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, May 25, 1965, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bryan
Daane
Ellis
Galusha
Maisel
Mitchell
Robertson
Scanlon
Shepardson
Messrs. Bopp,1/ Hickman,1/ Clay, 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. Holmes, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Messrs. Garfield, Partee, and Williams, Advisers,
Division of Research and Statistics, Board of
Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
1/
Entered the meeting at point indicated in the minutes.
5/25/65
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Mr. Patterson, First Vice President of the
Federal Reserve Bank of Atlanta
Messrs. Eisenmenger, Sanford, Eastburn, Mann,
Ratchford, Jones, Parsons, Tow, and Green,
Vice Presidents of the Federal Reserve Banks
of Boston, New York, Philadelphia, Cleveland,
Richmond, St. Louis, Minneapolis, Kansas
City, and Dallas, respectively
Mr. Lynn, Director of Research, Federal Reserve
Bank of San Francisco
Messrs. Fousek and Sternlight, Assistant Vice
Presidents of the Federal Reserve Bank of
New York
Mr. Geng, Manager, Securities Department,
Federal Reserve Bank of New York
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
May 11 through 19, 1965, and a supplemental report for May 20 through
24, 1965.
Copies of these reports have been placed in the files of
the Committee.
In comments supplementing the written reports, Mr. Sanford said
the gold stock would drop by another $60 million this week, the second
such decline this month.
The total decline since the beginning of the
year thus amounted to $1,095 million and the gold stock now stood at
$14,293 million.
At the moment, it looked as though the pace of sales
in the next couple of months would be below the very high levels of
the recent past, mainly because the accumulation of dollars by France
now seemed to have tapered off, at least temporarily.
However, as was
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evident from past experience, it was hazardous to assume that because
French reserves, or those of any other country for that matter, ceased
to grow for a month or so, that could be counted on as a continuing
trend.
Turning to the London gold market, Mr. Sanford reported that
the major development in the last two weeks had been the reappearance
of Communist China as a substantial buyer.
Apparently, their purchases
were a reflection of the officially expressed distrust of sterling by
China.
Purchases during the latest period amounted to $18 million on
top of the $5C million or so taken earlier this year.
The Bank of
England permitted the fixing price to rise somewhat, to $35.1168, from
the relatively low level at the beginning of the period, $35.0916 on
May 12.
But to avoid sharp fluctuations in price, the Pool had to sell
some gold; it sold $19 million, increasing the overall deficit from
$174 million to $193 million.
Apart from the Chinese demand, the gold
market had been rather quiet.
The price this morning receded further
to $35.095.
The exchange markets had shown little movement of significance,
Mr. Sanford commented.
The Bank of England for the most part had been
on the sidelines with the spot sterling rate drifting slightly lower.
This morning sterling weakened a bit, to $2.7944, on reported selling
from Paris, and Bank
of England support had been necessary.
The dis
count on three-month forward sterling continued to hold at about 1-3/4
per cent.
5/25/65
-4Mr. Sanford reported that the Canadian dollar fluctuated during
the period without any lasting trend.
However, it was possible that
the concentration of new Canadian issues scheduled to come to the New
York market in coming weeks could put pressure on the rate, especially
since he understood that Chinese grain purchases from Canada were
expected to reach $100 million.
So far as the continental currencies
were concerned, the dollar had managed to hold the gains it had made a
couple of months ago.
But it had not enlarged those gains except in
the case of the German mark where a combination of factors--including
the repatriation of foreign funds, general commercial demand for dol
lars, and possibly some speculation connected with expectations of an
increase in the German bank rate--had pushed the mark to its lowest
level since mid-1963 despite continued tight (and perhaps tightening)
money market conditions.
The Belgian franc remained at or close to
the ceiling, and the Italians continued to take in dollars on a large
scale, most of which they were swapping out to their commercial banks.
There had been a number of changes in the System swap network
during the last two weeks, Mr. Sanford observed.
Most notably, it had
been possible to pay off another $45 million on the Swiss franc draw
ings--$20 million on the Swiss National Bank swap and $25 million on
the swap with the Bank for International Settlements--bringing the
amounts still outstanding to $60 million and $75 million, respectively.
The purchase of Swiss francs to make those paydowns reflected for the
most part a special one-time adjustment in the reserves of the Swiss
National Bank rather than market developments.
Nevertheless, it was
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encouraging to have been able to liquidate $95 million of the swap
indebtedness in Swiss francs since March 31.
On the other side, the
System increased its drawing on the Bank of Italy by $50 million to
$250 million on May 18, to absorb part of that Bank's continuing dollar
inflow.
Also during the period the Bank of England paid down another
$50 million on the swap drawing on the System with previously acquired
dollar balances, thus reducing its outstanding drawings to $230 million.
As was indicated at the last meeting, Mr. Sanford continued,
the System would make considerable progress in further reducing its
swap indebtedness through transactions associated with the British
drawing on the International Monetary Fund.
Today $82 million of the
swap with the Bank of Italy would be paid off with lire bought directly
from the U.K.
In addition, the System had bought an equivalent of
$45 million of guilders from the Netherlands Bank and $40 million
equivalent of Belgian francs from the National Bank of Belgium, both
in connection with the U.K. Fund transaction.
In the case of the
Netherlands, the purchase would enable the System to liquidate com
pletely its drawing under the swap arrangement, while in the case of
the Belgium $40 million would be reconstituted of the fully-drawn
portion of the swap, leaving a net indebtedness vis-a-vis the National
Bank of Belgium of $60 million.
Finally, the U.K., also for value
today, was paying off its entire swap drawing with the System from
the proceeds of its Fund drawings.
As a result of all of those trans
actions, the System's gross and net indebtedness under the swap network
would be reduced to $363 million.
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One final point, Mr. Sanford said, was that he understood that
the Japanese authorities had lost a fair amount of reserves this month
in holding the yen just above its floor.
If that trend continued, he
thought the System should be prepared to see Japan make use of its
facilities under the swap arrangement.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
May 11 through 24, 1965, were approved,
ratified, and confirmed.
Mr. Sanford noted that the System's swap arrangement with the
Netherlands Bank, in the amount of $100 million, would mature on
June 15, 1965.
He recommended renewal for a three-month period, the
term of the present arrangement.
Renewal of the $100 million swap
arrangement with the Netherlands Bank
for a further period of three months
was approved unanimously.
Mr. Sanford then said that the System probably would have to
renew all or some parts of certain drawings that matured during the
next several weeks.
These included (1) a Swiss franc drawing on the
BIS maturing on June 8, which presently was in the amount of $75 mil
lion and which might be worked down a bit further but was not likely
to be completely erased before maturity;
(2) a drawing on the Bank of
Italy of $18 million, which also matured on June 8; and (3) two draw
ings on the National Bank of Belgium maturing on June 22.
One of the
drawings on the Bank of Belgium, in the amount of $50 million, repre
sented the part of the swap arrangement that was always fully drawn,
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subject to renewals at six-month intervals.
In the recent period that
drawing had been completely utilized, but $40 million would be recon
stituted today.
The other drawing, of $25 million, was under the
standby part of the arrangement and had a term of three months.
Chairman Martin asked why it was necessary to act today on
renewal of drawings on National Bank of Belgium that matured on June 22,
since the Committee would meet again on June 15.
Mr. Sanford replied
that the Account Management tried to work with a lead-time of at least
ten days on operations of these types.
In answer to a question by Mr. Shepardson, Mr. Sanford said
that renewal of the drawing on the Bank of Italy would be a first
renewal, but those of the drawing on the BIS and of the $25 million
drawing on the National Bank of Belgium would be second renewals.
Mr. Shepardson said he continued to have questions about the
desirability of second renewals.
As he recalled the discussions when
swap arrangements were first begun, the intent was to use drawings to
deal with flows that were considered temporary and likely to be
reversed soon.
The Committee was definitely committed to the view
that drawings were not to be used to deal with nonreversible flows.
If it proved necessary to renew drawings a second time, the circum
stances requiring them were hardly temporary, and he questioned
whether such actions were within the Committee's original intent.
Chairman Martin said that it might be desirable for the Account
Management to prepare a memorandum for the Committee indicating the
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number of times various drawings had been renewed.
Mr. Sanford
indicated that such a memorandum would be distributed by the time of
the Committee's next meeting.
In response to Mr. Balderston's request for clarification of
the nature of the swap arrangement with the National Bank of Belgium,
Mr. Sanford observed that the agreement with that Bank differed from
all others in the network, in that $50 million, the amount of the
original arrangement, had been fully drawn on both sides on a six
month maturity basis since initiation of the arrangement.
That was
in accordance with the wishes of the Belgian authorities for reasons
connected with their domestic money market.
The $50 million drawn
by the System was kept on deposit in Belgium until such times as it
was needed, and much of the time it simply had remained on deposit.
At the moment it was all utilized because cf pressures against the
dollar, but, as he had noted, $40 million would be reconstituted
today.
The $25 million drawing maturing on June 22, on the other
hand, was under the part of the arrangement that, like others in the
network, was on a standby basis except when drawings were found to be
necessary.
Mr. Hayes suggested that it might be useful if the memorandum
the Account Management was to prepare included information on the
actual utilizations of funds under the fully-drawn part of the Belgian
swap line, and the Chairman agreed.
Mr. Shepardson asked whether his understanding was correct
that because part of the Belgian arrangement was always fully drawn
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the System could be considered to have been in debt to the National
Bank of Belgium for over a year.
Mr. Sanford replied that that was
not necessarily a valid conclusion.
When the amount that was fully
drawn was on deposit in Belgium, the Systen was earning interest on
the deposit; at the same time, the National Bank of Belgium was earn
ing interest on security holdings in this country.
In his judgment
the System should be considered indebted to the Bank only when it
utilized the funds that were on deposit.
It did so only part of the
time, although recently it had been much of the time.
Mr. Shepardson remarked that he wanted to be recorded as
objecting to the planned second renewals.
As he understood the mat
ter, they went beyond what the Committee originally had contemplated
in connection with swap drawings.
Mr. Hayes commented that he thought the second renewals in
question were definitely to the advantage cf the United States.
He
did not think the Committee had a rigid policy against more than one
renewal of swap drawings.
Many drawings had been paid off without
any renewals, and in his opinion the fact that from time to time some
of them had been renewed one or more times was not contrary to the
policy of limiting drawings to a short term, which he would define
as one year or less.
Mr. Daane suggested that the contemplated memorandum give
information not only on the number of renewals but also on their
rationale, from the point of view of their advantages to the United
States.
Mr. Sanford replied that that would be done.
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Renewal of the drawing on the Bank
of Italy, as recommended by Mr. Sanford,
was noted without objection.
Renewal of the drawings on the Bank
for International Settlements and on the
National Bank of Belgium, as recommended
by Mr. Sanford, was noted, with Mr.
Shepardson objecting.
Mr. Sanford then said he would like to make some observations
on Mr. Coombs' memorandum of April 30, 1965. entitled "Action on Inter
national Liquidity," on which Messrs. Furth and Young had commented in
their memorandum dated May 14, 1965.
(Copies of these documents, which
were distributed to the Committee on May 20, have been placed in the
files of the Committee.)
It was Mr. Coombs' feeling, Mr. Sanford said, that time might
be running out on some of the swap arrangements and that the Committee
perhaps should look more to other means of repaying drawings than the
ultimate one of gold.
That thought was much in line with the view
Mr. Shepardson had expressed today regarding continuing swap drawings
for an extended period.
It was Mr. Sanford's understanding that
Mr. Coombs had in mind two exploratory approaches in the field of
international liquidity.
The first had to do with breaking the ice in
the form of drawings on the IMF by the U.S. to settle swap drawings
which proved irreversible within their normal span.
Previous discussions
with the Governors of the Bank of Italy and the National Bank of Belgium
had indicated that they would favor U.S. drawings of their currencies
from the IMF for this purpose, and that view was supported by conversa
tions with other Governors.
Hence, Mr. Coombs recommended that the U.S.
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borrow lire and Belgian francs from the IMF to settle swap drawings
that had not been settled within the usual terms.
Such operations
would obviate the necessity of ultimate settlement in gold; such
settlement would be undesirable considering the large decline that
already had occurred in the gold stock this year.
Secondly, Mr. Sanford continued, Mr. Coombs would like to
explore with central banks the possibility of reaching advance under
standings, hcwever informal, in place of ad hoc ones on a last-minute
basis, that in the event of speculative pressure on the currency of
any member of the swap network, those central banks receiving inflows
of funds would give sympathetic consideration to joining immediately
with the Federal Reserve in short-term credit assistance to the cen
tral bank under attack.
Thus, the System would have some partners to
share part of the burden of new rescue operations, such as might be
necessary later this year, for example, in the case of sterling and
the Japanese yen.
As Mr. Coombs had pointed out in his memorandum,
there might be a basic reluctance on the part of most European central
banks to commit themselves, however informally, to sizable credit
facilities superimposed on the already sizable ones extended to the
Federal Reserve.
Accordingly, Mr. Coombs suggested the possibility
of considering the Federal Reserve drawing rights of $2,650 million
as a pool which could be partially and temporarily diverted to other
central banks at a time of need.
That would be a way of converting
the bilateral swap lines between the Federal Reserve and foreign
central banks into swap lines which could be made, to some extent,
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multilaterally available and thus relieve the U.S. and the Federal
Reserve of part of the financing burden that fell upon them because
of the central role of the dollar in international finance.
He was sure, Mr. Sanford said, that Mr. Coombs would be glad
to have the Committee's blessing on both of these points as soon as
possible, so that he might engage in further exploratory conversa
tions.
Chairman Martin observed that Mr. Coombs' proposals involved
policy of the Treasury as well as the Federal Reserve.
He thought
the Committee might hold a preliminary discussion of them without
contemplating any action today.
Mr. Ellis noted that Mr. Coombs proposed to make some of the
System's $2,650 million of drawing rights under bilateral swap lines
available multilaterally.
He asked whether it might not be better to
seek an enlargement of available drawing rights rather than simply to
spread around the existing total.
Mr. Hayes remarked that while the System did have $2,650
million available under its swap lines, only part of that amount
ordinarily would be usable in a particular case of need, depending
on which currencies were experiencing drains.
More generally, it
seemed to him that Mr. Coombs' two ideas were simple and straight
forward, and almost transparently likely to be helpful to the United
States.
Drawing by the U.S. on the IMF were, of course, the respon
sibility of the Treasury rather than of the System, but from the
Committee's point of view Mr. Coombs' suggestion in this connection
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seemed to fit exactly with the type of concern Mr. Shepardson had
expressed.
Other countries had drawn on the Fund relatively freely
from time to time.
The United States had used it only for technical
purposes last year, but there had been much discussion of the possi
bility of its using the gold tranche more actively.
Such a course
obviously would be consistent with the idea of providing international
liquidity when and where it was needed.
It seemed to him that,
although the matter was not a responsibility of the System's, it was
logical for the Committee to give its blessing to a proposal that
could only be helpful to the nation.
Mr. Coombs' second suggestion, Mr. Hayes continued, was simply
to explore informally with a few central banks that were likely to
be so minded the possibility of their agreeing to make short-term
credit facilities available when needed.
It had been possible to put
together the $3 billion package of assistance to Britain quickly when
their situation became critical last November, and matters worked out
all right; but the operation was hectic, and he personally hoped it
would not have to be repeated.
If there were some possibilities cf
advance preparation for any necessary short-term assistance, it would
be to everyone's advantage to explore them informally.
It would be
preferable if other countries were willing to make short-term credits
available to one another without reference to their swap arrangements
with the System.
But it was Mr. Coombs' thought that if those countries
were reluctant to do so in view of their commitments to the Federal
Reserve, some of which were quite large, there was the possibility of
5/25/65
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the System's temporarily relinquishing part of its drawing rights on
them.
Mr. Hayes said he had found the Furth-Young memorandum to be
interesting, and its points were well taken if one granted the assump
tions made.
But the assumptions were too broad; Mr. Coombs did not
contemplate actions as sweeping as the Furth-Young memorandum implied.
For example, it was said on page 1 that "It might be a difficult task
to persuade the foreign banks to extend to all other participants the
facilities they have thus far been willing to extend to the Federal
Reserve."
Certainly, he would agree with that statement.
But there
was no suggestion to make all of the System's swap lines multilateral;
it was proposed only to talk further with a few central banks that were
likely to be willing to do so.
The next sentence read:
"And to per
suade the governments of the foreign countries involved to agree in
advance to a quasi-automatic invocation of the General Arrangements to
Borrow to permit IMF refunding of any intractable swap drawing would be
even more difficult."
But he did not think the System would have to so
persuade the governments involved in order to get them to agree to make
some short-term credit facilities available.
Perhaps it was not wholly
true that any short-term swap drawing could bring lasting relief to a
currency under attack only if there was a refunding by the Fund in
sight.
After all, gold sales were one way of liquidating a drawing,
and a good deal of relief could be brought to a situation by a short
term drawing by itself, as was seen last November.
points that Mr. Hayes thought were of some bearing.
These were specific
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Mr. Hayes said he also agreed with the point in the memorandum
that the proposed multilateral arrangements would not reduce the risk
of gold outflows.
But the purpose of seeking a few such arrangements
was not to save gold; it was simply to obtain the psychological advan
tages of having more than one central bank render assistance to a
country in need.
Last November the United States might have supplied
the full $3 billion of assistance to Britain, but such an action
certainly would not have had the same advantages as did the multilat
eral assistance that was actually given.
Mr. Daane commented that he was sympathetic to Mr. Coombs'
suggestion for U.S. drawings on the Fund, although as Mr. Hayes had
noted the decision would be made by the Treasury.
He felt that it
would be unwise to invoke the General Arrangements to Borrow in con
nection with a U.S. Fund drawing but he thought it was appropriate to
think in terms of a drawing for the described purpose without getting
into the GAB.
The United States deliberately had left itself some
room for maneuver in the recent activation of the GAB in connection
with the British Fund drawing by keeping down the size of the dollar
component.
Moreover, drawings by the U.S. would indicate that this
country continued to view the gold tranche as a reserve asset.
On the
whole, he thought the idea was a good one.
Mr. Daane's feelings were mixed on Mr. Coombs' other proposal,
for multilateral swap arrangements.
As he sensed the climate there
was not any real amenability to the idea at present, and he thought
the question of timing had to be thought through carefully.
If the
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matter was widely pressed now, not only might it be rebuffed but other
countries might conclude that the U.S. was taking the leadership in
trying to assure that credit facilities would be constantly available
to Britain, as well as to the U.S., regardless of the internal policies
of those countries.
Such possibilities did not necessarily argue
against opening the subject in a private and informal way with one or
two countries, but he would not like to see an all-out effort made at
this juncture.
In particular, one of the countries that might be most
amenable to the suggestion at some future time might be turned against
it if the issue was pressed now.
Mr. Wayne observed that although there was some reference to
the Japanese yen in Mr. Coombs' memorandum he thought that what in fact
was under discussion was the British pound, which might be under con
tinual attack in coming months.
On that basis he considered Mr. Daane's
concerns to be well-founded.
Mr. Hayes agreed that the outlook for the pound was the foremost
consideration underlying the suggestions for multilateral swaps, but
said that he certainly would not exclude the possibility that the
Japanese might be in difficulty in the near future.
Mr. Wayne replied that he recognized that possibility.
However,
the yen was not now under attack and the pound was; and the yen was not
a reserve currency.
He also questioned the desirability of the System's
taking the initiative in this matter.
England had an active role to play.
It seemed to him that the Bank of
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Mr. Hayes remarked that there obviously was room for judgment,
but he was impressed by the fact that if the U.S. should be confronted
by another sterling crisis it was likely to feel obligated to give aid.
There was not only the swap arrangement on which the U.K. could draw;
the British might also have to sell their dollar investments, which
would involve a dollar drain.
He would merely submit that it was not
too early to think about how such a problem might be solved.
He was
not advocating a wholesale approach to foreign central banks; he agreed
with Mr. Daane that it was desirable only to explore the attitudes of
one or two central banks informally and cautiously.
He also agreed
with Mr. Daane with respect to the undesirability of activating the
GAB in connection with any U.S. Fund drawing.
Such drawings should be
made on an ad hoc basis, involving whatever currencies the U.S. happened
to need.
Mr. Wayne commented that he would feel more comfortable about
the matter if the System had the benefit of the Treasury's views with
respect to the IMF aspect of the proposals.
Chairman Martin said he thought it was important that all
concerned be constantly alert to the international monetary problem,
which might soon be coming to a head.
As he had indicated, he did not
think the Committee should take any action on Mr. Coombs' proposals
today.
The Treasury had been given a copy of Mr. Coombs' memorandum,
and perhaps the Committee might have a discussion at its next meeting
to determine whether it wanted to participate with the Treasury in
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exploring the proposals further.
There were no objections to the
Chairman's suggestion.
In reply to Mr. Shepardson's question, Mr. Young said that. the
Treasury had not yet been given a copy of the Furth-Young memorandum.
It was agreed that the memorandum should be transmitted to that Depart
ment.
Messrs. Bopp and Hickman entered the meeting at this point.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U.S. Government securities
and bankers' acceptances for the period May 11 through 24, 1965.
A
copy of this report has been placed in the files of the Committee.
In supplementation of the written report, Mr. Holmes commented
as follows:
System open market operations during the past two
weeks were carried out in an atmosphere of continuing
demand for Treasury bills and some other short-term
securities, while a mood of caution pervaded the longer
term markets. On balance, System operations absorbed
a modest amount of reserves over the period, with fairly
steady absorption over the first portion of the interval
being largely offset by reserve injections on the last
three business days.
The money market atmosphere remained about unchanged
during the past two weeks, although Federal funds traded
a little more often at 4 per cent than at 4-1/8 per cent,
reversing the pattern of the previous several weeks.
Borrowing, on the other hand, averaged a shade higher
in the statement weeks ended May 12 and 19, and net
borrowed reserves were a little larger. In both of
those weeks a pattern developed in which Federal funds
traded largely at 4-1/8 per cent before the week end,
followed by substantial member bank borrowing over the
week end, and then a shade more comfortable reserve
situation after the week end with funds trading at 4
per cent and borrowing falling off. In the current
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week the pattern has not been quite so marked, as
borrowing rose more moderately over the week endalthough we did return again to an effective funds
rate of 4 per cent yesterday.
In carrying out System operations in the past
two weeks, the Committee's authorization to make
repurchase agreements against a wider range of col
lateral during Treasury financing periods continued
to prove useful. In particular, it facilitated the
meeting of a larger portion of the period's reserve
needs through repurchase agreements than would have
been possible otherwise--and thereby reduced the
need for outright bill purchases. Even so, the
scale of current and prospective reserve needs is
such that yesterday it was deemed necessary to buy
a fair amount of Treasury bills in a go-around of
the market. Looking ahead, a very large reserve
need still remains to be met in the balance of May
and early June. Probably, this will call for a
combination of techniques to provide reserves,
including additional outright purchases of bills as
well as new repurchase agreements and some buying
of coupon-bearing issues.
Yesterday's purchases of bills by the System,
coming on top of continuing demand from a variety
of other sources, helped push rates slightly lower
and the average auction rates, at about 3.89 and
3.94 per cent for the three- and six-month issues,
respectively, in yesterday's auction were about a
basis point lower than in most recent weeks. The
June tax date should produce some let-up in corpo
rate buying in the weeks just ahead but the reserve
need may, as noted, make the System a large buyer
in these weeks; on balance there seems little
immediate prospect of any natural upward pressure
on bill rates.
In contrast to the short-term market, the bond
markets have been suffering from some indigestion
in the past two weeks. Distribution by dealers of
the Treasury's recent offering of nine-year 4-1/4
per cent bonds has been very slow. Apart from some
takings at gradually lower prices by Treasury trust
accounts, dealer sales of the 4-1/4s have been
almost exactly offset by the need to absorb equally
modest offerings made in the market by investors.
High-grade corporate offerings have elicited an
apathetic investor response and tax-exempt issues
have had mixed success--with some attractively
priced issues moving out and others proving quite
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sticky. Increased demands on the capital markets
seem to be largely responsible for this heavy atmos
phere, although market discussion of official
objectives has also played some part. Prices of
Treasury issues have held up quite well during this
period, as dealers have sought to protect the value
of their large holdings. Price levels may be in
for some testing in the period ahead, however, as
further efforts are made to distribute holdings.
Following his statement Mr. Holmes responded to questions about
the size of dealer inventories of longer-term Treasury securities and
the nature of recent purchases of coupon issues by the Account Manage
ment and the Treasury.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactiors in Govern
ment securities and bankers' acceptances
during the period May 11 through 24, 1965,
were approved, ratified, and confirmed.
Prior to this meeting the staff had prepared and distributed
certain questions suggested for consideration by the Committee.
These
questions were as follows:
1.
Business conditions.
What are the implications for price stability and
for sustained advances in production and employment of
(a) the inventory situation, (b) the capital goods
situation, and (c) prospective fiscal developments?
2.
Balance of payments.
Assuming voluntary restraint will hold down capital
outflows this year, will other factors tend to bring a
lasting improvement in our balance of payments?
3.
Credit.
How is the pace of credit expansion likely to respond
to prospective changes in the rate and composition of
economic activity over the next few months? Are demands
-21-
5/25/65
on the banking system likely to become less intense
than they were earlier in the year?
4. Money.
What do recent shifts in public holdings of money
and time deposits suggest as to prospective changes in
the demand for these financial assets?
5.
Money market relationships.
How have relations among money market variables
changed since last fall? Assuming a continuation of
current monetary policy, what combination of money mar
ket conditions, interest rates, reserve availability,
and reserve utilization by the banking system might
prove mutually consistent during coming weeks?
Staff comments on these questions were included in the staff
economic and financial review at the meeting, which was in the form
of a visual-auditory presentation.
Copies of the text of the presen
tation and of the accompanying charts have been placed in the files
of the Committee.
The introductory portion of the review, presented by Mr. Noyes,
was a follows:
As the United States moves into a fifth year of
expansion, questions persist as to the danger of infla
tionary developments, and also as to the threat of
slackening growth or even recession. These two very
different possibilities have both been in the foreground
during the two years since the spring of 1963, along
with our serious balance of payments problem.
This morning, the staff review is addressed once
again to the prospects for sustained domestic expansion
and improvement in our international payments position.
It is only two weeks since the staff last reviewed
the economic scene, but even in so brief a period addi
tional evidence has become available to confirm trends
then just emerging in the first of the April statistics.
Growth in production has slowed, and the interim steel
settlement has moderated inventory demands.
Bank credit
5/25/65
-22-
and deposit expansion are less vigorous, as the initial
impact of the Regulation Q change fades and as credit
demands appear to be shifting from banks to the capital
markets.
But some upcreep in prices has continued, with
further increases in metals and meats. And rising
defense needs and higher plant expansion targets are
being translated into rising orders for durable goods,
particularly machinery. The Congress seems disposed to
go at least as far as, and perhaps further than, the
Administration has recommended in excise tax cuts.
We will begin the staff review with a discussion
by Mr. Reynolds of the influences at work on our balance
of payments and the prospects in this area for the
period ahead.
There followed sections on the balance of payments, presented
by Mr. Reynolds; on inventories and business fixed investment, by
Mr. Williams; on prices, production, and employment, by Mr. Garfield;
and on financial developments, by Mr. Koch.
The concluding portion of the review, presented by Mr. Brill,
was as follows:
The slight firming of monetary policy that took place
first around early February and again in late March, has
not been evenly transmitted to all money market variables.
As can be seen on the chart, member bank borrowings have
risen steadily in recent months, and net borrowed reserves
have deepened by even more as banks have economized on
excess reserves. The increased pressure on bank reserve
positions has been reflected mostly in the interest rate
on Federal funds, which has pierced and generally remained
above its former discount rate ceiling, while the bill
rate has remained generally stable to declining at a level
somewhat below the discount rate.
The slight decline that has occurred in bill rates
from their late February- early March peak has been accom
panied by a slight decline and then stability in Government
bond yields, and a fluctuating but on average higher
Federal funds rate. The decline in bill rates can be
explained by a number of factors, including a sharp reduc
tion in bills available to the public, some repatriation
of funds from abroad, and a large bill demand from
corporations and State and local funds.
5/25/65
-23-
In the weeks ahead, maintenance of net borrowed
reserves in the $100 to $150 million range, as indicated
by the shaded area on the chart, would likely be accom
panied by bill rates remaining in their recent range,
although there might be temporary upward rate pressure
just before the mid-June tax and dividend dates. It
also appears that some upward adjustment in long-term
rates could occur, as dealers distribute their relatively
large takings of the reopened 9-year Treasury bonds, and
with their large inventories of recent corporate and
municipal underwritings. Corporate yields, not shown on
the chart, have already risen since mid-March.
Such a complex of market rates and marginal reserve
availability would appear consistent with some slowing
in bank credit and deposit expansion from the first
quarter pace. In this context, growth in both time
deposits and the money supply would be expected to
average close to 1964 rates. This would represent some
acceleration from the March-April '65 rate for time
deposits, and some deceleration for the money supply.
Pushing net borrowed reserves to around an average
of $200 million--below the shaded area shown--would
increase the likelihood of an upward adjustment in bill
rates, although probably not much above 3.95 per cent,
the top of the range shown. The large margin that has
developed since March between the funds rate and the
bill rate suggests that there is likely to be little
further scope for the Federal funds market to cushion
bank reserve pressures without reflection in the bill
market. Such pressures might also redound upon the
In view
cost and availability of CD money to banks.
of the technically exposed position of the capital
markets at the moment, a further move in the direction
of restraint would also be likely to have repercussions,
at least temporarily, on markets for longer Government
and other bonds.
To sum up the staff replies to the questions
distributed prior to the meeting, recent developments
in the balance of payments are encouraging, but there
is no evidence of lasting improvement from factors
other than the voluntary restraint program. The review
of domestic developments suggests some moderation occur
ring and in prospect in the pace of economic and
financial expansion, even taking into account the like
lihood of fiscal stimulation around midyear. This
moderation should temper pressures on commodity and
financial markets and on the banking system. In our
judgment, the present posture of policy is contributing
to a healthy transition from the excessively rapid pace
of the first quarter to a more sustainable rate currently.
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5/25/65
Mr. Ellis asked if there was any direct evidence to indicate
the rate and probable duration of reflows of funds from abroad and
how long such reflows were likely to affect the U.S. bill rate, if
they were the principal factor in its recently reduced level.
Mr. Reynolds replied that confidential Canadian data indi
cated that U.S. corporations had brought back about $400 million
from Canada in March.
The normal reflow in that month was about
$200 million, so it was obvious that more than seasonal forces were
at work.
There also was some evidence to suggest that the noraml[sic]
return flow to Canada in April did not occur this year; instead,
some additional funds were brought back to the U.S.
Liquid hold
ings of U.S. corporations in Canada might by now be back to the
level of December 1963, the goal the Administration had sought.
In the chart show the staff had hazarded the guess that there would
not be much further reflow; that seemed unlikely unless the Admin
istration's program was intensified.
Mr
Brill added that the staff had concluded that the
principal factor holding down bill rates recently was the reduced
volume of bills available to the public at a time of strong demand
for them, rather than the reflow of funds from abroad.
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:
3/25/65
-25-
For a long time members of this Committee have been
expressing some unease about the rates of growth of bank
credit and liquidity in our economy over a period of months
and even years, and periodic efforts have been made, with
only very limited success, to check these rapid growth
rates.
International considerations have always provided
strong backing for these efforts, as they still do. But
in the absence of clearly visible inflationary pressures
in the domestic economy, many members have felt reluctance,
in varying degrees, to press these restraining efforts
with much vigor or continuity. Recently, however, it has
become increasingly apparent that the mere threat of infla
tionary pressures has been reinforced by an actual upcreep
in industrial wholesale prices at an accelerating rate.
The evidence of a developing inflationary movement is by
no means conclusive; the upcreep could be slowed down or
reversed--although in the present setting of great business
optimism this may be wishful thinking. The stakes are so
high, and the consequences of a real upward price movement
could be so disastrous, both at home and more especially
in our efforts to defend the dollar, that we would be fully
justified, in my judgment, in taking a definite though
moderate further step at this time to slow the expansion
of bank credit and thus to contribute, to the best of our
ability, to preserving a sustainable domestic expansion
and a sound currency.
Business activity. Let me revert, now, to a brief
summary of recent data that have led me to this conclu
sion. Contrary to the impression given by some of the
April data--which of course involve a pause in the
excessively rapid pace of advance of the first quarterthe outlook for the domestic business situation remains
very good indeed. It has been streng:hened in the past
few weeks by the step-up in capital spending plans (backed
by strong corporate profits) and, more recently, by the
President's proposal of a second-stage excise tax cut to
take effect at the beginning of 1966. More important for
the shorter run is the inclusion of the automobile excise
tax in the first part of the program, with the cut
retroactive to May 15. This should make the July tax cuts
more of an expansionary factor than had been expected
before. Developments in the steel industry appear less
likely than they did to be a seriously disruptive factor.
Apart from a continuing buildup of steel inventories,
which is likely to lead, incidentally, to only a rather
modest downward drag on total industrial production later
in the year, the overall inventory picture and inventory
policies remain quite conservative.
5/25/65
-26-
On the price front, industrial wholesale prices
moved up another notch in April, and no reversal is
evident in May. The edging up in this area has been
going on since 1963, but it now seems to be accelera
ting. Over the last three months the rise works out
to an adjusted annual rate of 2 per cent, as against
roughly 1.5 per cent over the last six months and 0.6
per cent in the full year 1964. Raw material prices
also continue to move up, and announcements of price
changes remain virtually all on the upside. Demand
pull seems more to blame than cost-push factorsand this might well have a bearing on our policy
consideration.
Balance of payments. The improved balance of
payments figures for March and April are a reflection
of the initial success of the President's program of
voluntary restraint. At the end of March the banking
system as a whole was under the 105 per cent ceiling
by $60 million--but 80 banks were under the ceiling by
$330 million, while about 50 others were over their
targets by $270 million. Detailed payments figures
for March indicated especially sharp curtailment of
long-term bank lending in Europe. Despite these favor
able developments, there is no basis for believing
that a fundamental payments improvement is under way;
and yet there is an urgent need for such improvement,
since the effective life of the voluntary program is
expected to be relatively short--perhaps not much over
a year. Meanwhile gold losses continue to be heavy,
with more in the offing.
Credit and money. The current bank credit picture
is far from clear. While the rate of increase in April
(seasonally adjusted) was back close to the 8 per cent
figure characteristic of 1963-64, as compared with the
much more rapid growth of the first quarter- -there is
reason to doubt whether this really points to much of
a slowdown, in view of special factors affecting the
April figures. If we combine March and April, we find
an annual growth rate of 11.5 per cent, the same as
that for January and February combined. While some
fragmentary May data do suggest a slowing of the expan
sion, I am impressed by the continuing great strength of
loan demand, as indicated by our latest loan projection
survey in New York. This demand is abetted by the vigor
of capital spending plans and the relatively low level
of the prime rate--though there are continuing efforts
to make the prime rate somewhat more inaccessible to
longer-term borrowers and to borrowers of less than top
credit standing.
5/25/65
-27-
Turning to measures of liquidity, we find an 8.3 per
cent rise in money supply plus time deposits in the first
four months of 1965, well above last year's gains. And
total nonbank liquidity has risen appreciably faster in
the last six months than gross national product. On the
other hand, the banks' liquidity position has shrunk,
especially in the matter of short-term Government security
holdings.
Monetary policy. I think we should now feel free to
modify policy, if this seems desirable, without the
restraints of an "even keel," even though dealer holdings
of the 4-1/4's are still relatively large. With rather
sizable corporate security offerings in prospect, we must
probably accept the likelihood that a tightening of policy
might find some reflection in slightly firmer long-term
rates.
As I said at the outset, I think the time has come
to make another moderate, but clearly visible, change
toward greater restraint on the growth of bank credit.
The abundance of liquidity is pressing supplies of funds
on lenders and this works counter to the success of the
voluntary credit restraint program. It may also be
encouraging a gradual deterioration in the quality of
credit, on which we hear frequent comments from financial
observers. While some stiffening of policy is needed as
a signal at home and abroad of our determination to help
solve the payments problem, the domestic business and
price outlook now permits and may even require such a
change.
I would like to see net borrowed reserves somewhere
around the $200 million level. The bill rate should, I
believe, be a secondary consideration. Because of low
dealer bill inventories and relatively light bank partici
pation in this market, the suggested increase in net
borrowed reserves may have only minor impact on bill rates;
and this in turn may minimize any expectations of a near
term change in the discount rate.
The directive should be modified to recognize the
recently quickened pace of price advances, to eliminate
the reference to Treasury financing, and to call for
firmer conditions in the money market, if the Committee
reaches the same conclusion as I have on the need for
current action. I think the staff's Alternative B is
entirely satisfactory.1/
1/ The two alternative drafts of the directive prepared by the
staff are appended to these minutes as Attachment A.
-28
5/25/65
Mr. Ellis reported that the general atmosphere of the First
District's just-completed semiannual business outlook conference seemed
to substantiate the complaint of one participant that "euphoria seems
to have broken out all over."
While the horizon nine months away still
seemed to have the traditional grey clouds impeding clear analytical
vision, the projections for the remainder of 1965 were notable prima
rily for their bland uniformity.
The standard forecast of a GNP
increase of $24 billion by year-end centered in a range of only plus
or minus 1.7 per cent of present GNP with none of the participants
predicting a decline.
New England business trends tended to substantiate the wide
spread euphoria, spiced by some gnawing doubts, Mr. Ellis continued.
The Boston Reserve Bank had just completed its annual quota of four
area conferences and from those exposures he would judge that the
question most on the minds of the District's commercial bankers was
how they could satisfy the loan demand they faced in view of their
tightened liquidity positions.
They recognized that the liquidity
characteristics of both assets and liabilities had changed substantially
as banks had expanded term loan and instalment lending, shifted from
Governments to municipals, and expanded time deposits and negotiable
CDs; nevertheless, they continued to have real concern about their
tightened liquidity positions.
Loan-deposit ratios of all weekly
reporting banks in New England averaged 73 per cent as of May 12, a
level 3.5 points above the national average and an all-time peak for
First District banks.
Boston banks, of course, were much higher,
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5/25/65
with an average ratio of 77.3 per cent.
In spite of their concern
about liquidity positions, each banker reported that he was going to
"serve his customers" and satisfy loan demand as it
showed up.
The
same bankers that reported they were making loans they would not
touch a few years ago were not going to lose customers by rejecting
loans now.
had
Mr. Ellis said he thought the staff's chart presentation
been excellent, and that he would not repeat the discussion of the
general outlook for business and for prices.
To answer the question
about the balance of payments directly, he would say he judged that
factors other than the voluntary restraint program would tend to
worsen the balance during the rest of this year.
He noted the care
with which the staff had phrased the statement that they could not
foresee an increase in the current account surplus this year.
personally expected some worsening on current account.
He
U.S. exports
of agricultural commodities were likely to be reduced, particularly
to the protection-minded Common Market countries, and exports also
would be adversely affected by lowered capital outflows, whether for
direct or indirect investment.
Total imports would be lifted by
imports of steel in anticipation of a steel strike and in event of
a shutdown.
It was his personal hunch that foreign automobile pro
ducers would again enlarge their share of U.S. unit sales as domestic
producers again lengthened the new models and increased their horse
power.
Tourism already stood ready to worsen the balance by $200-$300
million, and expanding Government commitments in Viet Nam, Santo
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5/25/65
Domingo, and so on might be expected to swell outflows on Government
account.
Against those possibilities stood the hoped-for achievements
of the temporary voluntary restraint program.
Unfortunately, to the
extent that such restraint was effective it increased the likelihood
that it would become less voluntary and less temporary.
To conserve time, Mr. Ellis said, he would blend his comments
on the last three agenda questions.
He expected that a slowed rate
of business expansion would lessen credit demands from the obviously
excessive first-quarter levels.
Whether bank credit expansion would
subside to tolerable rates or become merely "less excessive" remained
moot.
In any event, the obvious present strength of credit demands
and the apparent willingness of banks to satisfy growing demands
testified that the System's gradual policy moves over the past year
to lessened credit ease had not stymied economic expansion.
He found
it helpful to describe the Committee's actions as cautious probing
that had resulted in a gradual transition to modest credit restraint
in face of steadily expanding demands for credit accomodation.
In
that process the Committee had simultaneously sought whatever balance
of payments advantage might result from a narrowed rate spread between
bills and long-term bonds.
He was persuaded that such a policy of
cautious probing had been successful and should be continued.
The staff report,1 / Mr. Ellis noted, described April as a
month when "the increase in industrial production was small, retail
1/ "Current Economic and Financial Conditions," prepared for the
Committee by the Board's staff.
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5/25/65
sales drifted down further, and the labor market barely held its own."
Yet, the April increase in bank loans and investments exceeded the
gain of April 1964 by four times, and the April expansion in total
bank reserves exceeded the three-month average growth rate by 18 per
cent, ensuring a 10 per cent average rate of growth in bank reserves
for the past three months.
The evidence suggested to him that the
Committee's modest moves to lessen credit availability had been out
matched by enlarged lending and investment activities by the banks,
with a resultant acceleration of credit expansion that had carried
well into the month of April.
Two factors, both probably temporary, suggested to Mr. Ellis
that caution should be exercised in further probing.
The first was
the enlarged holdings of bonds by Government security dealers.
The
second was the possibility that repatriation of funds from abroad
might peter out and substantially alter the balance of forces that
had maintained such strength in the bill market in face of lessened
bank reserve availability.
While recognizing the need for alertness to those two factors,
Mr. Ellis would continue to probe toward lessened reserve availability.
In terms of market forces of recent weeks, he would identify policy
targets of $200 million net borrowed reserves, plus or minus $50 mil
lion; borrowings averaging around $500 million; Federal funds normally
trading at 4-1/8 per cent; and dealer lending rates at 4-3/8 to 4-1/2
per cent.
Such gentle probing was not likely to stiffen short bill
5/25/65
-32
rates in light of the magnitude of nonbank funds available to the
market, but, hopefully, eventual redistribution of investment funds
would allow a 10 or 15 basis point rise in short bill rates.
Mr. Ellis preferred alternative B of the staff drafts of the
directive.
Mr. Irons reported that preliminary figures and estimates for
the Eleventh District indicated that the rate of expansion in economic
activity had slackened off a bit during April, but currently there
were some signs of a resumption of earlier trends.
The changes in
April had been small; in May industrial production continued a slight
decline and crude oil production was down.
On the other hand, con
struction contract awards were inching up in May, employment was
strong, and unemployment was running somewhat below 4 per cent.
Retail trade in April was above March, but was showing no change in
May.
Automobile sales continued strong.
Bank debits were up appre
ciably.
Recent weather was among the more favorable developments,
Mr. Irons said.
Heavy rains in all parts of the District, including
areas that previously suffered from drought, made the agricultural
outlook much better than it was some months ago.
There also had been
some improvement in agricultural prices, including livestock prices.
At District banks, Mr. Irons continued, there had been decreases
in loans, investments, and deposits, but of very small amounts.
The
demand for Federal funds had been large and while sales also had been
substantial net purchases were sizable.
Borrowings from the Reserve
5/25/65
-33
Bank averaged about $33 million in the recent period, compared with
$23 million during the preceding period.
Reports of Directors of the
Bank's branches in Houston, San Antonio, and El Paso--which, while
perhaps making up an unscientific sample, were interesting neverthe
less--were more optimistic than one might be on the basis of available
statistics and indexes.
Bankers stressed the strength of loan demand,
although they recognized that it might be diminishing a little from
the first quarter of the year.
Banks were pressing for deposits, and
they seemed reconciled to doing business on a higher-cost basis.
outlook for the District as a whole was rather optimistic.
The
The under
currents of concern by businessmen seemed to relate mainly to such
matters as the balance of payments, the recent heavy gold losses, and
Government fiscal policies.
On the national situation, Mr. Irons was in general agreement
with the staff's chart presentation.
Among the expansive factors
were business capital spending, new orders for durable goods, and
defense outlays.
The high levels of consumer spending and construc
tion activity were elements of support if not strongly expansive.
The level of inventories did not seem to be excessive, particularly
when viewed in relation to sales.
He doubted that there would be
appreciable accumulation of inventories--in any event, not as long
as prices did not seem to be rising too much and goods remained
available from suppliers.
Nor did he expect the impact on prices of
inventory accumulation to be very significant.
In sum, he thought
the national outlook was for sustained advances in production and
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5/25/65
employment, although perhaps at a slower rate than had been expected
earlier.
It would be necessary to stay alert to the possibility of
excesses in such areas as wage increases, consumer debt, inventories,
and stock market speculation.
Mr. Irons expected credit demands to continue strong, especially
in the commercial and industrial and the consumer loan categories.
Strong loan demands would be facing a lessened margin of liquidity in
the banking system, and banks would be actively seeking funds to meet
the demands.
Mr. Irons reported that the balance of payments voluntary
restraint program continued to have the support of bankers in the
Eleventh District and evidently was working satisfactorily.
thought the
He
uration of the program would be one factor in its
effectiveness; the longer it continued the less effective it was
likely to become.
There seemed to be a feeling among bankers that
the program was a one-year effort, especially if there was a substan
tial reduction in the flow of funds abroad in that period.
He did
not believe that if the voluntary restraint program was successful
in holding down capital outflows this year other factors in the pay
ments balance would necessarily be improved.
In his judgment there
was a need for other policies and approaches in addition to the
voluntary restraint program, and among those he thought there was a
place for a firmer monetary policy.
It would be necessary to stay
continually alert to international price relations, which would affect
the trade balance.
There also were questions of confidence in the
5/25/65
-35
dollar and the effects that gold outflows might have on attitudes.
The level of U.S. military expenditures abroad also had to be taken
into consideration.
Turning to credit policy, Mr. Irons thought there would be a
strong demand for funds during the period from Memorial Day through
the Independence Day holiday, and it would be necessary to supply
additional reserves temporarily.
Given the domestic and international
situations, he would favor undertaking a moderate firming action by
letting the market tighten against the expected demand.
During the
past week the market had firmed a little, although he could not say
that it had been particularly firm.
He favored a slightly lower level
of reserve availability, increased use of the discount window, a Fed
eral funds rate at 4-1/8 per cent, and a bill rate reflecting those
influences.
He preferred net borrowed reserves in the $150-$200
million range and borrowings in the $450-$500 million range.
Alter
native B of the staff drafts of the directive was acceptable to him.
Mr. Swan reported that in the Pacific Coast States employment
was virtually unchanged in April and the unemployment rate rose a
little as the labor force increased.
However, employment in the
aerospace industries rose from March to April, the first monthly
increase since late 1962.
Aerospace employment had been rising in
the past few months in the State of Washington, but not in California
before April.
Present indications were that the rise might well be
temporary, with declines anticipated in June and July.
5/25/65
-36
Lumber markets were somewhat weake:: in April and early May,
Mr. Swan said, and prices continued well below the levels of a year
ago.
On the other hand, activity was high in metals, both steel and
nonferrous metals.
Mr. Irons had
The livestock situation was much the same as
reported for the Eleventh District; range conditions
were very good and livestock people were quite optimistic.
The gains in business loans at weekly reporting banks in the
Twelfth District continued to lag behind the country as a whole,
Mr. Swan noted, and in the first half of May they were less than in
the same period a year ago.
On the other hand, the increase
in real
estate loans at reporting banks in April, on which he had commented
at the previous meeting, apparently continued in the first half of
May.
Banks continued to be under some reserve pressure.
For the
five weeks ending May 19, borrowings averaged over $60 million and
were about four times as large as in the previous five weeks.
Mr. Swan thought the analysis of the national picture given
in the chart presentation today was highly interesting, and he would
not take issue with it particularly.
He wculd simply say that in
view of the indications of some moderation in the rate of expansionin production, retail sales, and inventories, for example--it seemed
to him that there was little basis in the domestic situation at this
point for a further firming of policy.
To be sure, the rapid
increases in bank reserves and bank credit in March and April were
matters of some concern, but he expected the gain in bank loans to
5/25/65
-37
moderate somewhat in the period ahead in view of the indications for
the economy.
He had been especially interested to note the comments
in the memcrandum on member bank reserves to the effect that "weekly
average data for the three weeks ending May 19 show a marked shift
from the rapid expansion of member bank reserves and deposits that
occurred earlier in the year;" and that "Total reserves seem likely
to change little in May on a seasonally adjusted basis."
Those
comments might indicate that the Committee's earlier moves toward
firming were having some impact at this point.
The period in question
was too short to provide a basis for firm conclusions, but the develop
ments reported seemed to argue against further tightening now.
Mr. Swan agreed that there was a disappointing lack of
indications of lasting improvement in the balance of payments apart
from the effects of the voluntary restraint program.
But that was
hardly surprising; the Committee had been concerned about the payments
problem for quite a long time.
While international considerations
might call for action by the Committee soon, he would prefer to await
further developments in light of the general slowdown of the domestic
economy.
In particular, he would like to know more about the shape
that fiscal policy was likely to take, in view of the proposals now
under consideration.
Consequently, he would suggest that for the
present the Committee continue the policy it had been following.
To
him that could mean a continuation of the conditions prevailing in
the last two weeks, with member bank borrowings around $500 million
and net borrowed reserves around $150 million, even though those
5/25/65
-38
figures perhaps were slightly above the intentions the Committee had
indicated earlier.
change.
However, he would not like to see any significant
He also was concerned about the testing underway at present
that had been mentioned with respect to longer-term interest rates.
In sum, Mr. Swan said, he would accept alternative A for the
directive with the understanding that the money market conditions to
be sought in the next three weeks would be substantially those pre
vailing in the last two weeks.
Mr. Galusha said that the Ninth District economy appeared to
be in good shape and seemed likely to continue to expand, over the
near-term at least, at a respectable rate.
Attitudes toward the
agricultural outlook depended on the kind of agriculture.
Livestock
people were highly optimistic, but people in the grain producing
States were not happy; crops were very late this year.
There would be a great deal of construction spending in the
Ninth District over coming months, Mr. Galusha commented.
Rebuilding
of structures destroyed or damaged by recent floods and tornadoes,
particularly in the Twin Cities area, might lead to the District's
having a boomlet of its own for some time to come.
Spending on plant
and equipment probably would be somewhat above the levels indicated
for the District by the recent McGraw-Hill survey.
As far as Ninth District bank loans were concerned, Mr. Galusha
said he had to distinguish between city and country banks.
Among the
latter, loans grew much more than seasonally over the first half of
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5/25/65
May, probably because of heavy livestock feed costs.
Among the city
banks, however, loans did not increase at all on a seasonally adjusted
basis; indeed, since mid-April loan growth had been about what would
have been expected from the seasonal pattern alone.
It was perhaps
worth noting that by usual standards District banks were feeling a
pinch.
He had no hard information on loan charges, but loan-deposit
ratios, both of reporting and nonreporting banks, were at or very near
post-1960 highs.
And there had been much selling, particularly among
country banks, of Government securities.
In fact, total credit at
all District banks increased a bit less than seasonally over the first
half of May, and much less than over the first half of May 1964.
Mr. Galusha went on to say that recent behavior of Ninth
District banks might be accounted for, in part anyway, by a sharp
drop in time deposit growth.
Time deposit holdings actually declined
over the first half of May, whereas they usually increased in that
period.
In consequence, total deposits of District banks increased
considerably less than seasonally between the beginning and middle
of May.
As far as the national scene was concerned, Mr. Galusha was
inclined to agree with Mr. Swan.
The numbers, which of course
lagged events, seemed to indicate there had been some slowing in the
rate of economic advance.
One aspect of the domestic situation that
concerned him was the apparently large growth of business accounts
receivable.
Someone had to finance business when bank credit was
tight, and it usually was the suppliers.
He was not sure of the
5/25/65
-40
significance of the development but, in effect, the credit that banks
were extending to their good customers was being made available to
others indirectly through financing of receivables.
Mr. Scanlon commented that developments of the past several
weeks had fortified the belief of Seventh District bankers and business
men that economic expansion would continue throughout 1965.
Forecasts
of activity for the year as a whole typically had become more optimis
tic.
He did not find support among businessmen in the District for the
currently widely publicized view that activity might be topping out.
Most local labor analysts in centers not heavily dependent
on steel or autos looked for further increases in employment in the
second half of 1965, Mr. Scanlon said.
The number of reports of
labor shortages was rising and such reports were no longer confined
to skilled workers.
Jobs requiring only "bodies and hands" were going
unfilled in some areas, especially areas where auto employment was at
high levels.
That situation was reported most often for service
industries but occurred also in some manufacturing firms.
Demand for steel had held up extremely well since the postpone
ment of the strike threat, Mr. Scanlon reported.
In the Chicago area
the rate of ingot output declined 6 per cent from the week ending
April 17 to the week ending May 15.
Despite heavy order backlogs,
steel producers had begun to shut down facilities in need of repair
that they had been operating up to the strike deadline.
5/25/65
-41It appeared, Mr. Scanlon continued, that the average level of
wholesale prices, led by aluminum and copper products, had moved up
slightly further in recent weeks.
Surprisingly, there was less out
spoken concern over inflationary pressures than several months ago
when solid evidence of price increases was less evident.
Farm incomes
were rising in areas where cattle and hogs were important and the
improved price situation for livestock was expected to continue at
least through 1965.
The Reserve Bank's recent survey of country
bankers indicated that the long-continued rise of farm land prices
might be accelerating somewhat.
Business loans at District banks had continued to expand in
the past few weeks at the slower pace that had been observed in April,
Mr. Scanlon remarked.
Borrowing by manufacturers of metal products
had continued to rise contraseasonally, and loans to most other busi
nesses remained at relatively high levels.
The acquisition of
municipal securities had slowed markedly, although it had not been
reversed.
Holdings of Governments were up, on balance, although
Chicago banks had sold some bills over the past month.
Those develop
ments, plus the reserve positions shown for the major District banks,
seemed to reflect a fairly comfortable reserve situation.
There had
been relatively little borrowing at the discount window.
Mr. Scanlon's views on policy paralleled those of Mr. Irons.
However, as he listened to the figures mentioned around the table he
found it difficult to detect any perceptible change in suggested
3/25/65
-42
objectives with the exception of net borrowed reserves of $200 million.
And even with respect to that figure, net borrowed reserves had been
at $171 million in the most recent statement week, and so he would
regard a figure of $200 million as merely resolving doubts on the
side of firmness.
If it took a change in the directive to accomplish
that, he would favor alternative B.
Mr. Clay reported that farm income prospects in the Tenth
District had improved very materially in recent weeks.
In part that
situation stemmed from more satisfactory weather conditions that had
brightened the outlook for both grain and grass.
Substantial rains
had alleviated the drought in the Plains area, except for a hard core
drought area centered in east central Colorado.
The record snow pack
in the mountains also assured abundant supplies of irrigation water.
The other principal factor improving farm income prospects,
Mr. Clay said, was the higher level of livestock prices.
While meat
animal prices were not likely to retain their recent spread of 10 to
20 per cent over year-earlier levels, they were expected to remain
above year-ago levels throughout the year.
Supplementing those fac
tors was the expectation that Government payments to farmers would
be higher than last year.
Accordingly, agriculture should be an
expansive force on the general level of economic activity in the
region in the months ahead.
Despite the improved prospects for
agricultural output and income, the structural readjustment in agri
culture continued to take its toll as many farmers were unable to
continue operations on a profitable basis.
5/25/65
-43
Through the middle of May, Mr. Clay continued, bank credit
developments at District city banks had continued the more moderate
pace of April in contrast to the faster rate of the first quarter.
Business loan activity in the District, which accelerated in January
and February, did not show unusual strength in March, April, and
early May.
Time deposit volume, which expanded early in the year,
had shown only modest growth in recent months.
Turning to the national scene, Mr. Clay said it was apparent
that the pace of domestic economic activity had moderated.
While
the readjustments in steel and autos were taking place in an environ
ment of expansionary general demand, the forthcoming configuration of
domestic developments was not entirely clear.
On the international side, Mr. Clay said, the developments
under the Administration's program had produced favorable results,
re-enforced by monetary policy, but the full implications of that
effort were by no means apparent yet.
It seemed appropriate to
await additional developments in the international area and to observe
domestic credit developments further as well.
Accordingly, it appeared logical to Mr. Clay to continue
monetary policy essentially unchanged at this time.
That position was
not intended to minimize the importance of the international payments
problem, a problem that the United States had to solve.
In addition
to the basic monetary policy issue, however, was the fact that the
5/25/65
-44
present was a transitional period in domestic economic and credit
developments, as well as in the Administration's balance of payments
program.
Such an approach to policy, Mr. Clay observed, would call for
a continuation of recent money market conditions and about the same
degree of credit availability as indicated at the last meeting.
Alternative A of the draft directives was satisfactory to him.
No
change should be made in the discount rate at this time, he said.
Mr. Wayne reported that the strong trend in Fifth District
business activity apparently continued without significant change.
Cigarette output had been at record levels since February, and most
other manufacturing industries had maintained or increased already
high levels of production.
Nationally, Mr. Wayne continued, the April slowdown in the
rate of business expansion apparently extended into May, but after
the very fast pace of the first quarter some easing was to be expected.
Apparently there had been no decline in the rate of business invest
ment, which should be a substantial element of strength in the economy
for the near future.
The slight easing in the rate of business growth
had been accompanied by some price developments that might merit
attention.
In the international area, it seemed to Mr. Wayne that about
the only conclusion that could be drawn from recent developments was
that both the U.S. and the British were holding their own with some
5/25/65
-45
difficulty.
While the voluntary restraint program appeared to be
working quite well, it could not be assumed that any basic improvement
had been achieved in the U.S. balance of payments.
In that connection,
it was important to keep in mind the possibility that additional defense
requirements associated with recent international political developments
might introduce more strain on the U.S. payments position in the near
future.
In the policy area, Mr. Wayne noted that the money market
showed little reaction to the net borrowed reserves of the past three
months; key money market variables had been almost static for many
weeks.
The banking system also seemed to have developed a kind of
immunity to borrowed reserves.
In part, that was because banks had
obtained loanable funds in ways that used up fewer reserves or none at
all, as by the sale of notes, debentures, and CDs.
Also, they had
used existing reserves more intensively th::ough increased trading in
Federal funds.
In those and perhaps other ways banks might have post
poned the restrictive effects of a reduced level of available reserves.
It might. be that any given degree of restraint now required a lower
level of available reserves than was true by previous standards.
If
wholesale prices continued their trend of the past six weeks, it
would be necessary to give serious attention to actions that might
curb them.
For the present, however, Mr. Wayne did not favor a change
in policy.
Alternative A of the staff drafts of the directive was
acceptable to him.
5/25/65
-46Mr. Robertson said he would like to compliment the staff on
the chart presentation, which in his opinion had been excellent.
then made the following statement:
From the facts we have before us, it seems clearer
now than it was two weeks ago that the economy is in the
midst of a transition. A slackening of steel inventory
building, a lower level of automobile sales, and the
heaviest fiscal drag since the tax cut are all serving
to slow down the rate of domestic business expansion.
Some drop from the unsustainably high rates of increase
of the first quarter is desirable, but during such
transition phases business is typically extra-sensitive
to dampening influences, and I would not want monetary
policy to add to the pressures slowing down activity at
this time.
I realize that some observers, looking at the
fractional increases in price indexes recently, may come
to the conclusion that a generalized price advance is
being born that ought to be vigorously opposed by mone
tary tightening. But I am more impressed with the
relatively small number and small size of the price
increases that were generated by the peak of demand
pressures on our resources in the first quarter. That
we held the line so well under the circumstances I take
to be an impressive tribute to the basic forces making
for price stability during the current economic expan
sion. Now, with the pressure of demand on resources
being relaxed a little, national market forces will be
working against further price advances.
I think we
should watch carefully to see if such events give us a
satisfactory overall price performance before jumping
to the conclusion that they cannot and that monetary
policy should be tightened further. My own guess is
that market demands are not sufficient to support a
generalized price advance of any size at this time,
except and unless business and labor expectations of
inflation are so whetted as to start something of an
If that unlikely event
administered price-wage spiral.
should occur, then a significant and overt tightening
action by the Federal Reserve would be called for as
part of a vigorous program of counter-inflationary
public action. But until it is a fact rather than a
fear, we had better keep our powder dry.
I see nothing in either the international or
financial fields to gainsay this kind of policy pre
scription. The kinds of capital outflows that are
believed to be interest-sensitive are already well in
He
5/25/65
-47-
hand with the combination of policy measures now in force.
At the same time, our basic internaticnal competitiveness
continues to be strengthened with each passing month by
our persistently superior price performance and the increas
ing attractiveness of domestic capital investment.
On the financial side, bank loan and deposit expansion
seem to have slowed down markedly. As I read the figures,
there has been a net contraction of the banking system
and the money supply since late in April. In these changed
circumstances, I think we should be very careful about
prejudging what trend of expansion, if any, the banking
system might settle down to under the conditions of
reserve availability we are now maintaining. It could turn
out to be much smaller than the experience earlier this
year--perhaps even enough to call into question the appro
priateness of current policy. But this is a judgment that
we will be in a better position to make a few weeks from
now. In the meantime, I would be content with continuing
policy unchanged, with money market conditions being kept
about as they have been in recent weeks, and net borrowed
reserves ranging around $100-$150 million. (I would not
want to see them higher than that very often--even by
inadvertence--with the bond market in its current tech
nically vulnerable position. In other words, I would
advocate resolving doubts on the side of greater ease.)
In terms of the directive itself, I would favor alternative
A as drafted by the staff.
Mr. Shepardson said that without going into detail he would
express his complete accord with the views of Messrs. Hayes and Ellis.
Granting that there had been a little easirg from the domestic economic
pressures of earlier in the year, all indications--including business
expectations, the outlook for Governmental fiscal policy, and the
possibility of increased Federal expenditures associated with political
problems abroad--seemed to point to further increases rather than
decreases.
In his judgment the present relaxation of the excessive
pressures of a short time ago was a temporary development.
For that reason, Mr. Shepardson continued, he would favor
moving to less ease.
He thought a $200 million target for net
5/25/65
-48
borrowed reserves was appropriate.
He favored alternative B for the
directive, but questioned the desirability of including the word
"slightly" in the phrase "with a view to attaining slightly firmer
conditions in the money market."
The Committee had used the term
"slightly firmer" on occasions in the past, and he thought that at
times more emphasis had been placed on the word "slightly" than on
the word "firmer."
Mr. Mitchell remarked that the chart show must have been a
good one, since those favoring both alternatives for the directive
had been able to draw on it to support their views.
In keeping with
that procedure he would say that on the basis of the presentation he
favored alternative A for the directive.
Mr. Mitchell went on to say that he thought much of present
business confidence was engendered by the performance of the economy
in the first quarter.
But some of the activity then--particularly
the high level of automobile output--was borrowed from the past; and
some--particularly steel production--was borrowed from the future.
He was confident that the economy would continue to expand, but did
not think that an advance anything like that of the first quarter
could be looked for.
In the presentation today the staff had said
that the $14 billion rate of increase in aggregate expenditures of
the first quarter might be followed by a second-quarter rise at an
$8 billion rate.
In his judgment, however, the rise in the second
quarter could easily be at less than an $8 billion rate.
He also
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5/25/65
would note that the buildup of steel inventories was continuing, and
while its rate was difficult to assess it had been consistently under
estimated in the past.
On the question of prices, Mr. Mitchell observed, significant
recent increases had been concentrated mainly in the area of nonferrous
metals, and were due in part to strikes and political troubles abroad.
He failed to see any price developments of a type that the Committee
might appropriately try to snub.
In his judgment, the Committee had
to be prepared to tolerate more significant price movements than those
that occurred recently, unless it was willing to say that it did not
favor increased economic growth or a reduction in the unemployment
rate.
Some of the comments that had been made on the balance of
payments also left himrather unhappy, Mr. Mitchell continued.
Last
year the U.S. surplus on goods and services transactions was very
large--$8.2 billion.
This indicated that the country's trading
position is strong, he said, and any attempt to dramatically increase
exports and decrease imports to eliminate the overall deficit would
have serious repercussion on the country's longer run trading relation
ships.
It was, in his view, inappropriate therefore to use monetary
policy at this time to restrict imports or expand exports.
Nor was
it wise to use monetary policy to curb the capital outflow by
raising the level of U.S. interest rates.
Any move now toward firmer money market conditions would be
likely to lead to a rise in long-term interest rates, Mr. Mitchell
-50
5/25/65
said, particularly in view of the large holdings of longer-term issues
by Government security dealers and the vulnerable position of the tax
exempt market.
In his judgment a rise in long-term rates would hurt
not help the economy.
Accordingly, he felt the Committee should keep
policy about where it was and leave the directive unchanged.
Mr. Daane remarked that after noting the differences in
emphasis in the discussion to this point his feelings about appropriate
policy were mixed.
He thought the most important consideration at
present was that the Committee should maintain a policy posture that
would be conducive to confidence in the dollar.
He agreed with Mr.
Mitchell that monetary policy alone could not reform the balance of
payments, which was affected among other ways by the Government's
foreign aid program.
But the Committee did have a concern with general
attitudes toward the dollar.
If he felt that a change in policy was
necessary today to maintain confidence in the dollar he would favor
such a change; but in his judgment no overt policy change was required.
Mr. Daane thouht that members of the Committee, including
himself, sometimes tended to take too seriously the implications for
the economy of minor changes in net borrowed or free reserves.
Despite
the staff review he considered the economy to be exceedingly strong
at present.
Perhaps his views reflected the ebullience he had found
on a visit to Detroit last week; but it was difficult for him to
believe that a small increase in net borrowed reserves would have
much impact on economic developments in general and on long-term
interest rates in particular.
-51
5/25/65
Mr. Daane agreed with Mr. Swan that alternative A was
preferable for the directive.
However, in his thinking he translated
"no change" into the range of net borrowed reserves suggested by
Mr.
Irons--$150 to $200 million.
If
effect, the figure had been in
that range recently; net borrowed reserves had averaged $155 million
in the last three statement weeks, and a little higher in the last
two weeks.
As he had indicated, his feelings were mixed; from some
standpoints he would rather see net borrowed reserves at the $200
million level.
On balance, however, he would hold to alternative A.
However, he would suggest two minor amendments to the staff draft.
In the first sentence he would say "The economic and financial develop
ments reviewed at this meeting indicate a generally strong further
expansion of the domestic economy, although at a somewhat slower
pace. . ." rather than that these developments indicated "maintenance
of a high level of economic activity. .
." as suggested by the staff.
To him the staff's proposed language implied that activity was on a
plateau, whereas GNP was expected to rise at an annual rate of $8
billion in the current quarter.
Secondly, in the last paragraph he
would call for maintaining about the same money market conditions as
had prevailed "since the last meeting of the Committee,"
rather than
"in recent weeks."
Mr. Hayes remarked that in view of the comments by Mr. Daane
and others regarding recent levels of net borrowed reserves, it
might be useful for the Manager to indicate what range of figures he had
had in mind in operations since the previous meeting.
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5/25/65
Mr. Holmes replied that, as he had understood it, the Committee's
intent was that net borrowed reserves should average somewhat over $100
million.
However, he also had understood that the Committee wanted
operations to be related to other conditions in the money market; and
in some respects the money market had had a somewhat easier tone
recently despite the higher level of net borrowed reserves.
He could
not say that he had had a target range ot $150-$200 million net bor
rowed reserves in mind.
Mr. Daane commented that net borrowed reserves nevertheless had
come out in the $150-$200 million area, and he thought the Committee
could contemplate a continuation of that range without adopting
alternative B for the directive.
Mr. Hayes observed that in his opinion the most recent figure
of $171 million was regarded as a slight aberration on the high side,
at least by some Committee members.
Mr. Maisel said he felt the tone of the staff report was
excellent.
From it he drew the following conclusions.
The past six
months had been characterized by a sharp increase in savings by
businesses and governments.
It was fortunate that increased auto
sales, as well as the run-up of steel inventories, were available to
offset that higher level of savings.
He noted that industrial prices
had not had any statistically significant rise in nearly six years
and that the main recent price rises had been primarily in inter
national goods and raw materials.
It now appeared that the two
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5/25/65
major spending factors which sparked the first quarter expansion would
be missing in the next half year.
Since even with that extra spending
the economy fell short of a completely desirable level of production
and employment, it was extremely important that plant and equipmen:
investments rise to make up the gap.
As a consequence, he thought no
action should be taken that would endanger that growth.
such growth was probable.
He felt that
On the other hand, he did not believe that
a period of slackening growth with a declining workweek was a period
for putting further pressure on financial markets.
As a general rule, Mr. Maisel said, he would prefer that the
Committee not vote a change in policy which would have very little
actual effect.
It was too likely to be misunderstood.
that alternative A was the proper directive.
He believed
He would, however, go
along with Mr. Daane's first proposed change but not his second one.
Perhaps, however, a change also should be made at the end of the first
paragraph to call attention to the fact that as a result of movements
in the past month the money supply was no greater than it was six
months ago.
While moderate growth might be proper, it had not occurred.
Mr. Hickman observed that for the first time the figures were
beginning to show the hesitation in the economy that had been expected
to occur from declines in autos and steel.
That was the case in indus
trial production, where the increase in April was smaller than in
recent months, as well as in such series as overtime pay and the wage
and salary component of personal income.
A similar pattern would
presumably be reflected in the second-quarter increment of GNP.
5/25/65
-54
Prices had moved up on a selective basis, but, with the exception of
agricultural products, most increases appeared to have been adjustments
to shortages and bottlenecks that might already have passed.
In addition to declines in autos and steel, Mr. Hickman
continued, cutbacks were beginning to appear in associated industries.
For example, the workweek at rubber plants had been reduced from six
to five days to correct for extremely large inventories of tires.
Reflecting those developments, some analysts had lowered their sights
from the very optimistic levels prevalent earlier.
Mr. Hickman reported that the Cleveland Reserve Bank's staff
estimated that the combined changes in steel, autos, and related
industries would have a net drag on the industrial production index
from the second quarter to the second half of the year averaging
about two index points.
That was expected to be only partly offset
by further gains in machinery and defense.
It thus appeared that
further net gains in the production index this year would be small
at best.
Despite strength in capital spending and the expected fiscal
stimulus, the "standard forecast" for GNP indicated rates of quarterly
gain below those achieved in 1964, Mr. Hickman remarked.
His staff
was inclined to project somewhat lower rates than the standard fore
cast, but by almost any reckoning momentum seemed to be diminishing.
Thus, the U.S. would be losing ground in the national effort to close
the gap between actual and potential GNP.
of unemployment.
That implied a rising rate
5/25/65
-55
Against that background, Mr. Hickman said, fiscal measures
proposed by the Administration appeared to be inadequate.
For example,
the full employment surplus for the second half of 1965 had been revised
upward to reflect an unexpectedly large rise in Federal income tax
receipts.
Looking further ahead, he was also disturbed by the alarm
ingly large fiscal drag estimated for the first half of 1966, even
taking into account further reductions in excise taxes.
Thus, it
appeared that U.S. fiscal policy, as now planned, would be inadequately
countercyclical this year, and would become procyclical next year.
Whether the Committee liked it or not, monetary policy might be called
upon to make a still further contribution to economic expansion,
despite the country's balance of payments difficulties.
Viewed retrospectively, Mr. Hickman observed, the level of net
borrowed reserves, which averaged $161 million over the past two weeks,
and member bank borrowings, which averaged $500 million, might prove to
have been too restrictive.
With the uncertainties in the business out
look, he would prefer to see borrowings around $400 million and net
borrowed reserves in a range of $50 to $100 million.
That, he thought,
could be acconplished within the scope of alternative A of the staff's
draft directives.
He would accept Mr. Daane's recommendation with
respect to the first paragraph, but not his suggestion for the second
paragraph.
In concluding, Mr. Hickman noted that covered yield
differentials were still not favorable to the U.S. and there were
reports of attempts to attract funds to Canada from the Fourth
District on a rate basis.
He thus would like to see the Treasury
5/25/65
-56
either offer a strip of bills or increase the weekly bill offering,
despite the Treasury's temporarily large cash balances.
Mr. Bopp remarked that now that the interim steel settlement
had been reached, the economy appeared to be experiencing the slight
hesitation so widely anticipated earlier in the year.
A recent meet
ing of Philadelphia area business economists held at the Reserve Bank,
while noting the slowdown, reached the conclusion that the economy
was in for no general downturn.
Those economists felt that steel
inventories would hold at about present levels until the latter part
of the third quarter, whereupon some accumulation would occur.
They
felt also that if a final settlement was reached in early September,
steel production would decline 20 to 25 per cent.
It was felt that
upward momentum would still be maintained, however, paced by high
rates of capital expenditure and a moderately expansive fiscal
policy.
The median forecast for gross national product in December
1965 was almost $670 billion (annual rate), up 5.5 per cent from the
fourth quarter 1964.
A tapering off of the rate of increase was fore
cast during the latter part of the year, with wholesale prices
remaining relatively stable and unemployment creeping up to around
the 5 per cent level.
As for the strength of business loan demand in coming months,
discussions with District reserve city bankers provided mixed
appraisals, Mr. Bopp commented.
Two of the larger banks expected
some noticeable increase in business loans in the latter half of the
5/25/65
-57
year; the remaining banks saw only a slight rise.
None of the banks
could pinpoint any category of business loans as likely to show
particular strength.
Instead, they viewed prospective loan demand as
coming "across the board."
Over all, no significant strengthening in
loan demand was anticipated.
Turning to policy, it appeared to Mr. Bopp that the present
monetary posture was appropriate to the near-term outlook.
The
rapid increase in business loans experienced in the past few weeks
would be disturbing if continued over a protracted period.
But the
rate of increase seemed to be moderating, and with the pace of business
activity likely to be slower in coming months, demand for credit should
be more moderate.
Though prices had shown some increase, pressures
were confined primarily to metals and food.
He continued to be
impressed by the facts that productive capacity was expanding and unit
labor costs remained stable.
Unemployment would probably rise over
the summer months and, while much of present and prospective unemploy
ment might be structural in nature, it was still necessary to maintain
a high level of aggregate demand if new entrants into the labor force
were to find employment and if measures to alleviate the structural
problem were to achieve ultimate success.
Given those factors and
considering also the apparent success of the President's voluntary
balance of payments program, Mr. Bopp would make no change at present
in the general posture of monetary policy.
Hence, he favored alterna
tive A of the staff drafts of the directive.
Mr. Bryan remarked that relatively few new statistics for
the Sixth District had become available in the two weeks since the
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Committee had last met.
However, the new statistics that were
available for the District seemed to confirm the indications of the
national figures of a slowdown in the upward trend of the economy.
As he saw it, the question was whether that represented merely a
reduction in upward momentum that might make for more stable growth
in the long run--in his judgment the economy had been growing at an
unsustainable pace earlier--or whether it reflected a genuine down
turn.
Obviously, he was not enough of an economic forecaster to say
with certainty at this point which was the case.
favored no change in policy.
As a result, he
He would vote for alternative A for
the directive, with Mr. Daane's suggested change in the first
paragraph.
Mr. Bryan's only other comment was on the balance of payments.
He was gratified by the contribution that the so-called voluntary
restraint program was making, but doubted that the program would
result in a lasting amendment of the situation.
Unless some new
approach was fashioned--such as in the area of Government foreign
loans and grants--he thought achieving improvement was going to be
slow and hard work.
Mr. Shuford said that economic and financial developments
continued to demonstrate strength, even though there perhaps had
been some slowing of the economic advance in recent weeks.
Employ
ment had increased rapidly in the past few months, and production had
risen faster than the upward trend in capacity.
While retail sales
were off a bit recently they were at a high level and, after allowance
5/25/65
-59
for special
fluctuations, had been rising at an average 5 per cent
annual rate.
Wholesale prices had been working up since late last summer,
Mr. Shuford continued.
They rose early last fall; in the fourth quar
ter they were nearly stable; and since December they had risen at a
3 per cent annual rate.
On the average, since last June they had
moved up at a 2 per cent annual rate.
Both the extent of the rise
compared with the virtual stability over the previous six years, and
the acceleration of price increases in recent months compared with
declines for corresponding periods of the three previous years, were
reasons for some concern.
Business activity in the Eighth District had approximated
that nationally, Mr. Shuford said.
Production and spending had been
expanding at slightly faster rates than na:ionally since last August.
Employment, while strong, had been increasing a little less rapidly
than in the nation.
Mr. Shuford noted that national financial markets continued
to reflect the strength of the economy.
As interest rates had
remained about unchanged, bank credit--chiefly loans--had expanded
at a marked rate.
Time deposits had increased at a rapid rate, and
a major share of the reserves supplied to the banking system had been
used to support them and also to support an unusual jump in Government
deposits.
The growth in the money supply had probably slowed since
November, but he was inclined to think not so much as current data
indicated after adjustment by the new seasonal factors and for the
unusual temporary transfer of funds from private to Government accounts.
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5/25/65
As to policy, Mr. Shuford felt tha: some firming was in order.
Without repeating the reasons that had been outlined today by Messrs.
Hayes, Irons, Ellis, and others, he would simply say that he too would
think in terms of net borrowed reserves fluctuating around $200 mil
lion, and the Federal funds rate above the discount rate most of the
time.
In addition, while he did not advocate attempting to raise
short-term rates, he nevertheless would be pleased if higher bill
rates resulted from the slightly firmer position he favored.
Mr. Shuford said that he would not change the discount rate
at this time.
As to the directive, alternative B seemed acceptable.
Mr. Balderston noted that much of the discussion at today's
meeting had centered on the domestic economy; he thought the minutes
would reveal that much more stress had been placed on domestic than
on international considerations.
He did not know whether a real slow
down was occurring in the rate of economic expansion that the country
had been enjoying for four years or whether there was merely a little
deflation in the bubble that might have grown on top of the boom.
The money supply had been affected by the large increase in Treasury
deposits.
The relapse in the stock market was what one would expect
and perhaps even hope for after the kind of ebullience that had been
witnessed for a while.
In short, Mr. Balderston said, he was not willing to make a
judgment right now as to whether the domestic advance had really
slackened.
He suspected, however, that unless the Committee took
some further steps with respect to policy, it might find that the
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5/25/65
psychology of businessmen had led them to decisions they would regret.
He thought he had observed some unhealthy ebullience in the thinking
of businessmen.
In any case, whatever the domestic concerns, the inter
national problem was very much with the Committee.
Mr. Balderston said he was reminded of the challenging
statement that Mr. Mitchell had made at the Committee's April meeting.
He (Mr. Balderston) had found many of Mr. Mitchell's individual obser
vations intriguing, but disagreed completely with his conclusions.
Mr. Mitchell had observed that overall restraint of credit growth was
not a desirable or feasible way of dealing with the problem of capital
outflows.
He also had argued that any effort to reduce the flow in
credit markets by more restrictive monetary policies was offset, in
part, by a diversion of the flow of current income away from consump
tion and durable goods expenditures into credit markets.
He had
concluded that the restrictive impact of a tight money policy would
slow up the rate of domestic expansion and not curtail substantially
the flow of funds seeking investment outlets abroad.
Mr. Mitchell
also had observed, and Mr. Balderston agreed, that interest rate
differentials were bound to persist for some time between the U.S. and
other countries which were not as intensively capitalized.
Mr. Mitchell
had concluded further that in the longer run the U.S. must establish
controls over capital outflows that did not have to be backed up or
reinforced by tighter money.
It was at that point, Mr. Balderston
said, that his own thinking departed from Mr. Mitchell's.
While the
5/25/65
-62
latter would stress domestic goals, Mr. Balderston would give equal
weight to international considerations.
In Mr. Balserston's opinion the Government had to act quickly
to curtail its foreign spending, or all efforts to improve the payments
balance would be fruitless; the private sectors of the economy could
not be asked to carry all of the burden.
But also, what progress was
being made in the private sectors would be undermined, in his judgment,
unless it was supported by some reduction in credit availability.
That was the responsibility of the Committee.
It might be argued, Mr. Balderston continued, that the recent
increase in bank credit had been more rapid than in other forms of
credit, and therefore was not as serious as it might appear.
However,
banking institutions had the know-how and the incentive to push funds
abroad.
Accordingly, he thought that the rate of growth of bank credit
was particularly in need of control.
Mr. Balderston concluded that the Committee should not concen
trate on domestic goals to the exclusion of international objectives.
Further restraint on credit availability was required, in his judgment,
to achieve the nation's balance of payments goals.
He favored alterna
tive B of the draft directives for the reasons stated by Messrs. Hayes
and Ellis.
Chairman Martin noted that some members of the Committee
favored one alternative for the directive today and some favored the
other.
He could argue the case either way.
There seemed to be only
slight differences in the objectives sought by the two groups, and he
5/25/65
-63
wondered if the distinction being made was not too fine to serve as a
basis for a policy change.
His own thinking probably tended in the
direction of the group favoring firming, although no one could be sure
about the appropriate timing.
He was becoming increasingly worried
about both the balance of payments and the possibility of domestic
inflation.
his views were not firm on either point but he certainly
was not worried, for example, that a deflation would occur.
The Chairman said he was not sure that monetary policy would
have any influence on price developments;
aged on that score.
sometimes he felt discour
But he could not go along with Mr. Robertson's
suggestion that the Committee should wait until there was clear evi
dence of a price bulge before acting, because then it would be too
late.
With respect to the balance of payments problem, it there was
a clear hemorrhage in U.S. internaticnal payments it might be necessary
to follcw Britain in raising the discount rate to a high level.
That
might happen.
Those were matters that the Committee had to weigh in arriving
at its policy decision, the Chairman remarked.
On the directive, he
thought the Ccmmittee was in a difficult situation when the two alterna
tives could be interpreted in the same way by different people.
Speaking not from his own point of view but in light of the discussion
today, a directive along the lines of alternative A might be adopted,
with the understanding that the conditions to be kept unchanged were
roughly those that were currently prevailing, whether they had been
attained inadvertently or not.
Net borrowed reserves currently were
5/25/65
-64
in the neighborhood of $150 million, he noted.
The Chairman said that
he could not support alternative A if it was taken as an instruction
to the Desk to get net borrowed reserves back to around $100 million;
in advocating no change in policy he meant no change in either direc
tion.
On the whole, he thought present policy, which he would describe
as "mildly restrictive," was appropriate.
Mr. Mitchell observed that the second paragraph of alternative
A called for maintaining about the same conditions in the money market
and not for maintaining net borrowed reserves at any particular level.
On that basis the figures for net borrowed reserves could be expected
to fluctuate
He was unclear from the discussion whether it was now
proposed to shift to a net borrowed reserve target or to continue the
earlier practice.
Chairman Martin commented that he personally did not favor
introducing numbers for net borrowed reserves into the directive.
But in its discussions around the table the Committee had tended
toward the use of such numbers in measuring the results achieved by
the Desk.
The Chairman then noted that Mr. Daane had suggested changes
in both paragraphs of alternative A, the first but not the second of
which seemed acceptable to those commenting on them.
He proposed
that the Committee vote on alternative A with Mr. Daane's first pro
posed amendment.
There followed some further discussion of the
wording of the directive.
5/25/65
-65Thereupon, upon motion duly made
and seconded, the Federal Reserve Bank
of New York was authorized and directed
until otherwise directed by the Commit
tee, to execute transactions in the
System Account in accordance with the
following current economic policy direc
tive:
The economic and financial developments reviewed at
this meeting indicate a generally strong further expansion
of the domestic economy, although at a somewhat slower
pace, and some improvement in our international balance of
payments, but with gold outflows continuing. In this
situation, it remains the Federal Open Market Committee's
current policy to reinforce the voluntary restraint pro
gram to strengthen the international position of the
dollar, and to avoid the emergence of inflationary pres
sures, while accommodating moderate growth in the reserve
base, bank credit, and the money supply.
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.
Votes for this action: Messrs.
Martin, Bryan, Daane, Galusha, Maisel,
Mitchell, Robertson, and Scanlon. Votes
against this action: Messrs. Hayes,
Balderston, Ellis, and Shepardson.
Mr. Hayes said he dissented from this action because he
considered it desirable to move toward firmer money market conditions
at present, even if the change was a slight one.
Messrs. Balderston,
Ellis, and Shepardson also dissented because they favored a move
toward firmer money market conditions, for the reasons indicated by
their statements earlier in the meeting.
5/25/65
-66
It was agreed that the next meeting of the Committee would be
held on Tuesday, June 15, 1965, at 9:30 a.m.
SecretaryThereupon the meeting adjourned.
Attachment A
CONFIDENTIAL (FR)
May 24, 1965
Drafts of Current Economic Policy Directive
for Consideration by the Federal Open Market Committee
at its Meeting on May 25, .1965
Alternative A (no change in policy)
The economic and financial developments reviewed at this
meeting indicate maintenance of a high level of economic
activity and some improvement in our international balance of
payments, but with gold outflows continuing. In this situation,
it remains 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 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 (firming)
The economic and financial developments reviewed at this
meeting indicate maintenance of a high level of economic
activity with some upward pressures on prices, a large expan
sion of bank credit and reserves in recent months, and
continuing gold outflows despite some improvement in our
international balance of payments. In this situation, it is
the Federal Open Market Committee's current policy to rein
force the voluntary restraint program to strengthen the
international position of the dollar, and to avoid the
emergence of inflationary pressures, by moderating growth in
the reserve base and bank credit.
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.
Cite this document
Federal Reserve (1965, May 24). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19650525
@misc{wtfs_fomc_minutes_19650525,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1965},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19650525},
note = {Retrieved via When the Fed Speaks corpus}
}