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, D. C., on Tuesday, March 23, 1965, at 9:30 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Balderston
Mr. Bryan
Mr. Daane
Mr. Ellis
Mr. Mitchell
Mr. Robertson
Mr. Scanlon
Mr. Shepardson
Mr. Clay, Alternate for President of Minneapolis
Bank
Messrs. Bopp, Hickman, and Irons, Alternate
Members of the Federal Open Market Committee
Messrs. Wayne, Shuford, and Swan, Presidents of
the Federal Reserve Banks of Richmond,
St. Louis, and San Francisco, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Holland, and Koch,
Associate Economists
Mr. Stone, Manger, System Open Market Account
Mr. Coombs, Special Manager, System Open
Market Account 1/
Mr. Cardon, Legislative Counsel, Board of
Governors
Messrs. Partee and Williams, Advisers, Division
of Research and Statistics, Board of
Governors
1/
Left the meeting at the point indicated.
3/23/65
Mr. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Roberts, Secretary, Office of the Secretary,
Board of Governors
Mr. Strothman, First Vice President of the
Federal Reserve Bank of Minneapolis
Mr. Patterson, First Vice President and
General Counsel, Federal Reserve Bank of
Atlanta
Messrs. Holmes, Mann, Ratchford, Jones, Tow,
and Green, Vice Presidents of the Federal
Reserve Banks of New York, Cleveland,
Richmond, St. Louis, Kansas City, and
Dallas, respectively
Mr. Lynn, Director of Research, Federal Reserve
Bank of San Francisco
Mr. Sternlight, Assistant Vice President,
Federal Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Mr. Arena, Economist, Federal Reserve Bank of
Boston
Mr. Rothwell, Economist, Federal Reserve Bank
of Philadelphia
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on March 2, 1965, 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 March 2 through 17, 1965, and a supplemental report for
-3
3/23/65
March 18 through March 22, 1965.
Copies of these reports have been
placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs stated that
the gold stock would remain unchanged this week at $14.6 billion,
after reductions in earlier weeks of the year totaling $825 million.
So far these reductions had not had any serious effects on the dollar,
perhaps partly because the French takings had been so well advertised
that they had been discounted in advance.
However, if U.S. losses
should continue over the next several months, with new reductions
every two or three weeks, there would be some rather serious effects.
During the current month of March, it was expected that gold sales
would reach a total of approximately $360 million and that the
Stabilization Fund would end the month with a gold balance of
roughly $65 million.
In April, scheduled gold sales amounted to
$135 million and probably would be further increased by other pro
spective sales to a total of at least $235 million.
In discussions at Basle at the time of the March Bank for
International Settlements meeting, Mr. Coombs said, the other central
banks concerned had accepted the U.S. proposal that the Gold Pool
should continue to intervene in the London gold market, even if the
Pool's resources of $270 million should become exhausted, with the
cost of intervention being shared on the same pro rata basis as
3/23/65
before.
-4
That decision would be reviewed at the time of the April
meeting and he was hopeful that the new arrangement would be con
tinued on a month-to-month basis.
As of today, $180 million of
the Pool's resources had been used up.
Meanwhile, buying pressure
on the London gold market had subsided, owing mainly, he thought,
to a series of foreign central bank statements disavowing any
support for the French gold program.
The gold market, however,
remained a highly vulnerable point in the defensive arrangements
and further sizable reductions in the U.S. gold stock would be
likely to stir up renewed speculation in the London market.
There
might be some possibility of acquiring from the Bank of England
$100-$150 million in gold to cushion temporarily the prospective
losses during April, but the basic solution, of course, lay in
sharply curtailing the current flow of dollars to the continental
European countries.
On the exchange markets, Mr. Coombs continued, the British
report earlier in March of an improved trade performance during
February temporarily strengthened sterling.1/
The
Bank of England's drawings on the swap line with the System, which
1/ A sentence has been deleted at this point for one of the
reasons cited in the preface. The sentence reported that sterling
had subsequently shown a weakening trend for specified reasons.
3/23/65
-5
had been reduced to $105 million at the end of February, had now
risen once more to $325 million.
Mr. Coombs thought that the pressures on sterling were
likely to continue until announcement of the April budget, which
might very well decide the future of sterling.
As of the end of
February, the Bank of England had drawn $700.million on the short
term credit facilities provided by central banks, and it was
possible that by the time the budget was announced their drawings
would have risen to $1 billion or more.
The implication was that
most if not all of the British drawing on the International
Monetary Fund would have to be used to pay off the central bank
credits.
Even if the British budget did prove to be a strongly
corrective force, they still would have a rather slender reserve
position, having exhausted much of the possibilities for drawing
on the IMF.
Mr. Coombs remarked that repatriation of U.S. short-term
investments in Canada had also been a major factor in the decline
of the Canadian dollar rate from close to its upper limits a month
or so ago to a level in recent days slightly below par.
Similar
pressure was also being exerted on the Japanese yen as customary
sources of commercial financing in New York and the Euro-dollar
market were becoming less readily available and more expensive.
3/23/65
During the past week or so, Mr. Coombs said, there had been
some signs of minor improvement of the dollar against continental
European currencies, and the dollar had strengthened further this
morning.
So far, however, there had been no sizable outflows of
funds from the continental financial centers and it had not been
possible to make any further progress in paying off the System's
swap drawings, which now totaled $515 million.
Mr. Coombs observed that the U.S. balance of payments
program seemed to be producing the pattern that many had expected
of pressure on the Canadian dollar, sterling, and the Japanese yen,
mainly owing to the curtailment of bank lending and repatriation
of short-term investments of industrial corporations.
In those
two areas, he expected the voluntary restraint program to be fairly
effective and to bring about a major improvement in the U.S. balance
of payments statistical position.
It remained uncertain, however,
whether the necessary cutbacks in corporate direct investment on
the continent of Europe would be achieved.
There was considerable
risk that corporations might try to satisfy their obligations under
the voluntary restraint program by pulling back sizable amounts of
short-term investments abroad, while maintaining intact much of
their direct investment programs on the European continent.
If
that pattern should materialize, there might be a spectacular
improvement in the U.S. balance of payments figures, heavy pressure
-7
3/23/65
on the Canadian dollar, pound sterling, and Japanese yen, and
continuing losses of gold to the continent.
During the month of
March France might take in as much as $100 million, which would
be fully converted into gold in April.
Mr. Coombs was inclined to think that further efforts
should be made to restrain direct investment in the Common Market
and other continental European countries.
The European central
banks also could help to restore payments equilibrium without
exposing themselves to further inflationary pressures at home by
encouraging, through the use of credit policy and other measures,
outflows of short- and intermediate-term credit into the inter
national capital markets.
The Bank of Italy already was doing
something along that line, and it was to be hoped that others
would also.
Unless such steps were taken, there was a distinct
possibility that the curtailment in the flow of U.S. credit would
produce a serious squeeze in the international credit markets,
particularly in the Euro-dollar market.
In response to a question by Mr. Mitchell, Mr. Coombs said
that the countries most likely to suffer from the credit squeeze
he had mentioned were Britain, Canada, Japan, and a number of the
less developed nations.
The position of some large European indus
trial concerns also might become exposed; unless the central banks
3/23/65
-8
moved in quickly to supply additional credit as U.S. credit was
pulled out, there could be a number of bankruptcies.
Mr. Mitchell then noted that there had been reports of
weakness in some Japanese industrial concerns, and of several
recent bankruptcies in that country.
Mr. Coombs commented that
since the war many Japanese concerns had been operating on thin
equities and were heavily dependent on financing from the United
States.
If there was a serious contraction in the flow of credit
to Japan, it was likely that the Japanese would find themselves
under severe pressure.
Mr. Daane asked whether Europeans were not likely to fill
the gap left by a contraction of U.S. credit abroad, in part by
shifting deposits from the United States to foreign banks or
foreign branches of U.S. banks or, possibly, even to the Euro
dollar market in general.
Mr. Coombs replied that there was some
likelihood of that occurring, but he considered it less desirable
than the alternative in which European central banks made redundant
dollar holdings available to their nationals.
It seemed to him
that the present situation offered those central banks an excellent
opportunity to help themselves and the entire world without
suffering any inflationary consequences.
Mr. Daane said he agreed that American corporations were
more likely to pull back liquid funds than to reduce their direct
-9
3/23/65
investments abroad.
He asked, however, whether it was possible
that they might turn more to local sources for financing their
foreign investments, perhaps with some official encouragement.
That would not only help the U.S. balance of payments but might
also eliminate the hard feelings that resulted when an American
corporation obtained funds in the U.S. for foreign investment at
a rate lower than that available to their foreign competitors.
Mr. Coombs replied that the U.S. payments balance would,
of course, be helped by such a development, but he doubted that
any official encouragement was necessary; European commercial banks
now were being swamped by credit applications of subsidiaries of
U.S. companies.
Swiss banks might be able to expand their short
term loans to American firms, but they were not in a position to
provide medium-term credits.
More generally, European commercial
banks were subject to fairly severe restrictions at the moment and
would not be able to lend much to American firms unless the central
banks eased their credit policies.
Mr. Mitchell asked whether Mr. Coombs would describe the
mechanics of the operation under which European central banks could
replace dollars repatriated by Americans.
Mr. Coombs replied that
in one possible sequence--which might be followed, for example, in
Germany--commercial bank reserve requirements would first be lowered.
3/23/65
-10
That would provide the commercial banks with additional mark
availabilities with which they could undertake more financing of
U.S. subsidiaries in Germany or could channel a greater volume of
funds into the international credit markets.
In the process a
demand for dollars from European central banks would be generated,
enabling the central banks to reduce their dollar holdings and thus
kill two birds with one stone.
There would be no effect on the
U.S. balance of payments statistics, but there would be a desirable
reduction in the overhang of surplus dollars at foreign central
banks.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
March 2 through March 22, 1965, were
approved, ratified, and confirmed.
Mr. Coombs noted that the Committee had approved a revision
of the guidelines for foreign currency operations at its previous
meeting on the understanding that it might consider further re
visions at the present meeting to deal with a point raised by
Mr. Ellis.
Certain revisions were proposed in Mr. Broida's
memorandum of March 16, 1965, which he understood were considered
by Mr. Ellis to meet the problem satisfactorily.
(Note:
A copy
of the memorandum referred to has been placed in the Committee's
files.)
The proposed revisions affected the first and second
-11
3/23/65
paragraphs of Section 4 of the guidelines, and in both cases
involved replacing the words "may prove desirable" with the words
"may be undertaken."
The proposed new words had a more positive
connotation, and Mr. Coombs felt it would be helpful if the
Committee would approve the suggested revisions.
Mr. Robertson said that he had no objection to the proposed
revisions as such.
He thought, however, that the Committee should
refrain from introducing increasingly liberal language into the
guidelines that might serve to limit the extent to which actions
taken under them were discussed with the Committee.
It was desirable
for the Committee to follow operations quite closely and to stay
fully informed on them.
Mr. Coombs commented that the main limitations on foreign
currency operations specified in the present authorizations and
directives related to purposes and dcllar amounts; otherwise, the
authorities given to the Special Manager were fairly broad.
The
reason was that the Account Management often was confronted with
situations that emerged suddenly and had to be dealt with immediately.
Mr. Robertson said he was aware of that problem, but would
suggest that the Committee and staff lean over backward to discuss
operations before rather than after the fact whenever possible.
Mr. Coombs replied that he would endeavor to do so.
-12-
3/23/65
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
Section 4 of the guidelines for System
foreign currency operations was amended
to read as follows:
4.
Transactions in Forward Exchange
Transactions in forward exchange, either outright or
in conjunction with spot transactions, may be undertaken:
(1)
When forward premiums or discounts are incon
sistent with interest rate differentials and
are giving rise to disequilibrating movements
of short-term funds;
(2)
When it is deemed appropriate to supplement
existing market supplies of forward cover,
as a means of encouraging the retention or
accumulation of dollar holdings by private
foreign holders;
(3)
To allow greater flexibility in covering
System commitments, including those under
swap arrangements;
(4)
To facilitate the use of holdings of one
currency for the settlement of commitments
denominated in other currencies.
Forward sales of authorized currencies to the U.S.
Stabilization Fund out of existing System holdings or in
conjunction with spot purchases of such currencies also
may be undertaken in order to allow greater flexibility
in covering commitments of the U.S. Treasury.
In all other cases, proposals of the Special Manager
to initiate forward operations shall be submitted to the
Committee for advance approval.
Mr. Coombs then noted that during April certain Bank of
England drawings on its swap line with the System, in the amount of
$80 million, would mature for the first time, and if, as seemed
3/23/65
-13
quite possible, they should wish to renew, he would recommend
approval of such renewals.
Renewals by the Bank of England
of its swap drawings on the System were
noted without objection.
Mr. Coombs noted that Federal Reserve drawings of $60
million on the Swiss National Bank, $50 million on the Bank of
Italy, and $5 million on the National Bank of Belgium also would
mature for the first time in April.
In the absence of a reversal
in the flow of funds enabling the System to pay off these swap
drawings, he recommended their renewal for a second three-month
term.
Renewals of the System's drawings
on the Swiss National Bank, the Bank of
Italy, and the National Bank of Belgium
were noted without objection.
Mr. Coombs reported that a $5 million drawing on the
Netherlands Bank would mature for the second time on April 20.
He was hopeful that it would be possible to acquire enough
guilders to repay this drawing, but if it was not possible he
would recommend a second renewal for a further period of three
months.
He noted that the Committee had authorized second renewals
of a number of drawings at the previous meeting.
The guidelines
specified that drawings should be fully liquidated within 12 months,
3/23/65
-14
and in general actual performance had been better than that; the
bulk of the System's drawings had been liquidated within six months.
Renewal of the drawing on the
Netherlands Bank was noted without
objection.
Mr. Coombs then observed that the Committee had received
his memorandum dated March 18, 1965, recommending an increase of
$100 million each in the swap lines with the Banks of Japan and
Italy, and that later it had been advised that he was recommending
an increase of $200 million, rather than $100 million, in the Bank
of Italy swap line.
(Note:
Copies of the documents to which
Mr. Coombs referred have been placed in the files of the Committee.)
Toward the end of last week, after preparing his memorandum of
March 18, he had received a suggestion from Governor Carli of the
Bank of Italy that the swap line be increased by $200 million.
Earlier, when a $100 million increase was under discussion, the
Bank of Italy had apparently anticipated that a U.S. Treasury
credit line of $100 million, extended to that Bank in March 1964,
would be renewed at the end of its one-year maturity.
However,
the Treasury was reluctant to renew that credit line--which, in
cidentally, had never been used--because doing so would lock up
an unduly high proportion of the limited resources of the
Stabilization Fund.
The Bank of Italy was hopeful that the System
could, in effect, take it up under its facilities; hence the
3/23/65
-15
suggestion for an increase of $200 million rather than $100 million
in the swap with the System.
As indicated in his memorandum, Mr. Coombs continued,
Governor Carli was one of the staunchest supporters of the U.S.
approach of relying upon mutual credit facilities to economize on
gold settlements.
He was inclined to concur in Governor Carli's
appraisal of the size of the credit facility needed to help cushion
the swings in the Italian balance of payments.
More generally,
conclusior of such a substantial increase in the swap line with
the Bank of Italy would provide further evidence that even the
Common Market partners of France were pursuing an approach dia
metrically opposed to the French call for a return to the gold
standard.
That, in Mr. Coombs' judgment, was an extremely impor
tant consideration.
Moreover, such an increase in the swap line
with the Bank of Italy might encourage Germany to be liberal in
extending a direct swap line to the Bank of England sometime in
May or June.
For Germany to do so would represent an important
breakthrough; it might mark the beginning of the development of
third-country swap arrangements similar to those of the System,
and to some extent such a development would take pressure off
the dollar in its role as an international reserve currency.
The
debate between the American and French approaches was in an active
stage at the moment, and although the $200 million figure was
3/23/65
-16
higher than Mr. Coombs originally had had in mind, on balance it
would give added weight to the U.S. side in the debate.
Mr. Balderston asked what arrangements would be made to
inform other countries with whom the System had swap arrangements
of any action that might be taken with regard to the swap line
with the Bank of Italy.
He recalled that in June 1964, after a
package of assistance to Italy had been developed, there had been
some feeling that other nations had not been given adequate advance
notice.
Mr. Coombs replied that normally other central banks were
advised by Telex the night before a change in a swap arrangement
was publicly announced.
It would be possible, if the action on
the Italian swap line was approved today, that its announcement
could be delayed until after the Basle meeting in April, and that
other central banks could be informed at that meeting.
not anticipate any disagreement with the action.
He would
Another alterna
tive would be to advise the other central banks by Telex several
days before public announcement.
Mr. Daane said that the circumstances surrounding the
action proposed now were quite different, in his judgment, from
those of last June.
He doubted whether other countries would con
sider an increase in the Italian swap line to be a sensitive
matter.
3/23/65
-17
Mr. Coombs agreed with this view.
However, he thought
Mr. Balderston had raised a good point regarding the desirability
of advance notice.
Perhaps such notice should be given one, two,
or three days, rather than just a few hours, in advance.
He felt
that the central banks could be relied on not to disclose the action
prematurely.
Mr. Scanlon mentioned that it had been pointed out in
earlier discussions that the sizes of the various swap lines should
have some reasonable relationship with one another.
He asked how
the proposed increase in the Italian line to $450 million would
affect the rest of the swap arrangements.
Mr. Coombs replied that the action recommended would make
the Belgian and Dutch lines look relatively small, but perhaps that
would be desirable.
The System's swap line with the German Federal
Bank was in the amount of $250 million, but if that Bank made a
direct swap with the Bank of England of, say, $250 million also,
the two could be considered additive.
There would be important
advantages to a British-German arrangement; for example, if there
was a flow of funds from London to Frankfurt, it would be more
convenient for the Germans to extend credit to the British than
for the U.S. simultaneously to borrow from the Germans and lend
to the British.
3/23/65
-18
Mr. Daane said he agreed with Mr. Coombs that the Italians
were strong advocates of the U.S. approach to the role of credit
facilities in the evolution of the international monetary system.
He thought the proposed increase in
the swap line would be useful
in fortifying their attitude.
In response to Mr. Mitchell's request for information on
present and prospective drawings under the System's swap facility
with the Bank of Italy, Mr. Coombs said that the System had a
drawing of $100 million now outstanding.
It would not be surprising
if the Bank of Italy took in $300-$400 million during the May
September tourist season.
reverse;
The situation then would be likely to
there seemed to be an inherent instability in
the Italian
balance of payments, with large surpluses tending to be followed
by swings in the other direction.
From time to time the swap line
would be likely to be drawn upon by one partner or the other,
it was hard to predict the amounts.
but
The U.S. was apt to be making
drawings initially.
Mr. Robertson said that he had no adverse reaction to
increasing the swap line by $100 million to $350 million, but he
questioned the advisability of raising it to $450 million now.
It seemed to him that $350 million would be sufficient to take care
of this country's needs for the foreseeable future.
He gathered
from what had been said that the main reason for going to $450
million was political, and he thought it was a mistake to attempt
-19
3/23/65
to use the swap lines for political purposes.
Moreover, to raise
the Italian line to $450 million created a danger of imbalance in
the relative sizes of the arrangements with various countries, and
might produce more problems than it solved.
Mr. Hayes said he had understood that there was a good
chance that the U.S. might want to draw as much as $450 million
during the Italian tourist season.
Mr. Robertson replied that the
line could be increased when the need became evident.
Mr. Coombs
observed that the need might present itself rather quickly.
Chairman Martin said that, as he understood the matter,
Governor Carli favored a $200 million increase primarily for economic
rather than political reasons.
Mr. Coombs agreed.
He added that the main political aspect
to the question involved the pressure on the Bank of Italy from
parties on both the right and left to buy gold with its dollar
holdings.
tries.
There were similar pressures in a number of other coun
The swap network gave central banks under such pressures
an alternative to gold purchases that carried an exchange guarantee
in terms of their own currencies.
Mr. Robertson said that he would expect the factor of
prestige to lead to requests for increases in other swap lines if
the Italian line was raised to $450 million.
Mr. Coombs replied
that in his judgment questions of prestige had not been important
-20
3/23/65
in discussions of the sizes of swap lines.
In the past, changes
in the swap lines had been in anticipation of swings in the flow
of payments.
There was a possibility that the Bank of Canada
might suggest a higher figure, but he doubted that other central
banks in the network would.
Mr. Daane said he thought the $200 million increase
clearly was justified on the basis of the general concepts under
lying the swap network.
Moreover, he did not think political
considerations should be brushed aside; it was helpful to have
one of the leading Common Market countries on this country's side
in the current debate on international monetary arrangements.
While
he would not. favor the action solely on that ground, he thought it
was an important supplementary consideration.
Mr. Hayes felt that the $200 million increase definitely
was a useful step.
The fact that Governor Carli had personally
suggested it should carry a good deal of weight, he said.
Mr. Robertson commented that while he suspected that the
proposed $200 million increase was not a desirable move, judgments
obviously could differ on the question.
Accordingly, he would not
dissent from the action.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, an
increase of $200 million in the swap
arrangement with the Bank of Italy, to
a total of $450 million, as recommended
by Mr. Coombs, was approved.
3/23/65
-21Mr. Mitchell referred to Mr. Coombs' recommendation that
the swap line with the Bank of Japan be increased by $100 million,
and asked whether drawings by the Japanese were likely to mount
rapidly in the coming period.
Mr. Coombs replied that that was a real possibility.
Japan
represented an important element in the international financial
structure, and their prospects were worrisome.
Indeed, if their
customary sources of financing dried up, it might even prove neces
sary during the coming year to develop a major international
package of credit assistance for them, as was done for Italy in
1964.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, an
increase of $100 million in the swap
arrangement with the Bank of Japan, to
a total of $250 million, as recommended
by Mr. Coombs, was approved.
Mr. Coombs noted that it was the Committee's practice to
establish the dollar limit on the aggregate amount of foreign
currencies that might be held under reciprocal currency arrange
ments at an amount equal to the sum of all individual swap
arrangements.
In view of the actions just taken to increase the
size of the swap lines with the Banks of Italy and Japan, he
recommended a revision of the continuing authority directive for
foreign currency operations to increase this limit from $2.35 bil
lion to $2.65 billion.
-22-
3/23/65
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
first paragraph of the continuing authority
directive for System foreign currency
operations was amended to read as follows:
The Federal Reserve Bank of New York is authorized
and directed to purchase and sell through spot trans
actions any or all of the following currencies in
accordance with the Guidelines on System Foreign
Currency Operations as amended March 23, 1965; provided
that the aggregate amount of foreign currencies held
under reciprocal currency arrangements shall not
exceed $2.65 billion equivalent at any one time, and
provided further that the aggregate amount of foreign
currencies held as a result of outright purchases
shall not exceed $150 million equivalent at any one
time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
Chairman Martin then noted that a memorandum by Mr. Nettles
of the Board's staff dated March 19, 1965, and entitled "Comments
on reciprocal currency agreements with Mexico and Venezuela" had
been distributed to the Committee for preliminary discussion.
(Note:
files.)
A copy of this memorandum has been placed in the Committee's
He asked whether Mr. Coombs would like to comment.
-23
3/23/65
Mr. Coombs said that he was not inclined at the moment to
make a specific recommendation regarding swap arrangements with
Mexico and Venezuela.
A similar question had been raised about
a year ago, and he had thought then that such action would be pre
mature.
Before the Committee made a decision now it might be useful
to hold further informal discussions with those countries and
probably also with one or two European central banks.
In general, Mr. Coombs said, the case for arranging a swap
with Mexico in the amount of, say, $50 million was fairly strong.
The Mexican economy was tied in closely with that of the U.S.
Their exchange system was wide open; at the time of the Bay of
Pigs invasion, for example, Mexico lost $300 million in short-term
capital outflows in a few months' time.
Some cushioning by means
of a swap line could have great value to them in stabilizing their
reserve position; much the same considerations had led the System
to negotiate a swap line with Canada.
Mexico also was an
Article VIII country under the IMF Articles of Agreement.
Venezuela's economic ties with the U.S. were not as strong,
Mr. Coombs said, and their capital flows were not as volatile.
In
addition, Venezuela was not yet an Article VIII country, although
it probably could attain that status fairly easily.
In due course, Mr. Coombs concluded, it probably would be
useful to incorporate into the network one or two such countries
-24
3/23/65
who were managing their affairs well, but he was not sure that now
was the appropriate time.
That time might be close for Mexico, but
he was less certain about Venezuela.
Chairman Martin asked how Mr. Coombs would view a swap
arrangement with Peru.
Mr. Coombs replied that he was unable to
comment because he had not examined the question.
Mr. Bryan expressed doubt that it would be desirable to
make a swap arrangement with Peru at the present time.
More
generally, he felt that the System might be getting into a trouble
some area by considering further extensions of the swap network.
He did not know how the difficulties could be avoided since
questions of national pride were so deeply involved.
He suspected
that eventually the System would have swap lines with Mexico and
Venezuela if those countries wanted them.
Mr. Mitchell said that he had discussed the Venezuelan
situation on two or three occasions with Governor Machado of the
central bank of that country, and could add an observation to tne
points covered in Mr. Nettles' memorandum.
Venezuela had not
bought gold for five years, but there was a possibility that they
would decide to do so soon.
They were this country's sixth largest
trading partner, and were selling about twice as much to the U.S.
as they were buying from it.
Their reserves were about equally
divided at present between gold and dollars, and they were getting
3/23/65
-25
restive about that ratio.
Given the size of their dollar holdings,
it would not be unusual for them to decide to buy some gold, and
if they did so Mexico might do the same; one could not say how far
the trend might go.
Governor Machado felt that some sort of an
arrangement would strengthen their credit position and also would
strengthen their ability to resist domestic demands that they
increase their gold ratio.
Thus, a swap arrangement might be
useful from the U.S. standpoint, and one probably would be desirable
at some point although not necessarily immediately.
Mexico ranked
fifth among U.S. trading partners, and in view of Mexico's location
and Venezuela's natural resources it was reasonable to expect that
U.S. relations with both countries would continue to grow.
Mr. Wayne thought it would be helpful for the Committee to
have memoranda providing information on current conditions within
the two countries before attempting to reach a decision on the
matter.
Mr. Robertson remarked that in his judgment the proposal
involved utilizing swap arrangements for a purpose that was foreign
to those originally envisaged for them.
The System would be moving
into the political field rather than limiting itself to efforts to
protect the international financial positions of the U.S. and the
other parties to the swaps.
If arrangements were made with Mexico
and Venezuela, no doubt other Latin American countries would request
-26
3/23/65
similar arrangements.
It would be highly premature, he thought,
to make swap arrangements with the two countries now.
Mr. Coombs noted that one basic purpose for the swap
network was to protect the U.S. gold stock.
Venezuela held
$500 million in dollars, and could convert a sizable proportion
of that sum to gold.
Mexico had been buying gold from Canada.
From the purely financial point of view--the defense of the U.S.
gold stock--he thought there were good arguments for swap arrange
ments with the two countries.
Chairman Martin said he thought Mr. Coombs' point was
valid.
But it seemed to him (Chairman Martin) that, as
Mr. Blessing of the German Federal Bank recently had suggested,
it was necessary to have some understanding among nations regarding
the role of gold.
It was not possible fcr all foreign countries
holding dollars to convert their holdings to gold, and he suspected
that the swap network now was being used about as far as possible
to supplement the gold exchange standard.
That was one of the
major, overall problems that had to be dealt with.
Chairman Martin then said that the matter of possible
swaps with Mexico and Venezuela had to be considered carefully.
He agreed with Mr. Wayne's suggestion that the Committee should
have memoranda on Venezuela and Mexico, and, he would add, on Peru.
Also, he noted that Mr. Furth had prepared a memorandum on Mexico
-27-
3/23/65
and Venezuela which should be distributed.
After receiving these
documents the Committee could discuss the question further at a
later meeting.
There were no objections to the Chairman's suggestions.
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. Govern
ment securities and bankers' acceptances for the period March 2
through March 17, 1965, and a supplemental report for March 18
through 22, 1965.
In supplementation of the written reports, Mr. Stone
commented as follows:
The past three weeks provided a classic example of
the way in which money market variables that are supposed
to move together--and that generally do move together
over the long run--can behave perversely in the short run.
Against the background of the seasonally heavy liquidity
needs associated with the dividend and tax dates, rates
on most: money market instruments moved upward. Major
banks were paying 4.30 per cent on 90-day CDs; finance
company paper moved up in rate after having declined
briefly at the outset of the period; some trading in
Federal funds occurred at 4-1/8 per cent on nearly every
day, and on six days the heaviest volume of trading was
at that rate; dealer loan rates posted by New York banks
moved up to as high as 4-3/4 per cent; and dealer port
folios of acceptances rose to over $325 million to the
accompaniment of developing discussion of an upward
adjustment of that rate. While all this was going on,
however, Treasury bill rates moved downward.
I confess that I have no full explanation of the
contrasting behavior of the bill rate on the one hand
and other money market rates on the other. I suspect,
3/23/65
-28
however, that a substantial repatriation of short-term
funds from abroad is underway--that a part of the
aggregate pool of corporate liquidity is being redis
tributed toward money market assets in this country and
away from such assets abroad. While these funds may be
spread among the whole range of our market instruments
eventually, corporate treasurers seem initially to be
concentrating them in the bill market until further
decisions are made. And while these return flows in many
cases require liquidation of dollar assets by foreign
holders, the effects of such liquidation may not be, and
probably are not, concentrated in the bill area, but rather
are iffused and dispersed among many market instruments.
And indeed, in some cases there may be no immediate foreign
liquidation of a money market instrument.
The conduct of open market operations was complicated
by the unusual behavior of short rates. If we had supplied
more reserves to ease the pressure on other rates, we would
very likely have triggered further declines in the bill
rate. And if we had supplied fewer reserves, or had ab
sorbed funds, as a means of dealing with the bill rate,
we would have aggravated the situation with regard to
other rates. We would, moreover, have had to reduce
marginal reserve availability so far as to give a false
signal to the market that the Committee had adopted a
firmer policy at its last meeting. In these circumstances
the Desk followed a middle course, trying to insure, on the
one hand, that the market mechanism handled smoothly and
well the heavy seasonal demands that converged upon it;
and attempting to avoid, on the other hand, a situation in
which the bill rate moved so low as to dilute the System's
contribution to the balance of payments program.
As for the outlook for bill rates, it is particularly
difficult to speak with any confidence right now. I doubt
that the bill rate can go much lower if reserve and bor
rowing conditions remain as they have been recently; at the
same time, if it is true that an important reflux of
corporate funds is underway, the "normal" relationships
among market variables may continue in suspension for a
time, and the upward pull to which bill rates should be
subject will not be fully exerted. Perhaps, therefore,
the best guess that can be made is that, within the frame
work of present policy, the bill rate may stay about where
it is or creep slightly upward.
3/23/65
-29
Mr. Stone added that the Committee might be interested in
the results of an informal survey that had been made by a Canadian
money market dealer interested in placing U.S. funds in Canada.
The dealer had contacted treasurers of 63 major U.S. corporations
and inquired about their plans for dollar holdings in Canada.
Forty-five of the treasurers reported that they planned to place
no additional funds in Canada in the immediate future, and for the
time being to repatriate funds as their Canadian investments matured.
The remaining 18 treasurers indicated that they would continue to
place funds in Canada but at a substantially slower rate than
earlier.
Mr. Scanlon asked if Mr. Stone would expand on his reasons
for believing that a continuation of current policy would lead to
no change or only a slight rise in bill rates.
Mr. Stone replied
that that expectation was based on the assumption that some substan
tial reflow of funds from abroad would continue.
He suspected such
a reflow was occurring not only from the reported actions of
corporate treasurers but also because it was the only obvious
explanation of the recent divergent behavior of rates on Treasury
bills and on other short-term instruments.
However, he did not
think that a continued reflow would force bill rates down much
further, primarily because dealers were not willing to acquire
additional bills yielding as little as 3.92 per cent when dealer
3/23/65
-30
lending rates at New York banks were ranging as high as 4-3/4 per
cent.
The high financing rates had not had much effect thus far
because the demands for bills had been so great that dealer inven
tories of bills were relatively low.
In response to questions by Messrs. Swan and Wayne,
Mr. Stone said that corporate treasurers were investing repatriated
funds in Treasury bills--including those with maturities of less
than 90 days--temporarily, until further decisions could be made.
They were under instructions from their chief executive officers,
who had been called to Washington, to bring funds back to this
country.
The bill market was the obvious place to put these funds
for the time being; it was much broader than, say, the CD market,
and large investments could be made quickly.
He would expect that
in due course funds would be moved out of bills and into other
money market instruments in many cases.
Mr. Daane said he was prepared to admit the impossibility
of projecting relationships among the different variables--which
was one reason he opposed proposals for using rigid numerical tar
gets in the directive--but he would still ask whether Mr. Stone
thought a further reduction in the marginal reserve figures would
leave the present discount rate in an untenable position, given
the reflow of funds from abroad.
To put his question another way,
did the reflow offer the Committee some leeway for maneuver, if it
wanted to take advantage of it?
3/23/65
-31
Mr. Stone replied that he doubted whether any serious
question would be raised about the discount rate unless the 3-month
bill rate got up to 4-1/8 per cent or higher.
In his judgment, the
Committee would have some room for maneuver if the reflow continued.
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 March 2 through March 22,
1965, were approved, ratified, and confirmed.
Mr. Stone then noted that a question had been raised at the
preceding meeting of the Committee with respect to the volume of
third-country acceptances in the New York Bank's portfolio of bankers'
acceptances.
In a memorandum to the Committee dated March 18, 1965,
he had shown a breakdown of the Bank's holdings as of the end of
December of 1963 and 1964, February 19, 1965, and March 12, 1965.
(Note:
A copy of this memorandum has been placed in the Committee's
files.)
In the Bank's customary survey of bankers' acceptances as
of the end of February it was found that 48.6 per cent of total
acceptances outstanding in the U.S. then had been drawn to finance
third-country trade.
As indicated in the memorandum, the proportion
of such acceptances in the Bank's portfolio was smaller; on March 12,
for example, it was 38.4 per cent.
About 45 per cent of acceptances
held by the Bank for foreign accounts on that date involved third
country trade.
Mr. Stone added that he had not undertaken in his
memorandum to advance arguments for or against holding such acceptances
3/23/65
-32
in the Bank's portfolio because as he had understood the Committee's
request it was for a factual report.
Mr. Hayes said he had studied the figures given in Mr. Stone's
memorandum and had thought about the question raised at the previous
meeting.
He still felt, as he had indicated then, that it would
be unwise for the Committee to modify its policy and refuse to buy
acceptanes involving third-country trade.
He was impressed by
the fact that such acceptances were included in the credits to which
the 105 per cent limitation--specified in the System's guidelines
for restraint on foreign lending by banks--applied; hence control
was being exercised at the source of this acceptance credit.
The
sale of an acceptance in the market to the New York Bank or to any
other purchaser did not affect the original transaction; the credit
concernec was still included in the 105 per cent limitation.
If
one assumed that there should be some kind of discrimination against
such acceptances, it should take place at the time the banks created
them.
If it was felt that the volume of third-country credits was
mounting undesirably and that they should be discouraged, that
should be indicated directly; and, indeed, it was indicated in
somewhat general terms in the guidelines.
Mr. Hayes said he also was impressed by the fact that Japan
accounted for by far the greatest part of third-country financing;
Mr. Stone's figures disclosed that as of February 19, $50 million
3/23/65
-33
of the $70 million of third-country acceptances held at the New York
Bank represented the movement of goods to or from Japan.
The whole
Japanese position was a matter of top-level negotiation with that
country, looking to the maintenance of the present level of financing
for Japan with the exception of export financing.
In his judgment
it would be inappropriate for the Committee to act today to make
third-country financing involving Japan virtually impossible.
If
the Committee changed its policy and refused to acquire third
country acceptances it would be necessary to inform the dealers,
and news of the action would be conveyed to the market rapidly.
This would seriously jeopardize the quality of the market.
At the
same time it was likely to result in some confusion, since foreigners
presumably would continue to want such acceptances and the New York
Bank would continue to buy them for foreign accounts.
Moreover, the
System had been working for 50 years, and particularly for the last
10 years, to promote the development of tte acceptance market, and
he questioned whether a decision now not to buy third-country
acceptances would be desirable from the longer-run point of view.
In sum, Mr. Hayes said, System participation in the
acceptance market on an across-the-board-basis--which happened, as
Mr. Stone's figures indicated, to result in a smaller percentage
of third-country acceptances in the Bank's portfolio than in total
outstandings--was a reasonable procedure, in his judgment.
He
-34-
3/23/65
thought it would be neither desirable nor practical to start
discriminating among the types of acceptances the System would buy.
Mr. Stone said he would like to emphasize one point
Mr. Hayes had made.
If the System began to discriminate against
any class of acceptances that fact would be known immediately all
over the country.
Other market participants also would stop buying
them, and dealers would begin to refuse to take them from banks,
which in turn would become unwilling to create them.
As a result,
the volume of that class of acceptances outstanding quickly would
drop to minimal amounts.
Mr. Robertson noted that he had been absent during the part
of the previous meeting when the questior under discussion first
had been raised, and he had not had an opportunity to consider the
matter fully.
He asked whether the Committee would be agreeable to
carrying the discussion over until the next meeting.
No objections
were made to postponement of further discussion.
Chairman Martin then called for the staff economic and
financial reports, supplementing the written reports that had been
distributed prior to the meeting, copies of which have been placed
in the files of the Committee.
Mr. Holland made the following statement on economic
conditions:
I think it is fair to say that every member of the
Committee's staff has been analyzing the statistics on the
3/23/65
-35-
economy's performance with more than the usual intensity
these past weeks. The reason is obvious. In its latest
phase, for the first time in this remarkably long and
stable business expansion, activity has clearly been
rising at an unsustainably rapid rate. This will be plain
from the size and composition of the fourth-quarter to
first-quarter rise in GNP when it is published, but some
thing like the current rate of upsurge actually began
last November and December, as soon as the auto strikes
were over.
How destabilizing will the inevitable let-down be?
Certainly this will be importantly conditioned by the
duration of the current spurt and the extent of distor
tions it interjects into business decisions. It is on
these issues that I would like to focus my remarks this
morning.
Insofar as duration is concerned, the general
expectation is that the rate of expansion will have to
slow in the second quarter. Such reasoning assumes a
more restrictive Federal budget posture until midyear,
and a less-than-seasonal spring rise in auto output
from the very high levels already attained in catching
up from last fall's strikes. Also assumed is a slow
down or even a reversal in steel inventory building
after the scheduled May 1 labor contract termination.
What is the key evidence at hand on these points?
As one measure of the Federal budgetary influence, the
full-employment surplus is projected to amount to
$4.8 billion in the April-June quarter, about half again
as large as over the preceding nine months, before
dropping back to a $1.4 billion deficit after midyear,
assuming adoption of the Administration program.
In the auto industry, domestic deliveries held
even in the first ten days of March, failing to show
the usual seasonal increase. But even if customer
takings of cars from here on out were to show no
seasonal rise at all, auto production would undoubtedly
be held at present rates for a month or two in order
to rebuild dealer stocks to levels more in line with
current sales.
In steel the present high rate of consumption has
probably served to attenuate the phase of inventory
building. Judging from the Census series on tonnage
held, steel consumers had only managed to build up their
steel stocks from about a 1.8-month to a 2.2-month supply
3/23/65
-36-
by the end of January, the l.st month for which data are
available. Several additional months of accumulation at
the recent rate would be necessary before the peak 2.8-month
stock ratio reached in 1962 and again in 1963 would be
reattained. An earlier change of pace in steel buying
could appear, however, if the labor picture should brighten.
This may be helped by the pattern-setting implications of
the can industry settlement which developed over the week
end, involving an annual increase in labor costs of about
3-1/2 per cent per man-hour.
This kind of decision, even if it does not spread
to steel, is symptomatic of a kind of reasonableness
in private decision-making that has seemed a good deal
more prevalent during this current inventory bulge than
in some earlier counterparts. In the past, over
ebullient business expectations engendered in such an
environment sometimes have fostered overreaching price
increases, extravagant wage settlements, generous hirings,
and optimistic levels of capital spending for future
capacity. In contrast, business performance on all
these counts has been restrained throughout this long
expansion, and particularly so in the rapid advance
beginning last November. No inflationary wage settle
ments have been agreed to by major industries during
this period. For the man-hours needed to increase output
temporarily, manufacturers have relied in greater part
upon larger overtime by existing workers, rather than new
hirings. Some observers regret the potential reduction
in unemployment thus foregone, but the economic distress
from subsequent cutbacks to lower production levels will
surely be less when it can consist of eliminated overtime
checks rather than outright firings.
On the price point, businesses have made relatively
few efforts to hang higher price tags on what they have
regarded as temporary bulges in orders. Overall, the
wholesale commodity price index is unchanged thus far
in 1965; the chief elements giving rise to the upward
tick in this index last fall--increases in nonferrous
metals prices and a recovery in petroleum products--have
since either leveled off or declined.
Capital expenditure programs have been increased,
but even after allowing for some possible understatement
of estimates, projected quarter-to-quarter increases in
business plant and equipment expenditures run somewhat
smaller than last year's quarterly advances. Perhaps
3/23/65
-37
more importantly, the capacity additions represented by
such outlays appear well balanced with underlying product
demands, both in total and by major industrial sectors.
Probably it is in the area of inventory investment
itself that the greatest possibilities for miscalculation
are created as a result of the current efforts to build
up stocks. Moreover, efforts to perceive such miscalcula
tions are very much hampered by the tendency for the early
inventory statistics to be particularly unreliable around
inflection points. For example, direct reports on inventory
holdings continue to suggest more moderate levels of stocks
than do the inferences to be drawn from the differences
between independent production and consumption measures.
We still cannot be sure whether inventory accumulation at
an annual rate of, say, $10 billion, is a good description
of the latest five months, although we know the first
officially published figures will be substantially less
than that, and perhaps for a short span of time or so
within that period the final rate, after all eventual
revisions, could even turn out to be somewhat higher.
We do know that the inventory investment over this
period has not been monolithic. Earlier accumulations
centered more in materials, but then later the focus
shifted to work-in-process and finished goods. Last
fall's additions were importantly in manufacturers'
hands, while later data suggest that wholesale and re
tail outlets are now bearing more of the brunt of
additions.
Such a distribution of the weight of added
inventories should increase the economy's ability to
weather the moderation in rates of growth that seems to
lie very close ahead.
The causes of that change in rate of growth relate
too largely to very short-term inventory adjustments, and
are impelled by too strong and special forces, to be
amenable to much if any timely moderation by monetary
policy. On the other hand, the inventory-caused bulge
in demands over these past five months seems well enough
perceived and sensibly enough dealt with by the private
sector to eliminate a good part of its potentially de
stabilizing ramifications.
Mr. Brill then made the following statement concerning
financial developments:
3/23/65
-38-
In attempting to draft a set of directives for
consideration by the Committee today, the staff bogged
down over the same problems that beset it--and the
Committee--at the last meeting and on other recent
occasions. The problem that continues to stump us is
the inconsistent behavior among the financial measures
that serve as guides to and targets for policy. We
don't seem to be able to get quantities and prices both
to move in a desired direction at once, and among the
quantities and among the prices we get divergent behavior
from time to time that is difficult to interpret and
makes it even harder to specify policy objectives. This
morning, I'd like to address myself to a few dimensions
of the problem.
First, let me turn to the quantities. It is natural
that attention should be captured by the rapid rate of
expansion in the flow of bank credit. An 8 or 9 per cent
annual growth in this variable is historically fairly
unusual, and the 10 to 12 per cent rate of recent months
is even more unusual. But so are the circumstances that
give rise to such quantities. It is not often, if ever
before; that monetary policy has had to operate under such
constraints and imperatives as (a) a high rate of private
saving, reflecting in part the effects of a cyclically
unusual fiscal policy, (b) a need for balance of payments
purposes to keep the level of interest rates--particularly
short-term market rates--relatively high, and (c) a need
for domestic expansion purposes to keep the cost of
financing investment as low as possible, consistent with
the desired level of short-term rates.
To meet these objectives within the limits of the
specified constraints, we have depended in part on debt
management maneuvers, but more importantly on monetary
techniques to divert a large share of the private saving
flow through the banking system. Banks have been
encouraged to compete aggressively in order to keep these
saving flows from depressing short-term market rates, and,
in turn, have transformed the saving into long-term
financing, thus satisfying objectives of monetary policy
while creating new headaches for bank supervision.
Over the past four years banks have succeeded in
capturing about a third of all credit flows, a proportion
previously achieved in the postwar period only in reces
sion years. But it might have been 50 or 75 per cent
without having materially different effects on the economy,
3/23/65
-39-
other than the increased discomforture of banks' competitors.
GNP doesn't grow any faster just because housing is financed
out of savings deposits rather than savings shares. Nor is
there any empirical evidence to suggest that holders of bank
time and savings deposits feel more liquid and behave dif
ferently from holders of other depositary claims or of open
market instruments. It is hard to ascribe any unique or
special meaning to bank credit changes that result primarily
from the increased vigor of bank competition for saving flows.
Even if there were some special economic significance
to the recent expansion in bank credit, there is little we
could do about it, given our emphasis on interest rates as
operating guides. So long as the quantity of reserves provided
is determined principally by the need to maintain certain
"conditions in money markets" (our euphemism for short-term
market interest rates), and so long as the ceiling rates banks
can pay to attract savings are set with an eye to keeping
funds here rather than flowing abroad, we can't control the
total quantity of bank credit flows. Even the Federal Reserve
can't overdetermine the economic system. Under the given
circumstances, we can give priority to our rate objectives
or priority to flow-quantity objectives, but not to both.
Similarly, it has become increasingly difficult to set
a meaningful objective in terms of desired changes in the
money supply. While in the long run the demand for money
may be interest inelastic (as suggested by our friends of
the Chicago school of monetary economics), it certainly
hasn't been inelastic in the short run. In particular,
money supply has responded sharply to increases in the
interest attractiveness of time and savings deposits. After
each increase in Regulation Q, there has been a sharp burst
in time and savings deposits, partly at the expense of other
types of institutional saving and market instruments, and
partly at the expense of money balances. But the bursts
into time deposits and out of money have been short-livedabout three months--and then money demand has resumed,
with growth in time deposits continuing but at a slower
pace. Such switches out of money into time deposits can
be accompanied by very sharp rises in total bank credit
without necessitating significant changes in bank reserves,
but the reversal of such deposit trends increases reserve
needs. This makes it very difficult to lump changes in
"the reserve base, bank credit, and the money supply" under
the same blanket intention, as is done in the first part of
the Committee's directive.
3/23/65
-40-
I say all this not in a spirit of criticism, but to
illuminate an impending problem in specifying the Committee's
near-term quantity objectives. The attractiveness of the
new higher rates paid by banks on time and savings deposits
is beginning to wane--on schedule. The rate of expansion
in time deposits has been slowing down in recent weeks and
that in money supply accelerating. While the increase in
the money supply in the first half of March is overstated,
reflecting largely the temporary disbursement of Government
balances, it also probably heralds a return to a more normal
rate of growth in money balances. If these deposit-shift
trends persist, a directive pointed to "no change" in
money market conditions probably would have to accommodate
an acceleration in the reserve base and in the money supply,
even with a slowing in the pace of bank credit expansion
from recent exceptionally high rates.
I emphasize the "probably"not only because our knowledge
of the linkage between quantities and prices is still so
imprecise, but also because there appears to be, at the
moment, some distortion in the constellation of interest
Most
rates that comprise "money market conditions."
indicators of money market conditions indicate some tautness,
even though the bill rate has eased significantly.
We don't know to what extent the bill rate decline is
attributable to ephemeral factors--including the repatriation
of funds from abroad or retention of funds originally destined
for foreign money markets as a result of the introduction of
the balance of payments program--or to a fundamental reappraisal
by investors of longer-term credit demands and monetary policy.
All we can say at the moment is that the bill rate appears
out of line with the rest of the money market, and it is not
clear which will move towards which.
My own preference would be to play it cautiously, for
it seems somewhat premature to assume substantial and con
tinuing success of the voluntary restraint program on the one
hand, or complete subsidence of inflationary potential on
the other. The fragmentary information available is favorable
on both fronts. It might be more prudent in the short-run,
however, to offset tendencies toward further reduction in
bill rates, even if it resulted in some temporary slowing
in reserve growth to do so, and not to resist a tendency for
the bill rate to move back into closer alignment with other
short-term rates if market forces propel it in that direction.
It should be noted that the Treasury is not in an especially
good position to provide help on this score, for its large
cash balance probably limits debt management to small additions
to the weekly bill auction.
-41-
3/23/65
Such a cautious monetary policy is recommended only
as an interim action until our vision clears. Three weeks
from now we should have a clearer reading on international
capital flows and wage negotiations, which would permit
a longer-term decision as to the appropriate posture of
monetary policy.
Mr. Hersey then presented the following statement on the
balance of payments:
On account of the disruptions caused by the port strike,
it will be some time before we can get a reliable reading
on trends in the current account of the balance of payments.
The key questions about underlying forces affecting the
current account are familiar ones. First, to what extent
will world trade, and U.S. exports, be slowed by British
efforts to correct their balance of payments and by the
efforts of France and other countries to check inflation?
The adjustment of British trade has barely begun. France
seems as determined as ever to halt the present rise in
costs and pressure on prices, even if that means allowing
a recession in French business activity. Success in their
effort will help them to preserve the strong payments
position that France got out of the devaluation of 1958.
The second question is:
is the U.S. competitive position
continuing to improve? On this, one may note that U.S.
wholesale prices of producers' equipment have risen 2 per
cent in the past year and a half. There are reports of
growing delivery lags for products such as machine tools
for which order backlogs have become large.
In the private capital account, at least one major
change has occurred in the last few weeks: the drying
up of the previously massive outflow of term loans from
U.S. banks. Little can be said yet about the outflow
of short-term bank credit. And we can't yet be sure
whether the quarterly reflux of corporate liquid funds
in March was greater than seasonal this year.
As to the banks' term lending, we do have some
useful information. Confidential data on commitments
show a very abrupt drop after the President's message
to Congress on February 10 and the coming into effect
that day of the IET on most term loans to developed
countries. In the 4 months and 10 days up to February 10,
commitments for term loans had totaled $1.6 billion,
of which $350 million were made within the first ten
3/23/65
-42-
days of February. In the rest of February and first half
of March, new commitments--now going almost entirely to the
less-developed countries--were well under $100 million, and
they may have been less than the present rate of total
amortization reflows.
Data on actual net outflows, as opposed to commitments,
show a revised figure for January of about $250 million. I
would guess that the net outflow in the first ten days of
February may have been of the same order of magnitude as the
January total. Taxable loans committed after August 5 of
last year had to be disbursed before the Gore Amendment was
put into effect if they were to escape the tax.
If the net outflow on term loans, which may have been
close to half a billion dollars ir the first six weeks of
the year, has now virtually dried up, one would expect to
see some impact on the spread between U.S. money market
rates and rates abroad, especially the sensitive rates in
the Euro-dollar market.
In fact, London Euro-dollar market rates did rise more
than seasonally from mid-February up to March 10, after which
they eased off somewhat. Mere cessation of the U.S. term
loan outflow could have been one factor in the tightening.
Much of the term loan borrowing in January and early February
must have been done ahead of real needs, in order to beat the
IET, and there is indirect evidence that borrowers were
putting some of the proceeds into Euro-dollar deposits.
This indirect evidence is the sharp rise reported by member
banks in their balances due to foreign branches, in the
four weeks after January 20.
If the United States is to make progress toward the
objective of re-establishing the dollar as an unquestioned
reserve currency, we will need to reduce the deficit financed
by official settlements, as well as the overall deficit, and
that means avoiding a drawing down of the large balances
which commercial banks abroad have built up in the United
States over the past two years. Interest rate tendencies in
the Euro-dollar market will have some bearing on the changes
in these balances.
Spreads between Euro-dollar rates and U.S. rates on CDs
were narrower on the average in 1964 than in earlier years.
This was one reason why commercial banks in Europe (including
U.S. branches) channeled more than $1 billion of short-term
funds to the United States in the 12 months through last
January. The inflows were fairly large in March and April
of 1964, when CD rates were relatively high; and again in
the summer, when the Euro-dollar market was easing off a
little. They were largest of all in November, when the
sterling crisis broke.
-43-
3/23/65
Although the rate spread, as measured by 90-day rates,
was smaller on the average in 1964 than in earlier years,
it was tending to widen a little as interest rates in most
European markets were rising, while ours were fairly stable
up to October. Then from October to February (if we make
a crude adjustment for seasonal variations) it appears that
Euro-dollar rates moved up somewhat less than rates in the
United States. I would suggest that among the reasons for
this relative ease in the Euro-dollar market from October
to mid-February was the feeding of Euro-dollar supplies from
two sources. The first source was the movement of private
funds out of sterling. The other source, indirectly, was
the heavy outflow of U.S. bank credit.
Now that these sources of supply of the Euro-dollar
market have lessened (and, perhaps, Canadian banks may be
drawing funds out of the market, to meet U.S. corporate
withdrawals of funds from Canada), Euro-dollar rates seem
for the moment to stand somewhat higher relative to U.S.
rates than they did a year ago. While three-month U.S.
Treasury bill rates and CD rates in the secondary market
are up by about 1/2 per cent and 3/8 per cent, respectively,
Euro-dollar 3-month rates are 5/8 per cent above their
March 1964 level.
These comparisons remind us that the U.S. policy of
the last few years for restraining capital outflows, which
focused on gradual changes in money market rates and
deposit rates, was deprived of much of its potential effect
by the general rise in interest rates :n Europe, where
monetary authorities have been endeavoring to control in
It seems to me that we are getting
flationary pressures.
closer to the heart of our problem with our new policies
of prohibitive taxation of some term loans and of restrict
ing the availability of U.S. bank credit to foreigners.
But interest rate differences, both short-term and long-term,
may still plague us.
Prior to this meeting the staff had prepared and distributed
certain questions and responses for consideration by the Committee.
These materials were as follows:
(1) Business activity--What are the implications for the
sustainability of economic expansion that can be drawn
from recent surveys of plans and attitudes and other in
formation with respect to (a) business spending for new
plant and equipment and inventory investment; and (b)
consumer purchases of autos, other durable goods, and housing?
3/23/65
-44-
Recent information on economic activity, including
surveys of business and consumer spending plans, suggests
that expansion in overall economic activity will continue
in the near future, although prcbably at a more moderate
pace than in the first quarter. The evidence is not
unambiguous; major questions still relate to the prospects
for inventory investment and consumer buying of autos and
other goods.
For autos, consumer buying plans suggest a substantial
rise in sales from 1964 levels, but nothing like the 20 per
cent gain over a year ago shown by the January-February sales
figures. It is likely that sales have been above a sustainable
rate, partly because of the existence of a backlog of demand
built up during the strikes last autumn. In fact, sales of
new domestically produced autos in early March declined slightly,
in contrast to the normal seasonal rise at this time of year,
and the year-to-year gain narrowed abruptly. It is possible
that the downward adjustment to a lower (seasonally adjusted)
level of new car sales may now be taking place.
The inventory situation, usually difficult to interpret
because the statistics are not especially reliable, also
continues to be clouded by the effects of past and possible
future work stoppages. Accumulation in November and December
was exceptionally high. In the current quarter it is likely
to continue heavy, despite reports that the high rate of steel
use is preventing the desired rate of accumulation, and despite
the results of the February survey which indicated that manu
facturers expected to add much less to their stocks this
quarter than in the final quarter of last year. Part of the
current rise in total business inventories is in distributors'
stocks, mainly automobile dealers. Even if steel accumulation
should begin to taper off soon, as a result of more favorable
contract negotiation prospects or the achievement of desired
stock levels, it is likely that auto inventories will con
tinue to rise for some time. Dealer stocks are still on the
low side--relative to a year ago and relative to sales. The
principal threat to sustained activity would come from
continuing accumulation of stocks, followed by a concomitant
cut-back in steel and auto orders, a possibility for late
spring or early summer.
There are other potential inventory problems--in
consumer durable goods other than autos, in apparel, and
in textiles. Retail sales data for home goods and apparel
increased only a little further from the advanced levels
reached last autumn, and for major household durable goods
reported buying plans were down moderately from a year ago.
3/23/65
-45-
Meanwhile, production of home goods and apparel and in
ventories of these goods held by distributors and
manufacturers increased appreciably.
While downward adjustments are ir prospect for
inventory investment and auto sales, moderate expansion is
likely to continue in the rest of the economy. Recent
surveys of investment plans and information on new orders
for equipment and on construction contract awards all imply
continuing growth in business expenditures on new plant
and equipment in the near future. Business plans call
for steady expansion this year at a pace only moderately
less rapid than last year. Continuing expansion into
coming months also seems assured for consumer spending
on services and State and local government spending on
goods and services. The expansionary impact of these
outlays is likely to be offset, in part, by a leveling
out in residential housing activity. After midyear,
additional stimulus to the economy is expected from the
proposed increase in social security benefit payments
and reductions in excise taxes.
(2) Balance of payments--What indications are there of
actual and prospective changes in capital flows to and
from the United States since the President's mid-February
message on the balance of payments?
Little statistical evidence is yet available on the
impact of the President's balance of payments program on
outflows of capital from the United States. Data on
capital flows in March, the first full month of the program,
will not be received for another month.
The fragmentary information available suggests, however,
that capital outflows have been reduced in the last month:
(1) a more than seasonal rise in Euro-dollar rates this
month, which would be consistent with larger than
usual withdrawals of U.S. corporate funds from
this market;
(2) a decline of more than 3 cents per ounce in the
price of gold in the London market over the past
two weeks, possibly reflecting initial effects
of the program sufficient to dampen gold specu
lation;
(3) a general strengthening of the dollar in foreign
exchange markets;
(4) weekly payments indicators which, though based on
incomplete coverage, show a surplus in the last
four weeks as compared with a large deficit for
the previous six-week period.
3/23/65
-46-
Besides some reflow of liquid funds, there may well
have been a reduction in outflows of long-term bank loans
to developed countries from the reportedly very heavy
rates of the first half of February. More generally, U.S.
lenders and investors may have hesitated in their activities
pending clarification of the program and its application
to them. There have been reports of such an attitude.
Also, new commitments on term loans to foreigners dried up
after February 10 to less than $100 million (and virtually
nil for developed countries) between then and mid-March,
as compared with $350 million in the first ten days of
February alone.
It remains to be seen, however, how much
of this seemingly favorable initial response will prove
transitory, and what forms and dimensions the ultimate
response to the program to limit capital outflows will take.
(3) Bank credit and money--What responses do banks appear
to be making to the combination of reduced reserve
availability, higher costs of funds: enlarged inflows of
time and savings deposits, and strong business loan demands?
Reflecting strong loan demand and somewhat tauter
bank reserve availability in recent months, lending terms
on business loans have tended to tighten, particularly on
interest rates and compensating balances.
Early reports
on the March lending practices survey indicate that most
banks reporting firmer policies in the December survey
moved further in that direction in March, and that addi
tional banks were making similar ad ustments.
At the same time, net deposit growth has been large,
mainly reflecting the acceleration in time and savings
deposit inflows in the November-February period.
Most of
the increased time and savings deposit inflow was in
response to general rate increases and the promotion of
relatively new instruments, such as savings and investment
certificates.
Banks also raised more funds this year than in the
early months of other recent years through issuance of
CDs, notwithstanding the relatively high rates needed to
At New York City banks, outstanding
attract these funds.
CDs have risen quite steadily, but at outside banks, after
rising sharply in January, they subsequently declined.
With prime banks recently paying 4-3/8 per cent on 6-month
maturities, within 13 basis points of the ceiling, it is
possible that some nonprime banks may be encountering
difficulties in retaining funds under the revised ceilings.
3/23/65
-47-
In addition to meetings strong loan demands, banks in
ceased their holdings of municipal and agency issues by
$1.5 billion over the first two months of 1965. In
addition, banks participated heavily in the Treasury's
January advance refunding.
With the cost of obtaining funds from the Reserve
Banks, in the Federal funds market, and through issuance
of CDs appreciably above the bill yield early this year,
banks made large reductions in bill holdings in January
and early February. Thus, banks have substituted longer
term Government and municipal issues for shorter-term
securities in their portfolios and bank liquidity has
declined further.
Other adjustments which some larger banks appear to
have made in response to the enumerated environmental
changes include more aggressive bidding for Federal funds,
which has driven the effective rate above the discount
rate on several occasions in early March, and efforts to
obtain increased correspondent bank participation in
broker and other suitable types of loans. Also, excess
reserves (seasonally adjusted) have averaged somewhat
lower in recent weeks.
(4) Business financing--What do business loan and money
market developments up through the March tax date suggest
as to the state of corporate liquidity and basic business
needs for bank financing?
Available data on business loan and money market
developments through the March tax date suggest that while
business needs for bank financing continue strong, this
apparently has not been associated with any marked deteriora
tion in aggregate corporate liquidity. Perhaps to a greater
degree than usual, however, there .re striking differences
within the business sector; some corporations are borrowing
heavily and others are supplying large amounts of short-term
funds to the market.
Tax and dividend borrowing was concentrated in the
week of March 17, when business loans at New York City banks
rose by a record amount, after declining the preceding
week. While the net increase over the two weeks combined
was not as large as in some earlier years, when corporate
tax payments were smaller and a larger volume of tax
anticipation securities was outstanding, it followed record
expansion in January and February.
A substantial part of the rise in business loans so
far this year has reflected special influences, including
borrowing for foreign purposes and short-term borrowing
3/23/65
-48-
by selected industries related to needs arising out of the
dock strike and the buildup of steel inventories. Much
of the remainder has been in domestic term loans, re
flecting in part the continuing upward trend in capital
outlays.
Meanwhile, corporate cash flows nave increased sharply
in the first quarter, particularly in industries operating
at peak rates such as autos and steel. The resultant
availability of funds from these sectors of the business
community has been reflected in continued demand for money
market instruments. Thus, the Treasury bill market was
unusually firm over the tax period, with yields declining
on strong investment demand and light tax-date selling.
Dealer bill positions, which usually show an appreciable
tax period rise, declined slightly. Banks retained more
CD funas than usual over the tax date and finance companies
have been finding funds readily available on commercial
paper in the 30-89 day maturity range.
(5) Money market and reserve ccnditions--Assuming a con
tinuation of current monetary policy, what range of money
market conditions, interest rates, reserve availability, and
reserve utilization by the banking system might prove
mutually consistent during coming weeks?
The March dividend and tax dates passed with a sur
prising lack of money market pressures.
While dealer loan
rates in New York were on the high side and the Federal funds
market was generally taut, Treasury bill rates actually
declined during the period, as bill demand was sizable and
tax date selling minimal. In the banking system, small net
borrowed reserves during the past two statement weeks were
accompanied by member bank borrowings averaging just under
$400 million.
As to long-term interest rates, the apparent early
indications of success for the Administration's balance of
payments program have quieted market expectations of a more
restrictive general monetary policy, and this changed view
has been reflected in the recent advances of Treasury bond
prices. Corporate and municipal markets also seem to have
stabilized since early March, with good investor reception
of the enlarged volume of new offerings.
More uncertainty than usual prevails about the relation
ship that might obtain in the coming weeks between free
reserves and short-term interest rates. Net bank reserve
positions have averaged a minus $25 million in the last
four weeks--a tauter position than earlier this year--but
3/23/65
-49-
bill yields have still tended to decline. Some of the
downward bill rate pressures of recent days may subsequently
abate or even be reversed, with free reserves still re
maining within the range of recent weeks. However, it
should be noted that we are now entering a period when there
is little net seasonal pressure on bill rates one way or
the other. Also, further repatriation of liquid funds
from abroad would tend to continue downward pressure on
domestic money market rates from this source.
If in the weeks ahead it were desired to bring bill
yields back closer to the discount rate, it might require
persistent net borrowed reserves, perhaps averaging around
$50 million. This would be consistent with Federal funds
trading principally at 4 per cent, but with frequent trans
actions at 4-1/8 per cent, and with a continuation of
relatively high dealer loan rates; such rates in turn would
help to support bill yields. In light of current and pro
spective saving flows, however, these money market conditions
would not likely produce any significant change in long-term
rates.
Such money market conditions are likely to be accompanied
by a slower expansion in total bank credit than the 12 per
cent annual rate in January and February. The margin of
short-term funds costs over bill yields should work to dampen
total bank credit and deposit expansion, although continuing
strength in loan demands may work in the opposite direction.
The recent slackening in time deposit growth, and the
resumption in money supply expansion, suggest that the initial
effects of rate changes under the Regulation Q ceilings have
waned. The money supply increased sharply in early March,
associated in part with a temporary and unusually large re
duction in U.S. Government balances. Further expansion in
the demand deposit component of the money supply would be
consistent with the money market conditions assumed above,
although at a much slower rate than in the first half of March
and probably at a rate below the 4 per cent of late summer and
fall of 1964.
Chairman Martin then called for the go-around of comments and
views on economic conditions and monetary policy, beginning with
Mr. Hayes, who made the following statement:
1. Business Activity. The domestic business situation
continues to be very strong, and despite uncertainties--notably
with respect to labor negotiations in the steel industry--prospects
for a sustained upward movement over the remainder of the year
3/23/65
-50-
are good. Industrial production, employment, personal
income, and retail sales all rose in February. As
expected, both inventory accumulation and heavy sales
of new autos are contributing importantly to what seems
to be an excellent first quarter; but inventory-sales
ratios are still low. The outlook has been strengthened
by the latest plant and equipment survey, which suggests
that a pattern of upward revisions, similar to that which
occurred in 1964, is developing. Further upward revisions
could make the 1965 advance even stronger than that of
1964. Unemployment remains in the same general range as
in recent months. The mild updrift in industrial whole
sale prices that began last fall appears to be persisting.
2. Balance of payments. Although available statistics
do not yet fully reflect current trends in our balance of
payments, there are several signs that the President's
balance of payments program is beginning to have a
significant effect on capital flows, especially short
term capital flows. The February deficit was large,
inasmuch as the flow-back in the last half of the month
failed by a wide margin to equal the outflow earlier in
February. Fragmentary data point to surpluses in early
March. Sizable repatriation of short-term funds placed
abroad by United States corporations is indicated by the
very rapid upsurge of Euro-dollar rates, and other
foreign short-term interest rates, as well as by the
behavior of the exchange markets; and, since February 11,
new term loan commitments and drawings of loans to
developed countries have been negligible. The initial
psychological impact of the program has been substantial,
at least in the financial area. We must see to it that
it is well sustained.
3. Bank credit and money. Bank credit advanced
again at a robust pace in February, led by another very
large expansion in business loans; and business loans
apparently scored a further sharp gain around the March
tax date. In the 14 months ended in February, bank
credit increased at an annual rate of 8.6 per cent as
against 7.5 per cent a year earlier, and business loans
rose at an annual rate of 13.8 per cent, as against 9.5
per cent a year earlier. While there were some special
factors at work, including activities in anticipation of
the balance of payments program, the main influence at
the moment appears to be a strong loan demand generated
by rapid economic expansion. Bank loan-deposit ratios
generally moved up further during the month, and by
3/23/65
-51-
significant margins. The sizable February growth in bank
credit was accompanied by an actual decline in the private
money supply, while U.S. Government deposits expanded.
On the other hand, time deposits posted a near-record
expansion. It seems to me that these divergent develop
ments reflect largely a response to the November revision
of Regulation Q, as has happened following earlier
revisions. Thus the recent performance of the money
supply should not be interpreted as evidence of a
restrictive monetary policy. Indeed, the staff's
memorandum on reserves notes that "...private demand
deposits and the money supply as a whole apparently are
increasing rapidly in March, reversing the February
decline." This points up the danger of attaching
excessive importance to short-run changes in the money
supply. On balance, the recent record of total bank
credit and total bank deposits still suggests to me
the desirability of some slow-down.
The repatriation of funds by United States corpo
rations has probably contributed to the decline of
several points in U.S. bill rates. This decline has
occurred despite a continued firm tone in the money
market that has resulted in steady or rising yields on
other short-term instruments over the same period, and
despite the occurrence of corporate and dividend tax
dates that are normally associated with upward pressures
on bill yields. There is a risk that a persistent
widening of the spread of foreigr short-term rates over
our bill rate may in time attract a reverse flow of funds
that could partly undo the initial favorable effects of
the President's program.
Monetary policy. It seems to me that several factors
point to the wisdom of some further reduction in reserve
availability. These include (1) the desirability of
bringing the bill rate back to around 4 per cent, (2)
the desirability of moderating the current excessively
rapid rate of growth of bank credit, and (3) above all,
the need to give stronger backing to the President's
program to ensure its longer-run success. The very
healthy state of domestic business gives us scope for a
further modest policy change without any real risk to
the economy. The coming three weeks offer an appropriate
time for action, since the need for an even-keel period
in connection with the Treasury's May refinancing might
interfere with the possibility of a policy change at the
April 13 meeting. Also, the recently reported heavy gold
3/23/65
-52-
losses provide a background of some urgency for a modifi
cation of policy.
It seems to me that net borrowed reserves might
fluctuate generally in a range of zero to $150 million,
with the hope that the bill rate might: move back close
to the discount rate. Since foreign and domestic ob
servers are likely to interpret any action taken now as
being aimed mainly at restoring U.S. bill rates, the
impact on intermediate and longer-term rates should be
small. However, the policy move should be definite
enough to signal to the market that a change of atmosphere
has occurred.
The wording of the directive should be changed to
reflect the recent gold losses and to indicate a moderate
change of policy with respect to the rate of expansion of
bank credit and with respect to money market conditions.
Alternative B would seem quite satisfactory, subject to
some minor changes in wording. 1 /
Mr. Shuford noted that, as had beer. discussed, economic
activity in the nation had been advancing rapidly in recent months.
Employment, production, incomes, and sales all had risen significantly.
Wholesale prices had moved up over the past six months in contrast to
near-stability over the past six years as a whole.
In the Eighth
District production and employment had been increasing as rapidly,
if not more rapidly, than in the rest of the nation.
Mr. Shuford observed that attitude surveys pointed to con
tinued expansion in business plant and equipment expenditures and
in outlays for consumer durables; and to a moderation in the rate
of inventory growth.
Those developments, if attained, appeared to
1/ The two alternative draft directives prepared by the staff are
appended to these minutes as Attachment A.
-53-
3/23/65
be consistent with continued economic growth.
Businesses had
been accumulating inventories at an unusually fast pace and some
slowing seemed desirable even though inventories were still low
relative to current sales.
Recent developments in foreign exchange and Euro-dollar
rates as well as the weekly balance of payments estimates indicated
a marked reduction in the outflow of capital since the President's
message, Mr. Shuford continued.
Foreign loans and investments by
banks in the Eighth District were limited, but he had talked with
the four banks in the District that reported on Treasury forms.
Those banks supported the voluntary foreign credit restraint
effort and were cooperating.
Reports indicated that there was
a somewhat stronger foreign demand for credit, and some foreign
borrowers were reported to have contacted a few banks seeking new
or increased lines of credit.
Thus, there were indications even
from interior banks that the program was receiving attention--and
perhaps taking hold--but it was too soon to make a reliable evalu
ation cf its effectiveness.
Business loan demand in the District, particularly in
St. Louis banks, had been very strong in recent months, Mr. Shuford
observed.
The net increase in borrowing during the week ended
March 17 was greater than normal for that tax period.
Bank attitudes
in the District with respect to extensions of credit had not changed
materially in recent months--at least not quite as much as the green
3/23/65
-54
book 1/ reported that they had changed in tne nation as a whole--but
some District banks were firming rates on a selective basis.
Corpo
rate holdings of liquid instruments were large, but with the expansion
in business investment the demand for credit also was strong.
Assuming no change in policy, as in the fifth question
posed by the staff, Mr. Shuford felt that the pattern of money
market and reserve conditions that would develop was highly unclear.
On balance, however, he thought Federal funds were apt to continue
in relatively short supply, with rates at 4 per cent and at times
a little above that figure.
Short-term bill yields probably would
range from their recent levels to slightly below the discount rate,
especially if the outflow of capital from the country was limited,
and long-term interest rates probably would change little.
reserves might stay within $50 million of the zero level.
Free
With
those money market conditions, he would anticipate a continued
growth in bank credit and time deposits, although some slowing in
time deposit growth might occur as the stimulative effects of the
recent change in Regulation Q wore off.
Tctal member bank reserves
probably would continue to increase in an irregular fashion.
The
money supply might be expected to begin rising soon, but at a
slower rate than last year; in his opinion that would be desirable
at this time.
1/ The report "Current Economic and Financial Conditions," prepared
for the Committee by the Board's staff.
-55-
3/23/65
In summary, Mr. Shuford said, he thought the domestic
economy was expanding rapidly, and it appeared that the voluntary
program was reducing the net capital outflow.
The existing con
ditions in the money market as well as the level of interest
rates and growth in bank reserves and money appeared appropriate
for the near future in view of the economic situation.
He favored
no change in policy at this time while the Committee awaited a
little better perspective on the national and international
situations, and he would not change the discount rate.
Alternative
A of the staff's drafts for the directive was satisfactory to him.
In a concluding comment, Mr. Shufcrd referred to Mr. Hayes's
observation that even keel requirements might interfere with the
possibility of a policy change at the April 13 meeting of the Com
mittee, and noted that he had understood that the Treasury would
not be engaging in any substantial financing operations until May.
Mr. Stone indicated that under the present schedule the
Treasury would be consulting with its Advisory Committees concerning
the May refunding on April 27, and would announce the terms of th.t
operation on April 28, with books open during the following week.
Mr. Bryan observed that the Sixth District's economy was
robust.
New jobs had kept insured unemployment low and increasing
personal income supported a high level of consumer spending.
Businesses and consumers had in recent weeks contributed to a
strong expansion in bank loans, and modest gains had occurred in
the farm sector.
3/23/63
-56
Mr. Bryan said he would attempt brief answers to some
of the staff's questions.
1.
The surveys seemed to indicate that plant and
equipment spending would continue to bolster the economy through
out 1965.
Consumers still had strong, if somewhat diminished,
buying intentions.
By early summer, if not earlier, some
downward shift apparently would take place in durable goods
inventory buying; but that expectation might be radically altered
on the upside by any important tendency to an upward drift in
prices.
Altogether, he thought that it was too early to make a
confident prediction regarding the entirety of 1965.
However,
barring important strikes, and with an excess of caution, he
expected no great slowdown in economic activity in the next
three months; and if he were to guess, he would guess that
substantially the present level of economic activity would extend
much further into 1965.
2.
Mr. Bryan said he had little firsthand information
on the balance of payments problem and had to accept Secretary
Dillon's testimony to the International Finance Subcommittee in
which he reported a spectacular decrease in loans to developed
countries since February 10.
The voluntary credit restraint program apparently had
made many more banks and other businesses aware of reporting
requirements than they had been before, Mr. Bryan continued.
3/23/65
-57
Perhaps in a desire to establish as large a base as possible
for the 5 per cent limitation, perhaps in a belated accrual of
candor, several banks in the District were "finding" new foreign
accounts and some apparently were going to start reporting for
the first time.
That might have the perverse effect of actually
increasing recorded short-term outflows temporarily.
Mr. Bryan did not know whether to be alarmed or uneasy,
or simply to regard the matter as a normal growth.
But according
to figures maintained at the Atlanta Bank, the Treasury at some
point in early March was short something over $1 billion in
foreign currencies.
$577 million.
The Federal Reserve System was short about
Those figures, to his mind at least, indicated
how imperative it was that the United States attain a balance
in its international payments.
3.
Banks obviously had been changing their portfolio
mix; but Mr. Bryan was not at all certain that the shift was a
result of reduced reserve availability.
It seemed to him more
nearly the result of higher costs of furds in the Federal funds
market, and a recently large inflow of time and savings deposits
at higher costs.
4.
Business loans at weekly reporting member banks had
been exceptionally strong during the first quarter, Mr. Bryan
said.
Some slowing occurred in the week of March 10, and he was
aware that everything could be explained away, but even so the
-58
3/23/65
gain from year-end 1964 amounted to over $1 billion.
In the
comparable period last year, business loans had declined by
$1.3 billion from year-end 1963.
In both cases the buildup of
such loans in the last quarter of the year had been sharp.
Federal funds had been tight during the past three weeks, as
pressures on bank reserves had mounted.
Although there was
considerable lag in the published data, corporate liquidity
had continued to decline as working capital expanded.
The
bulk of increased current assets had gone to increase receivables
and inventories.
It appeared that in spite of
continuing large
cash throw-off, business as a whole still required heavy increments
of bank credit, especially in time of good or booming business.
The fifth question, Mr. Bryan said, was a jigsaw puzzle,
and beyond his capacity.
He would have to listen as his colleagues
put together an answer.
As for national policy, Mr. Bryan continued, with the
exception of the Federal funds rate, Governments had been edging
down in yield
from recent peaks.
He understood that foreign
rates in the meantime had been trending upward over the last few
months.
That divergent development was to be expected as foreign
capital markets were thrown back on their own resources and U.S.
supplies of capital had to find domestic outlets.
Any further
divergence of rates would make the voluntary credit restraint
program the more difficult.
-59-
3/23/65
In addition, Mr. Bryan noted certain reserve figures.
Since August of last year, when the Committee was to have a
slight change of policy direction, total reserves had increased
5.8 per cent; nonborrowed reserves, 5.4 per cent; required
reserves, 5.7 per cent; and required reserves against private
deposits, 5.1 per cent.
While he could not prove the point,
he had the feeling that those reserve increments were well
above anything that the economy could long stand without an
inflationary evolution.
Meanwhile, he cculd not look with
equanimity on price developments--either in wholesale prices
or in consumer prices.
Although Mr. Bryan did not advocate a change in discount
rates, he believed that in such a situation the Committee had no
choice but to proceed to make more of the reserves going into
the banking system borrowed reserves rather than provided
reserves.
Thus he suggested, if reserves were to be measured
by a free reserve target, that the Committee retreat to net
borrowed reserves averaging about $50 or $60 million over the
next three weeks, with a weekly range between $125 million and
zero net borrowed.
Mr. Bopp reported that economic activity had stopped
increasing every month in the Third District after two years in
which consecutive month-to-month rises constituted the predominant
pattern.
Although unemployment was at relatively low levels
3/23/65
-60
compared to earlier years, it no longer was decreasing in most
of the District's labor markets.
the leveling-off process.
rather, the upward
Output measures also reflected
It was not that a downtrend had begun;
movement of economic activity had slowed very
substantially.
Mr. Bopp said that he would limit his further remarks
primarily to the staff's question on initial responses of banks
to the foreign credit restraint program.
In general, the five Philadelphia reserve city banks
engaged in foreign lending had been cooperative, despite some
questions over interpretation of the guidelines, computation of
base figures, and like matters.
Although it was too early as
yet to get a firm idea of what the future might hold (indeed,
base figures had not yet been computed for any of the banks),
some straws in the wind were disclosed by a survey completed
last week.
First of all, Mr. Bopp remarked, the banks did have
working ideas of their base figures; the four largest presently
were at 100 per cent or less of their working base.
The fifth
bank, which was the smallest foreign lender, stood at 108 per
cent.
Thus, there was room for some expansion within the pre
scribed limits by Philadelphia banks.
3/23/65
-61Asked where they expected to be with respect to the
105 per cent limit by July 1, Mr. Bopp continued, four of the
banks indicated that commitments now on their books could put
them well over the limit (two indicated they could go up to
125 per cent of the base period if all commitments were taken
down), but all four were optimistic that they could stay within
the limit.
The fifth bank, accounting for about 20 per cent of
foreign lending, reported that firm commitments and scheduled
take-downs would bring it to roughly 110 per cent of the base by
July 1.
Finally, when asked if any diversion of foreign loan
demand was coming their way from New York or elsewhere, three of
the banks indicated they had been approached by customers who
evidently were finding it difficult to obtain accommodatio
elsewhere.
Mr. Bopp then turned to national economic developments.
The economy continued to be characterized by basic, underlying
strength, he said, and there existed an overall margin of unused
resources which appeared to be sufficient to meet prospective
growth in aggregate demand.
However, the economic froth stemming
from past and possible future labor problems was creating some
industrial imbalances.
Nevertheless, he concurred with the opinion
that tighter money would be of questionable effectiveness in
slowing the present rate of inventory accumulation and, because
of time lags inherent in monetary actions, might possibly deter
-62
3/23/65
future investment at the precise time when inventory decumulation
had become a drag on the economy.
Given the present general stability of industrial prices,
the continuing high level of unemployment, and preliminary
indications that the President's balance of payments program was
beginning to become effective, Mr. Bopp would make no change at
this time in the general posture of monetary policy.
Accordingly,
he favored alternative A for the directive.
Mr. Hickman remarked that as the Committee knew by now,
he usually had very strong views on developments and policy.
But this was a period of transition, and it was difficult at
such times to be certain or to take very strong positions.
So
far as the statistical record was concerned, business continued
at a near-boom level, but logic indicated that some things soon
had to begin to slide.
side.
Uncertainty also prevailed on the monetary
Steps had been taken which logically should improve the
U.S. balance of payments, but the results thus far were
inconclusive.
Auto production and sales had been maintained at
extremely high levels, Mr. Hickman observed.
Some upward
revision of the forecasts for the year might be in order.
No
one believed, however, that the present pace of production, at
an annual rate of close to 10 million cars, could be sustained
3/23/65
-63
for long.
Perhaps a straw in the wind was the fact that prices
of used cars sold at auction had been declining since January.
The steel situation had not changed since the last
meeting, Mr. Hickman continued.
Ingot output remained at nearly
140 million tons, seasonally adjusted annual rate, but the sharp
drop that was expected by all analysts in the industry was still
in the cards: although it had been deferred.
While labor
management negotiations were making a ponderous beginning,
nothing decisive had occurred to clear the air, either as to the
prospective date of settlement or its contents.
The staff's answers to the staff's questions seemed to
Mr. Hickman to be reasonably complete, but he proposed to express
a few independent thoughts.
First, recent surveys of business
plans and attitudes seemed to him to be more than usually
difficult to evaluate; but then he had to confess to a general
skepticism regarding the survey technique of economic forecasting.
According to the most recent Commerce-SEC survey, plant and
equipment expenditures would be up by 12 per cent this year,
whereas at the present time a year ago the increase for 1964 had
been expected to be 10 per cent.
Since actual expenditures in
1964 had exceeded the forecast by 4-1/2 percentage points, one
might take the latest reading as bullish if the circularity of
the figures was overlooked.
Plant and equipment expenditures
would rise by more than current projections if business expanded
3/23/65
-64
vigorously throughout 1965--but that was precisely the question
to be answered.
The latest survey figures on manufacturers' expectations
for inventories and sales seemed to be self-contradictory,
Mr. Hickman said, and even less reliable than the spending
figures.
Moreover, the past performance of those figures
indicated that they should be used with extreme caution.
The
latest survey of consumer intentions to purchase cars showed a
decline from October, but declines almost always occurred at
this time of year.
Here again, the evidence was inconclusive.
Secondly, Mr. Hickman continued, it was still much too
early to measure the effects of the voluntary credit restraint
program, but there were a few signs that suggested ultimate
success.
The Euro-dollar rate had moved upward more than
seasonally from early February to mid-March.
In his discussions
with bankers throughout the Fourth District, he had been assured
that the
guidelines would be met to the extent legally possible
under existing loan agreements.
The stream of new commitments
had been curtailed, but almost every bank reported a rise in
outstandings under existing agreements.
Thus, so far as the
banking sector was concerned, things might appear to get worse
in a statistical sense before they got better, but the expected
outcome was favorable.
No figures were available as yet in the
District for nonbank financial institutions.
-65-
3/23/65
Thirdly, Mr. Hickman said, recent monetary developments
were clouded by the fact that the March tax and dividend dates
had just been passed; thus the statistics raised more questions
than they answered.
The domestic money market had not shown the
usual pressures associated with March tax and dividend dates,
despite the fact that business borrowings at New York banks had
risen by a record amount.
The reported slowdown in the expansion
of time deposits during March was apparently associated with
maturing CDs around the tax date.
The money supply moved upward
in early March, sympathetically with the decline in time deposits
and a reduction in the Treasury balance.
He did not attach much
significance to those developments.
Finally, monetary policy seemed to Mr. Hickman to have
been appropriate in the past three weeks, as indeed it had been
since the turn of the year.
Borrowings had averaged more than
$400 million in February, but were a little too low for his
taste in early March.
At the last meeting, he had recommended
a free reserve target of between zero and plus $50 million, but
it seemed to him that the Committee should begin to think now
of a lower target if the voluntary credit restraint program
caused a return flow to New York of funds that would be redundant
unless absorbed by System action.
As goals for the next three
weeks he recommended borrowings of about $400 million, free
3/23/65
-66
reserves below the zero line (say, between zero and minus $100
million as a target), a bill rate between 3.95 per cent and
4.05 per cent, and Federal funds at 4 per cent or higher most
of the time.
He believed the current direc:ive would accommodate
the kind of mild tightening he had in mind for the next three
weeks, but he would have no objection to alternative B of the
staff's drafts, providing the reference to gold was eliminated;
if the U.S. could improve its balance of payments, the gold flow
would take care of itself.
Mr. Daane said that the direction of his own thinking
had been indicated by his earlier question to the Account
Manager as to whether there was room for the Committee to firm
reserve availability a bit further without creating expectations
of a discount rate change or making the present discount rate
untenable.
If he understood all the nuances of Mr. Brill's
analysis, it also led in that direction.
In Mr. Daane's
judgment the Committee should pay more than lip service to the
general proposition that monetary policy was a flexible instrument.
One virtue of monetary policy was that in a real sense the
Committee was able to shift course at three-week intervals, or
even more often if necessary.
For the coming three weeks Mr. Daane was inclined to
think in terms of a somewhat lower net borrowed reserve figure.
3/23/65
-67
He did not have an overt move in mind; perhaps $25 or $50 million
in addition to the current figure of about $50 million net
borrowed reserves would be appropriate operationally.
A slight
shift of that sort, he thought, would be supportive of the
voluntary restraint program.
In his opinion it would be premature
now to attempt to judge the probable impact of that program, and
it certainly was too soon to estimate its effective duration.
Mr. Daane said he had been impressed by comments on the
quality of credit he had heard at the American Bankers Association
meetings at Princeton last week, although he had not yet been
able to assess their full significance.
The bankers were almost
unanimously of the view that a considerable deterioration in
credit quality was both in process and in prospect.
The head of
one of the largest New York banks had said frankly that his bank
was making loans of poor quality.
Apparently the deterioration
had proceeded further than current statistics indicated.
Mr. Daane continued by observing that he had thought
somewhat lower reserve figures could be achieved within the
present policy directive, simply by giving the Account Manager
somewhat greater leeway to err on the side of tightness, but he
would not object to the adoption of either alternative A or B.
If alternative B was adopted, however, he would be slightly
concerned about one possibility; namely, that if the market came
to believe that the System had decided to firm policy again,
3/23/65
-68
there might be a general conviction that still further firming
was in prospect and, consequently, an undesirably large shift
in expectations.
Mr. Mitchell said that he believed that alternative A
was appropriate for the directive.
He concurred in much of the
analysis of the domestic situation offered by Messrs.
Hickman.
Bopp and
It seemed inevitable to him that declines soon would
appear in some economic statistics--for example, in the figures
for housing, automobiles, and steel--even though total industrial
production might be little changed.
He would have no objection
to increasing domestic short-term interest rates if he thought
that would help bring the balance of payments under control, but
he did not think that it would.
It was desirable, in his judgment,
for Euro--dollar rates to rise in order to use the market mechaiism
to induce central banks in Europe to withdraw their holdings from
the U.S. and sell them to their commercial banks to invest in the
Euro-dollar market (with the result that U.S. liabilities would
be to commercial banks abroad rather than to central banks).
A
competitive rise in domestic short-term rates might weaken the
market incentive to reduce holdings of dollars in the United
States given to the central banks by rising Euro-dollar rates.
Funds had to be shifted from New York to the Euro-dollar market
for the present problem to be solved, and the unwillingness of
European central banks to hold dollars had to be faced by relieving
them of dollars.
An opportunity to get some reluctant holders
-69
3/23/65
out of dollars appeared to be opening up as U.S. corporations
and banks withdrew from the Euro-dollar market; given some market
incentive the gap might be met in part from the deposits in the
U.S. of foreign central banks.
Mr. Shepardson said that the oral presentations today
and the staff's answers to the questions, as he interpreted them,
all indicated a continuing high level of economic activity.
There
was a possibility of some letdown at a future date as a result
of a steel settlement and other factors that had been mentioned,
but at present practically all elements seemed to be moving at
a high level.
The Committee had been concerned because the money
supply had not risen over the past few months, but according to
the figures for early March it was expanding at a high rate again.
The growth rate of money often showed large short-run changes for
reasons that apparently were not wholly understood.
Bank credit was expanding at an unduly high rate, Mr.
Shepardson continued.
That fact, together with the balance of
payments problem, led him to conclude that it would be appropriate
to move to somewhat firmer conditions.
To the extent that the
reflow of funds from abroad continued, he noted, there would be
additions to the supply of funds to be disposed of domestically.
While Mr. Shepardson favored the type of policy called
for in alternative B of the staff's drafts, he thought a different
sequence for the statements in the first paragraph would be
3/23/65
-70-
preferable to improve the emphasis.
desirable to replace the words "to
Also, he would consider it
assure full success of' (the
voluntary restraint program) with the words, "to reinforce";
while the Committee could make a contribution to that program,
it was not within its capacity to assure its
success.
Specifically,
he proposed the following language for the first paragraph:
The economic and financial developments reviewed at
this meeting indicate a generally strong further expansion
of the domestic economy and the continuing need to improve
our international balance of payments, as highlighted by
the heavy gold outflows in recent months. In this situa
tion, it is the Federal Open Market Committee's current
policy to seek to reinforce the voluntary restraint pro
gram to strengthen the international position of the
dollar, and to avoid the emergence of inflationary pressures
while accommodating moderate growth in the reserve base,
bank credit, and the money supply.
Mr. Robertson made the following statement:
Business activity seems to me to be continuing to
expand at a rate that does not call for any change in
monetary policy. We have two major industries where
activity seems unsustainably high--autos and steel. But
we also have another industry, housing--every bit as
important as these two--where activity ought to be regarded
as unsustainably low.
I would no more favor a tighter monetary policy just
to damp down autos and steel than I would vote for an
easier policy simply in order to bolster housing activity.
These special industry developments ought to be allowed
to work out their own natural adjustments to changing
market conditions, so long as these developments are not
so extreme as to upset the whole economy. And, in fact,
a few early signs of remedial adjustments in each of these
areas can be seen. The economy as a whole meanwhile seems
to be resisting the destabilizing pressures from these
particular industries very well. Commodity prices continue
stable on average, and I gather the outlook for further
GNP expansion through the rest of the year is now for a
3/23/65
-71
somewhat steadier and more assured advance than might
have been expected a month or two ago. All this adds up,
in my mind, to no reason for change in monetary policy
for domestic reasons.
On the balance of payments side, signs of the con
structive effects of the new program of restraint seem
to be multiplying. Now if we can hold firmly to this
line for a reasonable period of time, our problem of
capital outflows will be very much ameliorated. The
implication of this for monetary policy, I believe, is
that we should hold our course steady at this juncture--neither
tightening to compound the effects of the program, nor easing
because of the extent to which our payments problem has been
reduced.
I think we need to be very careful, however, to think
through what is a monetary policy of "no change."
In
focusing as much attention on the three-month bill rate
as we have in this and recent sessions, we come very
close to a "bill rate only" policy. And we ought not
to blind our eyes to that fact. Even setting asidelong-run
considerations of principle, the practical considerations
of the moment counsel against "bill rate myopia."
Such
arguments as have been advanced in the past for special
attention to the bill rate have depended importantly, as
I understood them, upon two assumptions: (1) that covered
differential yields on three-month bills were a good measure
of the rate incentives to international capital flows; and
(2) that net movements of liquid funds out of the United
States were a critical weakness in our payments position.
Whatever merit they may have had in the past, neither
of these assumptions is appropriate now. Our technicans
have been warning us repeatedly that the covered bill rate
differential is inadequate and undependable as a measure
of the rate incentive to capital flows, and that is
certainly true at the present moment when bill rates in
this country are low relative to other money market rates.
Second, some reflux now seems to be taking place in liquid
funds, which were moved abroad earlier for reason of interest
rate differentials. I suspect it is a good deal easier for
banks and businesses to decide to move these liquid funds
back home than it is to alter longer-run lending, investing
and borrowing programs.
I regard bank lending as the critical part of our
program, and I think we should be watching very closely
those conditions that alter bank willingness to lend. But
-72
3/23/65
here the bill rate is not the most indicative measure.
The most relevant money market conditions to observe are
how much banks are being led to borrcw at the discount
window, and at what rate; the amount of Federal funds
available and the prevailing funds rate; what it costs
banks to sell certificates of deposit, and how much they
are managing to sell; and what banks are moved to charge
for whatever dealer lending they are willing to do. It
is this whole complex of measures that we should have in
mind when we tell the Manager to maintain money market
conditions about the same as have prevailed in recent
weeks. In point of fact, all these measures except the
bill rate have remained firm or even tightened somewhat
over the March tax and dividend period. I would not like
to see them made tighter, but allowed to range around their
late February-early March levels, even if the bill rate by
itself sagged a bit more for a time. I would assume all
this might involve free reserves fluctuating moderately
around zero, but not consistently negative. It is with
this understanding that I would vote in favor of the
"no charge" version of the current directive as drafted
by the staff, alternative A.
Mr. Wayne reported that Fifth District business had continued
to expand about in line with trends in the nation as a whole.
The
Reserve Bank's latest survey indicated a further rise in optimism
among businessmen and bankers, and manufacturers again reported gains
in new orders, shipments, and employment.
Most textile and furniture
plants continued to push capacity to the limit to meet delivery
schedules that. extended further into the future than ever before in
recent years.
Nationally, Mr. Wayne said, business activity apparently
continued at a very fast pace, accompanied by rising optimism on the
part of businessmen.
To the extent that such spreading optimism
colored recent surveys of plans for spending on capital equipment
3/23/65
-73
and inventories the latter were suspect as guides for forecasting.
Such plans were subject to continous adjustment in the light of
business developments.
Mr. Holland had suggested a fair degree of
stability in the private sector reflecting moderation in inventory
and wage policies.
The net result was that the surveys gave a fairly
strong indication of some increase, especially in the first half of
the year, but left much uncertainty as to the amount of the increase.
Several preliminary indications of the effectiveness of the
voluntary restraint program on foreign lending were encouraging,
Mr. Wayne remarked, and they gained significance because they fitted
into a logical pattern of what might have been expected.
To some
extent, impossible to define, those preliminary developments might
have been the natural result of the cessation of the heavy lending
which had preceded the inauguration of the program rather than a
consequence of the program per se.
The System should be encouraged
by the early results but not enough to reduce its efforts.
In the past three weeks financial markets had been definitely
stronger, Mr. Wayne
observed.
Bill rates had declined, contrary to
the normal seasonal pattern, and the tax-exempt market, which recently
had been heavily congested, had shown a substantial recovery.
While
those developments were unfolding here, the voluntary restraint
program had brought a definite tightening effect abroad.
Interest
rates were distinctly higher in Europe and in other parts of the
world.
As a result, the interest rate differential between the
-74
3/23/65
United States and Europe was now greater than it had been three
weeks ago.
Mr. Wayne thought the Committee should continue to support
the voluntary restraint program by maintaining firm conditions in
the domestic market.
That migh: well require a reserve availability
somewhat below the levels of the past two weeks.
Conditions in the
domestic economy would seem to permit if not to justify such a
reduction.
The pace of activity in a number of major industries
could hardly be described as less than feverish.
Those industries
included automobiles, steel, textiles, furniture, and aluminum, and
perhaps others.
The growth in bank loans in the past two months
indicated that funds had been readily available to encourage that
feverish pace.
It appeared to him that the Desk had maintained
reserve availability within the range indicated by the Committee at
the previous meeting but that rate of availability had not produced
the degree of firmness which he understood had been indicated in the
directive.
Hence, he would favor returning to that degree of firmness
by reducing reserve availability.
He wished he could agree with
Mr. Mitchell, but he felt that a widening of the rate differential
between the U.S. and Europe might subject the voluntary program
to irresistible pressures and bring it tumbling down like a house
of cards.
Alternative B for the directive appeared to Mr. Wayne to
express the posture which he considered appropriate.
3/23/65
-75
Mr. Clay remarked that the staff analysis of business
activity covered the situation very well and indicated the rather
pronounced uncertainties concerning some sectors of the economy.
It had to be assumed that the pace of activity in steel and autos
was not sustainable and that the recent rate of increase
aggregate economic activity would not continue.
in
Unless offset
by significant expansion in other sectors, readjustment in steel
and autos could have a pronounced impact upon the overall level
of economic activity.
The timing of that impact was not clear,
and its degree was clouded by both the uncertainty of timing and
the question as to whether the readjustments in steel and autos
would converge.
Those forthcoming developments were destabilizing
in nature and could prove dangerous to a continuation of the
business upswing at the present advanced stage.
However, the
underlying trends in the economy were rather reassuring, despite
the possibility of an irregular pattern of economic activity over
the course of the year.
While preliminary indications as to recent international
payments developments probably told little as to the success of
the Administration's program, Mr. Clay said, the short-run evidence
was on the positive side.
Or, to put it another way, it would be
discouraging if the new program, the expectations created by it,
and the initial financial responses had not made a noticeable mark on
3/23/65
-76
the various markets involved.
On the other hand, concrete evidence
as to the effectiveness of the program was going to require con
siderably more time to develop.
Tenth District city banks appeared to have responded to the
changes in financial environment in much the same way as outlined
in the staff comments, Mr. Clay continued.
Contrary to much of
last year when business loan demand deviated from that in the
nation, business loan demand had been strong in District banks this
year.
Moreover, the expansion had rot been confined to primary
metals and automobiles, but had been spread throughout the range
of business loan categories.
Selective interest rate increases
had been made in recent months, but it apparently had not been
possible for District banks to increase interest rates on loans
to national firms with prime credit ratings.
The faster pace of
time deposit growth following the modification of Regulation Q
had slowed down recently at District banks.
Portfolios had been
readjusted so as to increase holdings of municipal securities
and reduce somewhat holdings of Governments, and to lengthen the
maturities of the Governments held.
Special factors affecting loan expansion and lack of direct
evidence as to the effect of international payments developments
complicated the making of a judgment as to monetary policy, Mr.
Clay said.
Those factors particularly complicated the selection
3/23/65
-77
of the targets for monetary policy implementation.
In the present
state of flux, it would seem logical to him to attempt to maintain
policy essentially unchanged, about in line with the decision made
at the previous meeting of the Committee.
had declined slightly since that time.
The Treasury bill rate
With the uncertainties
involved as to all of the factors impinging on the bill rate, however,
it would not seem appropriate to instruct the Manager to reduce credit
availability to whatever extent necessary to bring about a 4 per cent
bill rate, even though a bill rate approximating the discount rate
remained the Committee's goal.
While the Committee was not seeking
a continuation of the rate of increase in bank credit that had
occurred in January and February, that was not likely to continue
in view of the slower rate of growth in time and savings deposits.
Alternative A of the draft current economic policy directive would
fit such a policy prescription, Mr. Clay said.
No change should be
made in the Federal Reserve Bank discount rate.
Mr. Scanlon turned directly to the staff questions.
1.
Economic activity in the Seventh Federal Reserve District
continued to rise, he said, paced by autos, steel, and producers'
durables.
While the outlook for autos and steel continueduncertain,
the outlook for machinery and equipment was strong and appeared to
be getting stronger.
as were consumers.
Midwest businessmen were generally optimistic,
Some capital expenditure programs of steel and
machinery producers were falling behind schedule because of shortages
3/23/65
-78
of skilled workers at both the construction site and the machinery
manufacturing plants.
Mr. Scanlon believed those developments were generally
consistent with the Board staff's comments on the first question.
He detected a somewhat greater feeling of strength in the economy,
but that might be because of the importance of the durable goods
industries in his District.
2.
Mr. Scanlon thought it was too early to get any meaningful
fix on the effects of the voluntary restraint program on the balance
of payments, but the evidence he had seen and the reactions he had
encountered were consistent with the staff statement.
Bankers and
other businessmen appeared to be taking the program seriously and
were reviewing their portfolios to find ways to meet the guidelines.
There was concern on the part of some of the banks that the Commerce
Department program might be less restrictive and, consequently, less
effective than the Federal Reserve program.
Those banks that had
estimated they were above the target levels as of mid-February now
indicated they hoped to be close to target levels by the end of
March.
As would be expected, those banks which had recently been
expanding their foreign business rapidly, especially some of the
medium-and small-size banks, had the greatest difficulty in making
necessary adjustments.
3.
On balance, Mr. Scanlon observed, banks had sold U.S.
Government securities and acceptances, had reduced dealer loans,
3/23/65
-79
and had paid somewhat higher rates for time deposits in order to
meet loan demands.
But they also had added to their municipal
and agency securities.
Weekly reporting banks in the Seventh
District showed a smaller net rise in total credit since the
end of January than a year ago, but that might reflect repay
ments on the unusually large loan increases of the two previous
months.
Reserve positions of the District's money market banks
were more comfortable than he had anticipated.
Considering the large increases in seasonally adjusted
reserves and bank credit, as estimated for all member banks for
January and February, Mr. Scanlon found it difficult to see how
the situation could be described as one of reduced reserve
availability.
To some extent, higher average borrowings had to
represent a substitute for other short-term sources of funds on
which rates had risen.
At the same time nonborrowed reserves had
been increased.
4.
Mr. Scanlon said he had nothing to add to the staff's
comments on business financing developments in recent weeks except
to note that widespread discussion of the balance of payments
program might have had some effect on expectations of both borrowers
and lenders and thereby tended to boost availability of funds in
domestic markets.
The strong demand for business loans and the
moderate sales of Treasury bills over the tax date appeared to give
3/23/65
-80
conflicting signals with respect to corporate liquidity.
thought it
He
quite likely that more than the usual amount of con
flicting indicators might be seen in
the weeks ahead as the voluntary
restraint program took hold.
5.
With respect to money market and reserve conditions,
Mr. Scanlon thought that two factors might play an impotant role
during the next few weeks.
Repatriation of funds in
consequence of
the balance of payments program might heighten interest in
bills and might exert downward pressures on bill yields.
same time,
the expected cutback in
disappearance
Treasury
At the
foreign lending combined with the
of such special factors requiring financing as the
dock strike might lead to slower growth in
loan demand.
It
seemed
to him that the impact of those forces would be for a given level
of free reserves to be consistent with both somewhat lower bill
rates and a somewhat slower rate of credit expansion than in
recent weeks.
Under current conditions, Mr. Scanlon said, he would like
to maintain the firm tone in
the money market of the past week
but he would dislike seeing the bill
rate pressed any lower.
His
feelings regarding policy were similar to those expressed by Mr.
Daane; he would not favor overt action today but would like to
see firmness maintained,
and he judged that that program could be
accomplished under alternative A for the directive.
By the next
-81
3/23/65
meeting, the Committee should have a better opportunity to judge
the effects of the voluntary credit restraint program and should
have some clarification on the disparity between short-term bill
rates and other short-term rates.
Mr. Strothman commented that the Ninth District apparently
was about to close its books on a very good first quarter--a quarter
marked by a continuing economic expansion and, moreover,
expansion.
a balanced
According to the Reserve Bank's most recent survey,
District manufacturers were expecting first-quarter profits and
output and, to lesser extent, employment, to be above their
fourth-quarter levels.
It was quite possible that the increase
in profits would be substantial.
Current but fragmentary information suggested that District
employment was continuing to grow and that unemployment was con
tinuing to decline, Mr. Strothman said.
That was what State
employment offices across the District reported.
Also, the District
"help wanted" index seemed to indicate that demand for labor was up
rather sharply.
Mr. Strothman had observed no marked change in prices in
the District.
Although there were reports of price increases, both
for raw materials and finished products, the modal response continued
to be "no change."
With respect to factors bearing on future prospects,
Mr. Strothman said he had only two comments to make.
First, there
3/23/65
-82-
had been some buildup of inventories among District firms; and
second, fragmentary evidence suggested an increase in new orders
and in the backlog of orders.
The increa.e in new orders was
impressive; the inventory buildup likewise was impressive, but in
an undesirable way.
Generally speaking, then, Mr. Strothman concluded, it
appeared than the current general economic posture and outlook in
the Ninth District were much like those of the nation.
Turning to the financial scene, Mr. Strothman remarked
that perhaps he should start by saying that the demand for
commercial and industrial loans evidently was still strong.
He
attributed the strength, at least in part, to the continuing
inventory buildup.
The mid-February to mid-March increase in
commercial and industrial loans for reporting banks had been much
greater than seasonal.
However, other forms of bank credit had
decreased in recent weeks, with the result that total bank credit
of reporting banks also had declined sharply, not only on a
seasonally adjusted basis but also absolutely.
That development
reflected the sharp contraseasonal decline in bank deposits, both
demand and time, that had occurred in the last few weeks.
The
decline was particularly reflected in the recent reduction in
reporting-bank holdings of short-term Treasury securities.
The
declines in total credit at reporting banks, and in their demand
-83
3/23/65
and time deposit totals as well, came after increases for all
Ninth District banks which persisted from the beginning of the
year through mid-February.
Only the trend of commercial and
industrial loans had continued uninterrupted.
When the numbers
became available, Mr. Strothman said, it would be interesting
to see whether the recent trend-breaking declines also had been
experienced by nonreporting banks in the District.
Mr. Swan said that in California and Washington, the only
States for which February data were as yet available, agricultural
and nonagricultural employment had increased and the unemployment
rate had declined--a reversal of the situation in January.
The
farm labor situation still was quite unsettled, but it could lead
to a considerable reduction in truck crop acreage, particularly of
tomatoes, and to considerably less credit to finance processing.
However, it still was early enough for the situation to change, and
exactly what the ultimate outcome would be remained to be seen.
As
the Committee knew, Secretary of Labor Wirtz was visiting the area
now to see whether there should be any change in policy with respect
to bracero labor.
In the three weeks ending March 1C, Mr. Swan remarked, total
credit extended by weekly reporting banks in the District increased.
A rise in holdings of other securities more than offset a reduction
in holdings of Governments and a substantial decline in loans,
-84
3/23/65
including business loans.
The business loan decline, which was
rather widely distributed and in total about twice that of a year
earlier, was in marked contrast to the increase in the rest of the
country.
Moreover, the increase in holdings of other securities
in large measure reflected a special situation involving a substantial
purchase of Federal Housing Authority issues by one bank.
Twelfth District banks had not been borrowing heavily from
the Reserve Bank, Mr. Swan said.
In fact, during the six weeks
ending March 17 the District's weekly percentage of national member
bank borrowings ranged between 4 to 1 per cent.
District banks
also had been in the Federal funds market as sellers and had been
making advances to security dealers.
On the other hand, reports
of the banks participating in the business loan survey supported
the national indication of some firming in rates and other con
ditions on loans.
Mr. Swan remarked that he agreed with the staff statement
in reply to the first question, that recent
information "suggests
that expansion in overall economic activity will continue in the
near future, although probably at a more moderate pace than in
the first quarter."
Granting all of the present uncertainties,
that seemed to him to be the most reasonable conclusion.
Although there was no conclusive evidence as yet regarding
the effectiveness of the voluntary credit restraint program, Mr. Swan
-85
3/23/65
said, the Reserve Bank had received every indication of support
from member banks in the District.
It appeared, however, that
most of the District banks would show an increase from the end of
January to the end of February in foreign credit extensions and
commitments, undoubtedly because of activity in early February.
As Mr. Shuford had reported was the case in the Eight District,
some banks in the Twelfth District reported calls by some foreign
borrowers investigating opportunities for new or increased credit
lines.
It seemed to Mr. Swan that, with the business situation
strong but, if anything, moderating slightly rather than accelerating,
there was no basis in the domestic situation for a firmer policy.
Nor did he see any basis for such a policy in the foreign situation,
with the voluntary credit restraint progran just getting underway
and with the early indications that it would be effective.
Con
sequently, he favored no change in policy; he would like to see a
continuation of current conditions in short-term markets.
The bill
rate had been declining recently, but as the Manager had reported
there were definite indications of firmness in other money market
conditions.
He was not particularly concerned about the bill rate
decline; he would be concerned if the easing extended throughout
the short-term area, but as far as he could see there were no
indications of such a development at this point.
He was inclined
3/23/65
-86
to expect the bill rate trend to reverse, but he would not be
concerned if the rate temporarily fell somewhat below its present
level and he saw no reason for acting for the specific purpose of
raising it.
Along with Mr. Robertson, he would hope that current
money market conditions could be maintained with free reserves
fluctuating around zero.
Mr. Irons reported that most economic conditions in the
Eleventh District were strong; although there were minor changes
in both directions, business activity was moving within a narrow
band at a high level.
Employment and industrial production were
up a bit, and construction was down, but it was hard to determine
in the shortrun how significant such changes were.
At banks, Mr. Irons said, commercial and industrial loans
had been strong during the recent period.
Among the major loan
categories, only construction loans had not increased.
Investments
were off a bit, with sales of U.S. Governments more than offsetting
increases in other investments.
Demand deposits were down slightly,
but time and savings deposits had shown substantial increases.
The positions of banks apparently were a little less liquid than
before.
Banks were not increasing their borrowings from the Reserve
Bank, but they had substantially increased their net purchases of
Federal funds.
Bankers reported that their rates on loans were
edging up on an individual borrower, negotiated basis.
He also
3/23/65
-87
had heard some general observations to the effect that there was
deterioration in the quality of some of the bank credit being
extended.
National business conditions also were strong, Mr. Irons
continued.
There were a number of uncertainties in the picture,
but in his judgment the elements of weakness were outweighed by
those of strength.
Demand was at a high level and industrial
production was continuing to rise.
expenditures were large.
Planned plant and equipment
Inventory accumulation had not been
quite as great as had been believed, and stock-sales ratios
continued low.
Mr. Irons said that the indications for the voluntary
credit restraint program seemed favorable both nationally and in
the District.
He had received unqualified statements of support
for the program from the 13 or 14 banks with which he had talked.
However, almost all of those banks had asked for additional
reporting forms so that they could rew.rk their December figures;
it seemed that some loans had been overlooked in the original
reports.
That introduced a new kind of uncertainty.
A week ago
he had thought that many of the District's banks were not over
the 105 per cent guideline level, but he could not say how the
picture would look when the revised forms were received.
Mr. Irons thought that fairly good cases could be made
both for maintaining the present posture of policy and for
-88
3/23/65
shifting a bit further toward a firmer policy.
But the range of
difference ir. the alternatives under discussion seemed to him to
be quite small.
In view of the many uncertainties in the situation,
his inclination at present was to maintain the posture of policy
about as it had been during the past three weeks; that, in his
judgment, would not be damaging to the international situation
or to the domestic economy.
He would favor net borrowed reserves
in the zero to $50 million range and would not be disturbed if
there was some rise in member bank borrowing.
He would expect
the rate on Federal funds to be at levels of 4 - 4-1/8 per cent.
He was not sure what Treasury bill rate would result because of
the various factors affecting it at present; while he would prefer
no further decline in the bill rate he would not advocate deliberate
action to increase it unless greater difficulties developed in the
market than there had been in the past three weeks.
change the discount rate.
He would not
It might be possible to continue the
current directive--there was something to be said for not changing
it--but he had no particular objection to alternative A of the
staff's drafts.
Mr. Ellis reported that the New England economy continued
to expand steadily as measured by employment, production, and
construction data adjusted for seasonal and irregular influences.
The newest and strongest evidence of such growth appeared in the
results of the Reserve Bank's annual survey of capital spending
3/23/65
-89
intentions, which covered a sample of New England manufacturers
accounting fcr one-fifth of the District's manufacturing employment.
Tabulations were still incomplete, but present indications were
that manufacturers planned to increase capital expenditures in
1965 by about 20 per cent over last year's outlays.
As a
reference point on accuracy, a similar survey last year suggested
a projected 16 per cent increase, while a still imcomplete tabu
lation indicated that the actual gain in 1964 was a little over
12 per cent.
Turning to the first of the staff's questions, concerning
business activity, Mr. Ellis said that he had found Mr. Holland's
report today to be highly perceptive, but it was not conclusive
with regard to the outlook.
Mr. Ellis' own judgment was that
economic expansion was likely to be sustained throughout the year
with a discernible inventory bulge traceable to the steel wage
negotiations.
Mr. Ellis remarked that, even though the staff's answer
to the first question asserted that recent survey results "all
imply continuing growth" in capital outlays, the capital investment
prospects were clouded by conflicting evidence.
The National
Industrial Conference Board's survey of capital appropriations
indicated a decline in appropriations in the fourth quarter of
1964, which suggested an investment slow-down concentrated in the
second half of 1965.
However, the more recent Commerce-SEC survey
offered contradictory evidence of growing investment outlays
-90
3/23/65
throughout the year.
On balance, Mr. Ellis preferred to rely on
the more recent survey, at least until there was further confirmation
of the level of appropriations.
Mr. Ellis noted that no solid evidence was available as yet
regarding the effect of the balance of payments program on inter
national capital flows.
He could offer only the reports of two
large insurance companies that they had put a dead halt to all
foreign commitments, at least until such time as the outlines of
the voluntary credit restraint program became clearer for themselves,
for banks, ard for corporations.
He reported that there was
widespread concern about the loopholes that might be found by
nonvolunteers or semivolunteers in the program, particularly in
the corporate category.
Concerning bank responses to the combination of forces
affecting their position, Mr. Ellis reported that District banks
were expressing satisfaction bordering on surprise with the strength
of business loan demand beyond that traceable to tax borrowing.
It
was apparent that New England weekly reporting banks had made more
substantial shifts in the composition of their loan portfolios in
the past year than was true of the national pattern.
He judged that
that was due to the basic strength of loan demands; business loans
had expanded by 14 per cent, real estate loans by 17 per cent, and
consumer loans by 11 per cent.
All other categories of loans had
actually declined at District banks, in contrast to expansions in
-91-
3/23/65
those categories nationally.
of their loans,
In addition to changing the composition
District banks had moved heavily out of Governments
and into municipals.
Mr.
Ellis noted that he had been participating in
the daily
telephone conference calls recently but did not have the explanation
for the current "perverse" behavior of money market variables, to
use Mr. Stone's term.
He suspected that the seeming inconsistencies
reflected imperfections in the market.
more basic forces.
But they might also reflect
For example, if it was true that corporations
were not sending short-term funds abroad and in some cases were
returning them, it was natural to expect them at first to put the
funds into short-term Governments, as Mr. Stone had suggested, and
for rates on those securities to sag.
Later the corporations
presumably would spread the funds to other markets.
Secondly, the
recent high dealer loan rates at New York banks might reflect the
distribution of reserves around the country.
Member bank borrowings
during the past three weeks had averaged about $100 million less
than in
the preceding three weeks; perhaps that was traceable to the
greater availability of reserves away from the money market centers.
The dealers were reaching out into the Federal funds market for funds
they needed and, while rates on loans at New York banks had risen,
dealers were relying less on those banks than earlier.
The impact of the reflow on the bill rate had resulted in a
decline of 6-8 basis points since the Committee's previous meeting,
3/23/65
-92
Mr. Ellis observed, and the rate was continuing to sag.
The
existence of apparent inconsistencies in the variables did not
relieve the Committee of the need for a choice as to which
variables it should lean on most in setting policy for the next
three weeks.
It was possible that the seeming inconsistency
reflected a basic incompatibility between the unrestricted provision
of Federal Reserve credit required to hold average net borrowed
reserves at the target level and a 4 per cent bill rate.
The
Committee last had moved from a positive to a negative net
reserve position in 1958-59 and the corresponding short-term bill
rate then had been 3 per cent.
That raised the possibility that
the Committee was trying to overdetermine the economic system- to
borrow Mr. Brill's phrase--in setting targets with respect to both
net reserves and bill rates.
Mr. Ellis said he thought the Committee should avoid the
natural tendercy to wait another three weeks for vision to clear.
He agreed in general with the staff's specifications of the relations
that were likely to prove mutually consistent in coming weeks, as
given in their answer to the final question.
Mr. Hayes' position on policy.
And he agreed with
In Mr. Ellis' judgment, the Committee
should move to soak up some of the repatriated funds to keep domestic
credit availability unchanged.
He favored an attempt to restore
short-term bill rates more nearly to the 4 per cent level.
3/23/65
-93
As a start, he would expect consistently negative reserve positions
and would accept net borrowed reserves in the $50-$100 million
range.
He favored alternative B for the directive, and thought
Mr. Shepardson's suggestions for revising the first paragraph
were good.
Mr. Ellis noted that it had been nearly a year since
Mr. Broida's memorandum analyzing the Committee's directives
had beer prepared.
The Committee had made substantial changes in
its procedures concerning what had been called "elements 1 and
2"
of the directive in the subsequent memoranda from Messrs. Mitchell,
Swan, and himself, but it had not yet succeeded in holding a full
discussion of elements 3 and 4.
He asked whether the Committee
would judge it helpful to have the staff again review past
progress and present practice, and prepare a new appraisal of the
present directive in the light of current needs.
Mr. Wayne commented that the Committee had discussed the
matter in question, although it had not reached a conclusion.
Mr. Ellis replied that the Committee had discussed elements
1 and 2 at great length, but he was referring specifically to
elements 3 and 4.
A general discussion of the desirability of
specifying numerical quantities in the directive, as called for
in the original proposals for the latter two elements, had been
scheduled repeatedly, but review of the minutes of Committee
3/23/65
-94
meetings since August 1964 documented the fact that such a
discussion had not materialized.
Chairman Martin said he thought Mr. Ellis' suggestion was
a good one.
There being no objection, it was understood that the
staff would proceed with a study along the lines Mr. Ellis had
indicated.
Mr. Balderston said that Messrs. Hayes, Bryan, Shepardson,
Wayne, and Ellis already had described his own prescription for
policy over the next three weeks.
Not wishing to repeat the
arguments he had advanced at the previous meeting, he would
simply remind the Committee that over a four-year period bank
credit had been expanding at an annual rate of 8 per cent, and
he would reiterate his belief that that rate of expansion was too
fast for continued safety.
It already had contributed to the
outflow of bank funds abroad and perhaps was setting the stage
for price advances and other evidences of inflation at home.
In this connection, he would commend
for the members' reading the
Committee's minutes for the year 1957, which he thought they
would find of some interest at present.
In his view, Mr. Balderston continued, the Committee had
a responsibility to help staunch the hemorrhaging of bank funds
by providing such conditions as would give the voluntary restraint
program a fighting chance to succeed.
In his judgment neither a
3/23/65
-95
voluntary restraint program, nor even a harness of selective
controls, could be fully effective if the loans and investments
of banks continued to rise at such a high rate.
To permit the
present rate of bank credit expansion to continue would strengthen
the pressure to put bank funds to work in the more lush pastures
abroad.
In his view, if the Committee did not move steadily,
although smoothly, toward a slower rate of reserve growth, the
System would have failed to support the voluntary restraint
program.
Whatever was to be accomplished had to be done now or
the chance to help make the program a success would have passed,
Mr. Balderston said.
Relatively easy reserve availability would
so tempt a few individual banks to find loopholes as to provide
excuses for others to emulate them.
Balancing on the thin edge
between the urge for profits and the urge to be patriotic, banks
would find adherence to the guidelines much more expedient if
the pressure on them to lend and inve.t was reduced.
They would
feel such pressure less if more of their reserves were being
supplied at their own initiative by discounting instead of at
the initiative of the System.
Turning to the domestic scene, Mr. Balderston remarked
that there were evidences of an incipient inflationary outburst
that should be heeded now while there was time for precautionary
measures to function.
The index of wholesale prices was 1 per cent
-96
3/23/65
higher than the average prevailing in the first nine months of
last year; sensitive commodity prices had shown no tendency to
recede after the run-up last fall; as Mr. Hersey had reported
today, prices of producers' equipment--which was so important in
U.S. exports--were 2 per cent higher than 1-1/2 years ago; and
the papers daily were citing reports of either price increases
or intentions to raise prices for various industrial commodities.
Mr. Balderston urged that the free reserve figure be
lowered progressively and gradually during the period when
monetary actions could be taken without disturbing Treasury
financings.
If the System was to readjust its posture during
the current calendar year, time was of the essence.
The tightening
of policy should be gradual enough for the impact upon bill rates
to be experimental, but steady enough so that the increase in
bank credit was diminished significantly from the 8 per cent rate
of the past four years.
To achieve those ends, Mr. Balderston urged further steps
now towards firmer money market and reserve availability conditions,
with the Desk aiming in the next period at a range for net borrowed
reserve of $50-$150 million.
Such a policy would imply some
increase in member bank borrowing from the System.
With that
policy shift--and he would emphasize that he was calling for a
shift rather than an easy continuation of the status quo--the bill
-97
3/23/65
rate probably would move above 3.95 per cent and perhaps would
penetrate the discount rate.
He was willing to pay that price
because he thought the Committee would be unable to stop the
outflow unless it acted now.
It was true, Mr. Balderston continued, that the Federal
Reserve could not by itself bring about equilibrium in the
nation's balance of payments.
But it was equally true that too
long an adherence to a very modest lessening of ease would fall
short of the contribution that the System should make.
The time
to curb the outflow of dollars by reducing the supply of bank
credit was now, while the voluntary restraint effort had youthful
vigor.
In the face of crisis, steady movement in the right
direction would seem to be called for; the present was a time of
international crisis.
For the Committee to resort again to the
status quo would verge upon a lack of policy, in his judgment.
Mr. Balderston concluded by noting that he favored
alternative E for the directive, with the revisions suggested
by Mr. Shepardson.
Chairnan Martin said that in view of the lateness of the
hour he would confine his comments on the current situation to a
few observations.
First, this was the only year of the current
business expansion in which he had heard no discussion at all of
the "February doldrums."
He thought that was significant, as an
3/23/65
-98
indication of the strength of business conditions.
It was
necessary, of course, to anticipate a slow-down at some point,
since the millennium had not been reached.
Secondly, he could
not believe that selective controls ever could be effective
without some buttressing by general controls.
In Chairman
Martin's opinion the timing of the Committee's policy actions
had been reasonably good.
A majority of the Committee appeared to favor a policy
change today, the Chairman noted, but the magnitude of the shift
advocated by most was so slight that it was difficult to say
whether it would prove significant.
To call for a change of
about $50 million in free or net borrowed reserves was to attempt
to exercise a high degree of precision, and he questioned whether
such a change would have any real effect or. current conditions
in the money markets.
firmer policy.
Nevertheless, he also favored a slightly
He thought the shift should not be large enough
to encourage expectations of an immediate increase in the discount
rate, nor should it be so slight as to encourage expectations
that the Committee was going to ease policy shortly.
He was not
sure how a change of the indicated magnitude could best be
accomplished, but he thought it desirable not to have market
expectations get carried overboard in either direction.
Suggested
alternative B for the directive seemed to come closer to spelling
3/23/65
-99
out such a policy than did alternative A, but the Desk probably
could operate in the same way under alternative A and still be
within the framework of the directive.
If the Committee chose
alternative B, he would favor the revisions that Mr. Shepardson
had suggested.
By a slight firming of posture today, the Chairman
continued, the Committee would be indicating that it was willing
to buttress the voluntary restraint program by using monetary
policy flexibly.
At the same time, the flow of savings was so
large that there was really little reason for a change in the
prime rate by banks.
Granting the present lack of meaning of
that rate, there was little or no evidence of any conditions in
the money markets that would lead to a change.
And the flow of
savings was such that even with a moderately less easy monetary
policy there might be slight reductions in mortgage rates, at
the other end of the spectrum.
That was an aspect of current
conditions in the money and capital markets that made it difficult
to use old benchmarks in deciding on policy.
Chairman Martin then referred to Mr. Mitchell's observation
that it might be helpful to have a wider spread between interest
rates here and abroad, and said that he questioned that conclusion.
Mr. Mitchell replied that he thought the Committee should
discuss the question fully some time soon; it was an extremely
3/23/65
-100-
important issue.
He was convinced that it was necessary to do
something to reduce foreign central banks' holdings of unwanted
dollars, and he felt, as indicated earlier, that a higher Euro
dollar rate and a widened spread between that rate and U.S.
short-term rates was one way of accomplishing that objective.
Chairman Martin said he agreed that further discussion
of the matter would be desirable at some point.
The Committee then returned to consideration of the
directive.
After discussion, the Chairman suggested that a vote
be taken on a directive with a first paragraph essentially like
that proposed by Mr. Shepardson and with a second paragraph
taken from alternative B of the staff's drafts.
Thereupon, upon motion duly made
and seconded, the Federal Reserve Bank
of New York was authorized and directed,
until otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the following
current economic policy directive:
The economic and financial developments reviewed at
this meeting indicate a generally strong further expansion
of the domestic economy and the continuing need to improve
our international balance of payments, as highlighted by
heavy gold outflows in recent months. In this situation,
it is the Federal Open Market Committee's current policy
to reinforce the voluntary restraint program to strengthen
the international position of the dollar and to avoid the
emergence of inflationary pressures, while accommodating
moderate growth in the reserve base, bank credit, and the
money supply.
To implement this policy, System open market opera
tions over the next three weeks shall be conducted with
3/23/65
-101
a view to attaining slightly firmer conditions in the
money market.
Votes for this action: Messrs.
Martin, Hayes, Balderston, Bryan, Daane,
Ellis, Scanlon, and Shepardson. Votes
against this action: Messrs. Mitchell,
Robertson, and Clay.
It was agreed that the next meeting of the Committee would
be held on Tuesday, April 13, 1965, at 9:30 a.m.
The Chairman then noted that tentative plans would call
for the two subsequent meetings to be held on May 4 and May 25.
The May 4 date, however, conflicted with the Second Meeting of
the Governors of Central Banks of the American Continent, to be
held in Uruguay during the first week of May.
Several members of
the Committee and staff were expecting to attend that meeting.
Accordingly, it might be best to shift the Committee meeting
tentatively planned for May 4 to May 11.
After May 11, the
Committee could return to its normal schedule, and plan to meet
next on May 25.
There was agreement with the Chairman's suggestion.
At this point all members of the staff left the meeting,
and the Committee went into executive session.
Subsequently, the
Chairman reported that in the course of the executive session the
Committee, upon motion duly made and seconded and by unanimous vote,
had accepted the resignation of Mr. Robert W. Stone as Manager of
the System Open Market Account, effective as of the close of
business March 23, 1965, and had selected Mr. Alan R. Holmes,
3/23/65
-102
Vice President of the Federal Reserve Bank of New York,
to serve
at the pleasure of the Federal Open Market Committee as Manager
of the System Open Market Account, effective March 24, 1965, on
the understanding that Mr. Holmes' selection was subject to his
being satisfactory to the Board of Directors of the Federal
Reserve Bank of New York.
Note: Advice subsequently was received that
Mr. Holmes was satisfactory to the Board of
Directors of the Federal Reserve Bank of New
York for service in the capacity indicated.
Thereupon the meeting adjourned.
Secretary
Attachment A
CONFIDENTIAL (FR)
March 22, 1965.
Draft Current Economic Policy Directives for Consideration by the
Federal Open Market Committee at its Meeting on March 23, 1965
Alternative A (no change in policy)
In light of the economic and financial developments reviewed
at this meeting, including the generally strong further expansion
of the domestic economy and the continuing need to improve our
international balance of payments, it remains the Federal Open Market
Committee's current policy to accommodate moderate growth in the
reserve base, bank credit, and the money supply. This policy seeks
to support fully the national program to strengthen the international
position of the dollar, and to avoid the emergence of inflationary
pressures.
To implement this policy, System open market operations over
the next three weeks shall be conducted with a view to maintaining
about the same conditions in the money market as have prevailed in
recent weeks.
Alternative B (slightly firmer policy)
In light of the economic and financial developments reviewed
at this meeting, including the generally strong further expansion of
the domestic economy and the continuing need to improve our inter
national balance of payments, highlighted by heavy gold outflows in
recent months, it remains the Federal Open Market Committee's current
policy to accommodate moderate growth in the reserve base, bank
credit, and the money supply. This policy seeks to assure full
success of the voluntary restraint program to strengthen the inter
national position of the dollar, and to avoid the emergence of
inflationary pressures.
To implement this policy, System open market operations
over the next three weeks shall be conducted with a view to
attaining slightly firmer conditions in the money market than have
prevailed in recent weeks.
Cite this document
Federal Reserve (1965, March 22). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19650323
@misc{wtfs_fomc_minutes_19650323,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1965},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19650323},
note = {Retrieved via When the Fed Speaks corpus}
}