
possible port strike. Underneath all this churning,
however, it is possible to discern some of the underlying
forces that are likely to be of decisive importance over
the period ahead.
Basic trends in the competitive position for merchandise
trade have been favorable for five years. But efforts to
slow down price-cost advances in Europe are beginning to
take effect. Therefore, continuation of favorable compet
itive trends hinges increasingly upon the continued
maintenance of price stability in the United States.
Changing demand conditions may limit further improvement
in the trade surplus in the short run. The large increase
in exports during the past two years resulted partly from
favorable cyclical forces. Growth in U.S. exports now will
be slowed by recent U.K. policy actions, less buoyant
expansion in some other industrial countries (e.g., France),
and less rapid growth in the imports of some nonindustrial
countries. Meanwhile, U.S. imports, after increasing in
12/15/64
-33
line with GNP for two years, may rise more briskly in
coming months, especially if inventory demands are strong.
Income from foreign investments remains on a strongly
rising trend. But the increase in receipts will be smaller
in 1965 than in 1964, mainly because tax factors shifted
some dividends from 1963 to 1964.
Relative credit conditions shifted adversely in 1963-64
as credit tightened in Europe and Japan and remained readily
available here. While covered interest rate relationships
affecting movements of liquid funds have not changed signif
icantly, both short- and long-term rates have generally
risen more abroad than here. Also, U.S. banks have been
eager to expand their foreign lending. Outflows of U.S.
private capital will have risen to a new high of more than
$5 billion in 1964, including about $2 billion of direct
investments, $1 billion of new foreign security issues, and
$1-1/2 billion of total bank lending. If any large
balance of payments improvement is to cccur during 1965 in
a context of continuing U.S. economic expansion, most of
the improvement must take place in capital flows. No early
easing of credit conditions abroad can be counted upon to
help.
Continuing erosion of the U.S. incernational reserve
position points to a need for showing significant further
improvement in the payments position fairly soon, or at
least for policies that would ensure ccntinuation of
favorable basic trends. Questions arise, however, about
the rate of improvement that is needed and feasible in the
light of other objectives, and about the mix of Government
policies most likely to achieve desired results.
(5) Money supply and liquidity--What interpretation should
be placed on recent fluctuations in the rate of expansion
in bank credit and the money supply?
Fluctuations in the rate of growth of total bank
credit in recent months have reflected in large part the
unusual pattern of Treasury financing operations. This
was particularly true of the July decline and August
increase in credit and the unusually large increase in
November. A major factor in the disparate changes in
September and October was the fact that the last-Wednesday
reporting date for September was the last day of the month.
This resulted in the recording of the large end-of-month
credit increase in September rather than, as is more usual,
12/15/64
-34-
in October. Since midyear the rate of growth in bank
credit has been about 8 per cent, the same as over the
first half of this year.
Within the aggregate of recent credit expansion,
however, there has been some change in composition.
Expansion in total loans since midyear has been some
what slower than earlier this year while holdings of
investmerts have increased somewhat faster. The rate
of growth of business loans, on the other hand, has
continued in recent months at an annual rate of close
to 10 per cent, the same as earlier in the year.
The seasonally adjusted money supply rose $500
million in November, at the lower end of the $500-$800
million range of monthly increases which has prevailed
since July. Over this period, the annual rate of
growth has been 4.6 per cent, considerably above the
2 per cent average for the first
five months of this
year but considerably below the 8-1/2 per cent rate of
June and July.
Short-run fluctuations in money supply growth such
as chese do not represent a departure from earlier
experienne in this series. A certain degree of lumpiness
in money expansion results from short-run shifts between
private and Government deposits and from attempts by the
public to bring money balances into line with desired
levels after temporary departures from those levels.
Factors which might have contributed to such fluctuations
this year would include:
(1) heavy consumer buying in
anticipation of a tax cut and large acquisitions of
securitie by the consumer sector in the early months of
this year; and (2) a restoration of previously reduced
balances, together with a lag in the adjustment of
expenditures and savings flows to the increase in dis
posable personal income stemming from the tax cut, in
June and July. The growth rate in money balances since
July, while somewhat more rapid than the 3.9 per cent
rate for the first seven months of this year, is not out
of line with the recent rapid rise in GNP, both in current
and in constant dollars.
The emergence of a substantial uptrend in seasonally
adjusted demand deposits at city banks since spring, after
a period of several years of little change, suggests that
businesses as well as consumers now may be increasing their
money holdings more closely in line with transactions needs.
The recent decline in the rate of growth in CDs would be
consistent with such a development.
12/15/64
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(6) Money and credit markets--Are the adjustments to
the discount rate increase in money and capital markets
and in bank reserve positions completed, or are they
continuing?
It appears that the adjustments in yield relation
ships to the discount rate actions per se have been
substantially completed, although some consequent changes
in financial flows may still be in process and day-to-day
rate fluctuations may continue for a time to be wider
than usual. However, basic yield relationships are still
subject to stress from the seasonal reversal of pressures
in short-term markets after mid-December as well as from
possible shifts in underlying supply-demand relations in
both sho::t- and longer-term markets.
Following the initial adjustments, bond yields
returned to levels close to those obtaining at the time
the official actions were taken. This resulted in part
from market interpretations of official statements and
also from continuing expectations that the flow of long
term savings to investing institutions would continue
large--and perhaps be enhanced by the recent amendments
to Regulation Q--while long-term credit demands would
remain relatively moderate. Municipal and corporate
security flotations have been well received recently,
but the basic strength of the long-tern market will be
further tested in January if the Treasury undertakes
longer-term financing operations at that time, as it has
in the past several years.
Upward adjustments of short-term rates have amounted
to as much as 25 basis poirts, resulting in further
flattening of the yield curve in the shorter maturity
range. Rates on Treasury bills have settled down somewhat
below the highs reached in the initial adjustment, while
rates on other short-term instruments generally have held
at the levels reached in early December.
Banks appear to have adapted to the new discount rate
in management of their reserve positions, although current
seasonal pressures tend to obscure basic trends. So long
as the 3-month Treasury bill rate does not rise closer to
the discount rate, the tendency which emerged in the past
three weeks for banks to want to keep borrowings at somewhat
lower levels is likely to persist.
(7) Monetary policy--In light of these and other
considerations, what policy with respect to bank reserves
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12/15/64
and money market conditions would be appropriate for
the next four weeks?
Mr. Treiber commented that at past meetings the statement
of the New York Bank member usually had focused on the areas of a
number of these questions, and his statement today would be con
cerned with all of them.
Mr. Treiber then made the following
statement:
1. Domestic economic activity. The domestic
economy continues to be basically strong despite some
distortion of current statistics because of the auto
strikes in October and November. Ecoromic activity
may be expected to continue to increase. There are,
however, uncertainties over labor-management problems
including threatened strikes of railroad workers and
longshoremen within the week, and possibly steel
workers in the spring.
Retailers are generally highly optimistic about
Christmas sales, and longer-run strength in the
consumer area is suggested by the October Census
survey of consumer buying intentions.
Business confidence is high. There is further
indication of strength in capital spending. The
November Commerce-SEC survey of plant and equipment
spending plans indicates an upgrading for the second
half of 1964, and a further advance in the first half
of 1965. The new survey is consistent with the view
that 1965 will see another sizeable advance in plant
and equipment spending, though perhaps not as large
as in 1964.
While both inventory and sales figures have been
distorted by the auto strike, it seems likely that
there has been some basic accumulation of inventory.
So far the building of steel inventory has been
moderate, but a big push in steel inventory accumula
tion is expected in the first quarter of 1965.
2. Employment. The November decline in the
unemployment rate to 5.0 per cent from 5.2 per cent
in October is encouraging, even though some of the
improvement is due to the unusually favorable weather
12/15/64
-37-
conditions which permitted more workers than usual to
engage in construction and other outdoor work. The
unemployment rate for married men is the lowest it has
been in more than seven years. There are shortages
in various types of skilled labor. The unemployment
problem is most severe among the unskilled, particularly
teenagers.
To cope with the problem of unemployment, greater
stress will have to be placed on measures to raise the
general level of education, to improve and expand
particular types of technical training, to induce young
people to take full advantage of educational and
training opportunities, and to enhance labor mobility
as well as equality of access to job opportunities.
While adequate credit is important to a dynamic and
expanding economy and helps to provide job opportu
nities, merely increasing over-all demand by expanding
credit will not solve the unemployment problem
stemming from lack of education and training. There
is great risk that pressing to increase over-all
demand will push up prices generally without
substantially reducing unemployment.
3. Prices. There has been no clear change in
the price picture. The consumer price index continues
its relatively mild upward drift. Industrial wholesale
prices apear to have risen a bit more than seasonally.
Specific price announcements continue to be predominantly
on the up side. On the other hand, there still continue
to be some announcements of price reductions. It is
too early to assess the impact on the general price
level of recent wage agreements. Yet it is apparent
that general price tendencies are upward.
4. Balance of payments. The latest balance of
payments figures indicate a large deficit--$272 millionfor November. Little can be said on the outlook for
December, since many cross-currents are at work. There
is the possibility of a deferment of $138 million of
year-end interest and amortization payments by the
British. Our deficit for 1964 is likely to be between
$2 and $2-1/2 billion; this is too large. A much
larger proportion of the deficit is reflected in a
buildup of private balances than in other recent years.
If, however, private holders of U.S. dollars become
nervous, there could be a large transfer of those
dollars to official bodies with the resultant potential
drain on our gold supply.
12/15/64
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The outflow of U.S. private capital in 1964 will
probably exceed $5 billion; this is $1 billion more than
in 1963. The outflow this year is at about the same rate
that existed in the first half of 1963 before the mid
summer ircrease in United States interest rates and the
proposal of the interest equalization tax. A large part
of the increased outflow in 1964 has occurred in the
short-term area; there have been continuous increases
throughout the year in short-term bank credits and
holdings of U.S. dollar deposits and money market assets
abroad. We cannot tell at this time to what extent the
recent increase in our discount rate and in maximum
permissible rates under Regulation Q may tend to reverse
the previous outflows.
The British situation is still very serious. Any
threat to sterling as a reserve currercy is a threat to
the whole international financial structure including the
U.S. dollar and its role as a reserve currency. Even
though the United States may have an inflow as a result
of Britain's unfortunate experience, such an inflow is
not a sign of fundamental U.S. strength. So long as
sterling is under pressure we cannot say that the position
of the dollar is really stronger internationally.
5 and 6. Credit conditions. Month to month
fluctuations in total bank credit have been unusually
erratic in the last few months. There have also been
substantial fluctuations over the year in the rate of
In the longer run,
expansion in the money supply.
however, growth has been continuous and substantial.
Bank reserves, bank credit, and the money supply
have continued to grow in 1964 at about the same substan
tial pace as in 1961, 1962, and 1963. Over that period
aggregate bank credit has advanced almost steadily at
about 8 per cent each year. The money supply has risen
about 3 per cent a year on average and in the last two
years at about 4 per cent a year. It is significant
that other forms of liquid assets have also kept growing.
The ratio of total liquid assets of the nonbank public
to gross national product is now higher than at the
recession trough of 1961; in previous expansions the
ratio has declined as the economy expanded.
As the demand for bank credit has expanded with the
expansion of the economy over the last few years, the
System has accommodated those demands by providing an
expanding volume of reserves. The cost of the additional
12/15/64
-39-
reserves and short-term interest rates have risen and
the tone of the money market has firmed as free reserves
have declined; but the additional reserves have been
provided to support the credit expansion.
The banks have pressed to expand their loans.
Reserves have been sufficiently available to enable
them to meet the demands of their domestic customers
and to seek aggressively and successfully to increase
their foreign loans unconnected with exports.
Savings appear to be readily available for long
term capital purposes. Two large issues of utility
bonds were publicly offered at yields which were about
the same as the yields on similar issues offered before
the recent discount rate increase.
7. Monetary policy. Over the longer run the
continuing large deficit in the U.S. balance of payments
requires, and the generally strong domestic business
outlook counsels, some reduction in credit availability.
A reduction in availability would be helpful in restrain
ing lending by banks to foreigners. Such a reduction
would be reflected in a somewhat, slower rate of growth
of bank credit. The time has not yet come, however, to
take overt steps in that direction; rather the System
should aim at maintaining relatively stable money market
conditions in the coming weeks and at observing the effect
of the higher rate structure on the growth of bank credit.
The possibility of an early advance refunding by the
Treasury also counsels market stability at this time.
The money market has adjusted well to the recent
increase in the discount rate. But the effects of the
policy change have not fully worked their way through
the market. The banks' needs for reserves are at a
seasonal peak; normal market forces put Treasury bill
rates under considerable pressure at this time.
The tone of the money market would appear to be the
most important guide over the next four weeks; the amount
of free reserves should be subordinated. A three-month
Treasury bill rate within the range of 3.75-3.90 per cent
would seem appropriate. There should be maximum flexi
bility to respond to market developments.
Mr. Treiber then referred to the draft directives that had
been submitted by the staff, and indicated that lie preferred
12/15/64
-40
alternative B for the second paragraph because it placed primary
emphasis on money market conditions.
Mr. Shuford said that he had considered the questions and
responses that: had been prepared by tne staff and had made a few
notes regarding them.
basic respect;
however, since his views did not differ in
from those set forth in the staff statements he
would not comment on details, but instead would offer some brief
general observations.
It appeared that the domestic economy was continuing to
expand, Mr. Shuford said, although the autcmobile strikes were
continuing to blur the analysis.
Most recent statistics, such as
those on employment, production, and total construction, had been
favorable.
Over the longer periods that perhaps were more relevant
for purposes of policy formulation, most indicators of economic
activity had been increasing, after allowance was made for the
effects of strikes.
Prices in some sensitive areas had risen but
the over-all indexes remained relatively stable.
It seemed to Mr. Shuford that it was still too early to
make a completely satisfactory evaluation of the effect on the
domestic economy of the recent increase in the discount rate and
the accompanying rise in short-term market rates.
These events
1/ The staff's draft directives are appended to these minutes
as Attachment A.
12/15/64
-41
might have some dampening effect, but the economy was strong
and should not turn down or slow unduly as a result of them.
Activity had been moving ahead with considerable momentum, and
monetary actions had been relatively stimulative from May to
November.
The most recent data on rates of expansion in reserves
and money seemed to Mr. Shuford to have shown some appropriate
moderation from summer and early autumn rates.
Since September,
total reserves of member banks had risen at less than a 2 per
cent annual rate.
This was down significantly from the 5 per
cent rate that had prevailed since November 1963.
However, the
contraction in the growth rate in total reserves had been about
matched by a reduction in Treasury tax and loan account balances
at commercial banks, freeing reserves for the support of private
deposits.
The money supply had risen at a 4.2 per cent annual
rate since September, a rate which was much lower than that of
last summer but about double the average since 1951.
Mr. Shuford noted that the present turn-of-the-year
period typically was characterized by considerable churning in
the money market.
He thought it would be advisable, in view of
both the international and domestic situations, for the Committee
to mark time for this period, attempting to keep money market
conditions relatively stable.
He agreed with Mr. Treiber's
-42
12/15/64
suggestions with respect to the general approach that might be
taken.
Certainly, the level of free reserves should be an
incidental consideration during the next few weeks.
He would not
favor having the Desk operate entirely on the basis of the tone
and feel of the market; some statistical measure should be used
as a guide to operations.
In his opinion the bill rate continued
to be the best guide for the time being, and the 3.75-3.90 per
cent bill rate range discussed at the preceding meeting remained
appropriate for the next few weeks.
Mr. Bryan commented that recent statistics for the Sixth
District: did not seem to reflect developments that were of
particular significance for, or predictive of, national economic
trends.
Therefore, he would turn to the questions submitted by
the staff.
On a number of these questions he had little to
contribute beyond the staff's analysis.
For example, he would
accept the staff reply to question 1, concerning production, sales,
and inventories.
On the second question, whether a significant
further reduction in unemployment was possible without strong
upward price pressures, there was a problem in his mind relating
to the word "significant."
He would expect that some reduction
in unemployment could be achieved if the economy continued to
expand, but in view of the expected large increases in the labor
force he was not sure that there could be a significant reduction.
12/15/64
-43
There was some limiting factor in any expansion, and in the
present situation this factor might take the form of difficulty
in matching the skills of available labor with those required,
at wage rates that were satisfactory to the unemployed.
Regarding question 3 on prices, it seemed to Mr. Bryan
that there was no clear indication that the country was under
going an inflationary development at present.
However, on the
average, whoesale industrial commodity prices had moved up a bit
recently.
Also, the upward movement continued in the consumer
price index and in some of its elements.
While these movements
might have been matched by improvements in quality of consumer
goods, there also were a considerable number of "hidden" price
increases--that is, increases that were inadequately reflected in
the index.
Whether average retail prices of consumer goods (other
than foods) actually had been stable thus seemed to him to be
uncertain.
On question 4, which called for an evaluation of the
direction of "underlying influences recently" on the international
position of the dollar, there was a problem associated with the
meaning of the word "recently."
refer to recent weeks.
Perhaps the intention was to
Over a somewhat longer period the U.S.
balance of payments position had improved, and the country might
be about to make great further "progress" by revising its
-44
12/15/64
bookkeeping methods, which would be a commendable step.
But
it seemed to Mr. Bryan that the deficit was going to be huge
over a perioc of years however it was calculated.
The country
seemed to be bleeding to death through these deficits.
Mr. Bryan said he was not sure what interpretation
should be placed on the recent fluctuations in the growth rates
of bank credit and the money supply, referred to in question 5.
He would agree that money supply growth on a year-to-year basis
had been within a reasonable range.
But he also felt that money
supply expansion in the past four months had been greater than
the country could absorb readily without setting the stage for
inflationary developments, and that in the
same period reserve
growth by any measure had been at a rate that was not sustainable
in the long run.
A free market always was in process of adjustment, Mr.
Bryan said, so his answer to question 6 would be that the adjust
ments t
the discount rate increase were continuing.
The real
issue was whether a reasonable degree of market stability now
could be expected.
In his judgment this would depend on whether
the rescue operation for the pound sterling proved to be successful,
or whether the imbalances were so great that the operation would
not succeed.
-45
12/15/64
Mr. Bryan favored an essentially unchanged monetary
policy.
He agreed that an objective formulated in terms of bill
rates was appropriate for the next four weeks and thought that
the range of 3.75-3.90 per cent in the three-month bill rate that
had been suggested would give the Manager ample latitude.
In his
opinion the Committee could not rely on any reserve figure for
target purposes at present; as Mr. Stone had pointed out, it
would be necessary to deal with complex patterns of developments
over the coming period.
Mr. Bopp observed that although the course of production,
sales, and inventories at this time was clouded by the effects of
the past and possible future labor difficulties, on balance the
economy appeared to be continuing along a moderate growth trend,
with more room to go before problems arose of labor and resource
availability.
It always was important to look ahead, however,
especially at a time such as the present when the economy might
be approaching a cyclical turning point.
Looking ahead, Mr. Bopp continued, there was the strong
possibility that some slackening would develop because of a
decumulation of inventories, a reduced rate of increase in capital
and housing expenditures, and a shift to a surplus position in the
Federal budget.
This longer-run view seemed to him one of the
most important aspects of the economy to bear in mind.
He did not
12/15/64
-46
feel that price increases, thus far, posed a particularly
disturbing problem for economic stability.
material resources were available.
The human and
Much depended on industrial
relations developments in the railroad and steel industries and
on the attitude of the administration toward any settlements.
The recent rates of expansion in money and credit appeared
appropriate to the domestic business envircnmnnt.
As for the balance of payments, Mr. Bopp thought the
deficit was a continuing and difficult problem, but one that had
to be kept in proper perspective within the context of a possibly
weakening business environment.
For the time being he would be
inclined to sit tight and watch developments closely.
Mr. Bopp said he would make no charge in the current
posture of monetary policy, although he would be inclined to let
short-term rates approach the lower limits of recent levels if
necessary to maintain about the same growth in money and credit
as had prevailed in recent months and if necessary to maintain
longer-term interest rates substantially unchanged.
Mr. Bopp reported that at a meeting last Thursday
(December 10) of economists representing various firms and
industries in the Third District, the consensus had been that the
economy would continue to expand throughout 1965, although at a
slower rate during the second half of the year.
The median
12/15/64
-47
forecast of the group was for a 3.8 per cent increase in GNP at
an annual rate in current dollars from the fourth quarter of 1964
to June of 1965, and another 1.2 per cent increase from June to
December.
The group expected plant and equipment expenditures to
be somewhat higher than McGraw-Hill's 5 per cent projected increase.
Residential construction was expected to provide neither a lift nor
a drag on the economy.
With some living off of inventory, steel
production was expected to decline from an expected 124 million
ingot tons in 1964 to 115 million in 1965.
Auto and truck output
was expected to be 9.1 million units in 1965 compared to 9.3
million units in 1964.
Mr. Bopp concluded by noting that he preferred alternative
B of the staff's drafts for the second paragraph of the directive.
Mr. Hickman observed that with the auto strikes finally out
of the way, the domestic economy was getting back into full stride.
Production and consumer takings were both
moving forward.
Except
for the possibility of dock or rail strikes, the near-term prospect
all were on the side of continuing expansion
at high rates.
There had been only one recent development in the Fourth
District that had differed significantly from national trends,
Mr. Hickman said, and that occurred in the area of construction.
Earlier this year, construction contracts in F. W. Dodge's Region
IV (roughly the Fourth Federal Reserve District) had been lagging
-48-
12/15/64
behind those in the nation, but this pattern was reversed in
September and October because of a clustering of several very
large building contracts in Ohio.
This development was a
reflection of the strength of heavy industries at this stage
of the business expansion.
As he had noted earlier in these meetings, Mr. Hickman
continued, a disturbing factor in the current business situation
was the stockpiling of steel as a hedge against a possible
strike in 1965.
Events were now moving into the full-fledged
accumulation stage.
The steel mills were running briskly, but
some of their business, in effect, was being borrowed from next
year.
Mr. Hickman reported that at the e.d of 1964, steel
users would have on hand an estimated 17 million tons of
finished steel.
By May 1, barring an early settlement, steel
users would have about 21 million tors on hand, as compared
with a normal range of 12 to 14 million tons.
While this would
not be as large as the steel inventory peak of 26-1/2 million
tons reached in the accumulation phase preceding the long 1959
strike, it would be appreciably larger than amounts stocked in
1962 and 1963.
If all other factors were equal, the cut-back
of production following the settlement could be absorbed by the
economy.
The danger was, however, that other things might not
12/15/64
-49
be equal.
He referred specifically to the prospects of a
smaller deficit, or possible surplus, in the Federal budget
in the spring of 1965.
It was at least conceivable that on
these and other grounds the economy might be in for a serious
adjustment around the middle of next year.
In this context, Mr. Hickman remarked, an attempt at
present to further stimulate aggregate demand through a
stepped-up rate of expansion of money and credit would make
the adjustment more difficult.
No growth at all would be
equally upsetting, and would be untenable politically.
He
thought the Committee should, therefore, continue to strive
for modest, sustainable growth, on the order of 3 to 4 per
cent for the money supply and of about 6 to 8 per cent for
bank credit.
In his judgment, except for a brief period of
sloppy ease last summer the Committee had held fairly well to
the appropriate course, and it should continue along the same
path as best it could.
Mr. Hickman said the present state of the money market,
and to a lesser extent of the capital market, was stable but
nervous, and it required unusually close attention to prevent
its running off in either direction.
He would, therefore,
continue the policy adopted at the last meeting, attempting as
a primary objective to hold the 91-day bill rate in a range of
12/15/64
-50
3.75-3.90 per cent on the bid side, and as a secondary objective
to provide average free reserves of about $50 million, plus or
minus $100 million.
For these reasons he preferred alternative
B of the drafts for the second paragraph of the policy directive
Mr. Hickman said that his reactions to the staff's
questions, prepared largely before receiving the staff's answers,
could be summarized as follows:
(1) Although up-to-date figures were not available, the
current growth rates of production, sales, and inventories
appeared to him to be very high, and probably not sustainable
beyond 4 or 5 months.
In this connection it seemed to him that
the first paragraph of the staff analysis, which described the
temporary influences augmenting inventory accumulation, was
quite satisfactory.
The second paragraph, however, seemed to
him to be inappropriate, because it tended to brush off the
significanceof what had already been said in the first para
graph.
The opening phrase, "Aside from these temporary
influences," marked the path of the brush-off.
The second
sentence ("On balance, the underlying econonic situation
appears to be one of continuing moderate growth") then completed
the brush-off.
Some definite unbalancing forces obviously were at
work in the economy, Mr. Hickman said.
It was an artificial
12/15/64
-51
device to distinguish between "underlying" factors, on the one
hand, and "temporary" or "special" factors on the other, in a
situation where the unbalancing forces were so deeply woven
into the economy as was the case with the present steel
inventory situation and with other inventories.
(2)
In Mr. Hickman's opinion the ecconomy could achieve
a reduction in the margin of underutilized man power (or rather
teen power and woman power) without upward price pressures,
provided it was done largely through specific structural measures
rather than entirely through additional aggregate demand.
Mr. Treiber's comments on this question were nearer to his own
thinking than were the staff's.
(3)
In the price area, the various diffusion indexes
that Mr. Hickman watched had been above 50 per cent for many
months, with the National Association of Purchasing Agents'
diffusicn index showing an increase in November for the fifth
consecutive month.
(4)
With reference to the balance of payments,
Mr. Hickman commented that outpayments from Government programs
and private capital flows obviously were still larger than net
earnings on current account.
Despite much discussion of the
balance of payments problem, no one appeared to be able to
foresee what the future held in store.
-52-
12/15/64
(5)
As he had indicated earlier, Mr. Hickman felt
recent changes in the money supply and liquidity had been
appropriate and had been roughly in line with what he
considered to be sustainable trends in measures of real
economic activity.
(6)
From the impressions he had gained on the daily
telephone conference call during the past two weeks, the money
and capital markets appeared to be stable but nervous.
(7)
In light of these considerations Mr. Hickman would
continue for the present to pay primary attention to market tone,
with secondary emphasis on bank reserves and the money supply.
Mr. Mitchell remarked that in considering the real
alternatives for monetary policy today the Committee had to
recognize that the System had made a trade-off between the
balance of payments constraint and domestic needs when the
discount rate was raised, and in effect had announced this to
the world.
At the same time, the System had said in effect
that it was going to minister to the needs of the domestic
economy by continuing to make funds available.
Subsequently,
these statements were reinforced by the operations of the Desk.
The market had accepted the feasibility of the kind of trade-off
that had been announced, and Mr. Mitchell did not think it was
realistic at present for the Committee to consider a departure
12/15/64
-53
from the described policy.
Since the System had convinced the
market that such a policy could be implemented, the only
questions confronting the Committee today were how to continue
to implement
it, and how to avoid arousing expectations that it
would not be possible to do so.
Mr. Mitchell said he would accept the Manager's judgment
that it would not be feasible now to follow a free reserve target.
He noted that Mr. Partee had recommended an instruction in terms
of desired market conditions, but he had not offered any specific
language for such an instruction.
Mr. Mitchell would accept a
bill rate target, but would prefer a range of 3.65-3.85 per cent,
to give rates a chance to flex a little in accordance with
seasonal changes.
All things considered, Mr. Mitchell did not think the
short-run posture of monetary policy could be very different
from this at the present time.
However, it was necessary to
recogniz, that monetary policy operated with a lag, and the
Committee also should be thinking in terms of the longer run; in
particular, it should be taking account of the possibility that
the pace of activity might slacken in the coming year.
Perhaps
the most the Committee could do was to keep expectations out of
unrealistic channels.
Expectations on the business outlook
ranged from boom to a leveling off or decline in activity, and
12/15/64
-54
it was desirable to avoid prejudicing and one of these views by
a prejudged monetary policy.
Mr. Partee had raised a question
about the sustainability of the present flat yield curve, and
had concluced it was reasonable to expect from market forces
that long-term rates would remain at about their present levels.
The Committee ought to avoid discouraging such an expectation,
based as it was on an analysis of market forces.
Mr. Mitchell said that, by and large, he thought the
staff's questions and answers made up a good document.
He agreed
in general with the analyses presented and he was especially
impressed with those on financial subjects.
He was unhappy,
however, with the staff response to question 2, on employment.
The analysis seemed to him to be quite unrealistic, and he was
sympathetic with Mr. Treiber's views on this subject.
He
disagreed with Mr. Hickman's criticism of the reply to the first
question; it seemed to him that if monetary policy created an
environment conducive to rising investment, which he thought it
should do, it could not prevent people from hoarding steel or
from increasing their inventories of autos.
As he read the
paragraph Mr. Hickman had criticized, it implied that the special
factors leading to accumulation of steel and autos had not spread
to the rest of the economy.
In his judgment such accumulation
should not be choked off by monetary policy; rather, it should
be accommodated, unless it became pervasive.
12/15/64
-55
Mr. Hickman said that Mr. Mitchell evidently had
misunderstood his comment, because he had not meant to suggest
that the current inventory accumulations should be choked off.
As he had indicated, he did not think that the Committee should
attempt to stimulate aggregate demand further, but at the same
time he would consider no
untenable.
policy.
growth in money and credit to be
In short, he preferred to continue the present
His objection to the paragraph in question was that it
implied that, apart from temporary factors, the prospects were
for continued economic growth.
In his judgment the more likely
development w.s a letdown in activity after the inventory
build-up had run its course.
Mr. Brill commented that the staff had had a relatively
short time horizon in mind when it prepared the paragraph in
question.
It was the staff's view that, aside from the temporary
inventory accumulation, underlying fo::ces suggested continued
growth in the short run.
The staff h.
not intended to imply a
judgment that growth would continue through the balance of 1965.
Mr. Swan commented that in his view the most important
question with regard to the current steel and auto inventory
accumulations was whether there would be some reaction on the
rest of the economy when they came to an end.
Mr. Mitchell
agreed, and Mr. Hickman noted that such a development might well
12/15/64
-56
occur at a time when the Federal budget was shifting to a
surplus position, thus compounding the problem.
Mr. Shepardson said that he thought the staff's
responses to the questions on the whole were good, and in
general he agreed with them.
It was important, in his judgment,
to distinguish between two possible reasons for the inventory
developments that had just been discussed.
If steel inventories
were being accumulated as a hedge against anticipated price
rises, that definitely would be something to be deplored, and
the Committee should do what it could to discourage it.
But as
he understood the situation, larger steel stocks were desired
primarily as a hedge against a possible stoppage of supply.
He
doubted if the Committee could do anything to stop such a
development despite the fact that it might result in a letdown
later unless there was a long strike in the steel industry,
which would be equally unfortunate.
Mr. Shepardson remarked that he had some questions about
the staff's analysis on employment, particularly in connection
with the list of alternatives given.
He would have put more
stress on the need for efforts toward structural improvement,
at the same time recognizing that monetary policy could not do
much in this respect.
He also questioned the implication that
growth in the labor force would be adequate to meet the demand
Cite this document
Federal Reserve (1964, December 14). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19641215
@misc{wtfs_fomc_minutes_19641215,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19641215},
note = {Retrieved via When the Fed Speaks corpus}
}