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, June 15, 1965, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Bryan
Daane
Ellis
Galusha
Mr.
Mr.
Mr.
Mr.
Maisel
Mitchell
Robertson
Scanlon
Mr. Shepardson
Messrs. Bopp, Hickman, 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. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Holland, Koch, and
Willis, Associate Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open
Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Governors
Messrs. Partee and Williams, Advisers, Division
of Research and Statistics, Board of
Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
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Mr. Patterson, First Vice President of the
Federal Reserve Bank of Atlanta
Messrs. Link, Eastburn, Mann, Ratchford,
Jones, Tow, and Green, Vice Presidents of
the Federal Reserve Banks of New York,
Philadelphia, Cleveland, Richmond,
St. Louis, Kansas City, and Dallas,
respectively
Mr. Lynn, Director of Research, Federal Reserve
Bank of San Francisco
Mr. Meek, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com
mittee held on May 11 and May 25, 1965,
were approved.
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Cpen
Market Account on foreign exchange market operations and on Open
Market Account and Treasury operations in foreign currencies for
the period May 25 through June 9, 1965, and a supplemental report
for June 10 through June 14, 1965.
Copies of these reports have been
placed in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
said the gold stock would remain unchanged this week but prospective
sales between now and the end of the month might very well require
a substantial reduction before the end of June.
On the London gold
market, demand had slackened somewhat with the price falling yester
day somewhat below $35.09.
The gold pool, however, remained in
deficit to the extent of approximately $170 million.
6/15/65
-3The main feature of the exchange markets had been the con
tinued lack of buoyancy in the pound sterling, Mr. Coombs observed.
Confidence remained decidedly weak with much talk in the market of
a new speculative drive on sterling later in the summer.
The British
announcement of a $200 million reserve increase at the end of May,
over and above the funds obtained from the British borrowing from
the International Monetary Fund, was received with suspicion, and
the cut in the Bank of England's discount rate from 7 to 6 per cent
had had little effect on market thinking.
The market was looking
for concrete evidence of improvement in the British situation which
had not been forthcoming thus far.
Trade figures for May, released
just this morning, were discouraging; they showed a decline in
exports and an increase in imports.
Since the beginning of June
intervention by the Bank of England had cost more than $100 million,
and a heavy volume of forward contracts was maturing this month.
The British Government was anxious to avoid showing reserve losses
this summer before the September meetings of the World Bank and
International
Monetary Fund, and hoped to show a sizable increase
in reserves.
Some possibilities for doing that were open to them,
including the conversion of part of their portfolio of U.S. stocks
into liquid assets suitable for inclusion in dollar exchange
reserves.
Some use also might be made of their $750 million swap
line with the System.
6/15/65
Another noteworthy development on the exchange markets,
Mr. Coombs continued, had been the gradual decline of the German
mark almost to the parity level.
That had reflected a deliberate
policy of the German Federal Bank, which had made no special effort
to resist occasional minor selling pressures on the mark.
The
German authorities believed that their overall balance of payments
position had moved to approximate equilibrium and that such a
development should be reflected in an exchange rate around the
parity level.
In Mr. Coombs' opinion that was a sound, healthy
approach, and one that other European central banks would do well
to emulate in similar circumstances, rather than resisting declines
in the exchange rates for their currencies.
In the case of Japan, Mr. Coombs reported, there were some
disquieting signs of developing pressure on Japanese reserves, partly
reflecting increasing difficulty in securing U.S. or European
financing of their sizable imports from less developed countries.
Few European central banks seemed inclined at present to take over
any substantial part of such Japanese trade finance, which hitherto
had been largely handled in New York.
If their reserve drains reached
sizable proportions this month, the Bank of Japan might very well
wish to draw on its $250 million swap line with the System.
If
the pressures continued to mount it would be well to consider what
European central banks might do to help out in the event of a sudden
drive on the yen.
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Finally, Mr. Coombs said, he regretted the need to report
that the dollar had slipped back to the floor against the French
franc and that the Bank of France already had taken in $50 million
in June.
Presumably they would take that amount and any further
accruals in gold.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
May 25 through June 14, 1965, were
approved, ratified, and confirmed.
Chairman Martin noted that in response to the Committee's
request at the preceding meeting Mr. Sanford had distributed a
memorandum dated June 10, 1965, entitled "Renewal of System swap
drawings."
(Note:
A copy of this memorandum has been placed in
the Committee's files.)
The Chairman asked if any members had
questions or comments regarding the memorardum.
Mr. Shepardson said he had a question regarding the System's
drawings under the swap line with the Naticnal Bank of Belgium.
In
May 1963, he observed, the Committee had revised its guidelines
for foreign currency operations to indicate that drawings should
be fully liquidated within one year of the time that any outstanding
amount was first drawn.
He noted from Mr. Sanford's memorandum that
$60 million was now outstanding on the Belgian swap line, and it
was his impression that there had been continuous use of either the
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6/15/65
standby part or the fully-drawn part of that arrangement for a
protracted period.
He asked Mr. Coombs tc comment on the matter,
Mr. Coombs replied that the $60 million figure to which
Mr. Shepardson had referred was composed of a $50 million outstanding
drawing under the standby part of the arrangement with the National
Bank of Belgium and of $10 million currently disbursed from the $50
million part of the arrangement that was always fully drawn.
It was
unfortunate that the Belgians had preferred to have part of the
arrangement drawn in full at all tines because such a procedure
confused matters; but in any case, it seemed appropriate to measure
use of that part of the arrangement by actual disbursements.
By
and large, the System had let the Belgians take the initiative in
indicating when disbursements would be desirable, and disbursements
had been made frequently both to absorb dcllar accruals on their
part and to furnish them with dollars at times of need.
August
1964 was the last time the System's accourt with the Belgian Bank
had been completely clear, with no disbursements under the fully
drawn part and no drawings under the standby part.
The one-year
period indicated by the guidelines thus would elapse in August 1965.
It was his hope that the account would again be cleared up in the
first week of July by means of the U.S. drawing on the IMF that
was now under consideration.
The desirability of doing so was one
reason he was recommending a Fund drawing by the U.S.
6/15/65
-7Mr. Coombs then noted that the $50 million standby swap
arrangement with the Bank of Sweden, which had a term of twelve months,
would mature on July 19, 1965.
He recommended its renewal.
In response to a question by Mr. Mitchell, Mr. Coombs said
that no drawings had ever been made on this swap line.
Thereupon, renewal of the standby
swap arrangement with the Bank of Sweden,
for a further period of twelve months,
was approved unanimously.
Mr. Coombs reported that two $150 million standby swap
arrangements having terms of six months, with the Swiss National Bank
and the Bank for International Settlements, would mature on July 20,
and recommended their renewal.
He noted that the Committee was
inclined to extend the maturity of the swap arrangements to twelve
months when that could be arranged, and expressed the hope that
sooner or later the Swiss would agree to such an extension.
However,
he was not sure that they were prepared to do so at this time.
Renewals of the standby swap
arrangements with the Swiss National
Bank and the Bank for International
Settlements, for further periods of
six months, were approved unanimously.
Mr. Coombs then recommended renewal of four outstanding
drawings.
They were two drawings on the Belgian swap line of $20
million and $5 million, which matured on June 30 and July 12,
respectively; a $100 million drawing on the Bank of Italy, maturing
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-8
on July 1; and a $60 million drawing on the Swiss National Bank,
maturing on July 20.
These would be secord renewals for the Belgian
and Swiss drawings, and a first renewal for the Italian drawing, he
noted.
All four renewals would be for three-month periods, but
Mr. Coombs was hopeful that it would be possible to repay the
Belgian and Italian drawings early in July, if the Treasury made
the recommended drawing on the Fund.
No special means were available
for repaying the Swiss drawing, except, perhaps, issue of a Treasury
bond denominated in Swiss francs.
However, the System had paid off
about $135 million of its Swiss franc debt since March, and there
was a good chance that the amounts still outstanding, which totaled
$115 million, could be reduced substantially or repaid in full in
the next few months.
Market developments appeared favorable to that
end; ordinarily the Swiss franc strengthened seasonally in June, but
this year it had been weak despite seasonal forces.
In response to questions, Mr. Coombs indicated that the Fund
held sufficient Belgian francs for purposes of the suggested U.S.
drawing, and that recent Italian accruals of dollars were a result
in large part of tourist expenditures there.
He added that the
Italian balance of payments position had been strong for over a
year; there had been a pendulum effect, reversing the earlier
weakness.
If the System's drawing was repaid in early July it might
prove necessary to make a new drawing later in that month or in
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6/15/65
August to take care of further inflows of dollars to Italy.
However,
the pendulum might swing in the opposite direction in the late fall
or winter, making it possible to repay any additional drawing
without recourse to the Fund.
Renewal of the drawings on the
National Bank of Belgium, the Bank
of Italy, and the Swiss National
Bank for further periods of three
months was noted without objection.
Finally, Mr. Coombs recommended renewal for the third time
of a $10 million sterling-Dutch guilder swap with the BIS that would
mature on June 29.
As indicated at previous meetings, he said, there
was more flexibility in connection with this type of "third currency"
swap than with the usual kind of drawing, but the swap in question
had been outstanding for a rather long time and it would be
desirable to liquidate it.
Some progress had been made in that
direction during the last month, and he was hopeful that the swap
could be cleared up soon.
Renewal of the sterling-guilder
swap with the Bank for International
Settlements for a further period of
three months was noted without objection.
Chairman Martin then noted that the Committee had held a
preliminary discussion of Mr. Coombs' memorandum of April 30, 1965,
entitled "Action on International Liquidity" at its previous meeting
6/15/65
-10
and had scheduled further discussion for the meeting today.
He invited
Mr. Coombs to comment.1/
Mr. Coombs observed that he had made two main points in his
memorandum, one of which had already been touched on today.
That
point concerned the desirability of opening up a new source of
intermediate-term credit to take over swap drawings that threatened
to run on too long.
In the past such drawings had been paid off by
means of Treasury gold sales or, in a number of instances, by
issuance of Treasury bonds denominated in foreign currencies.
There
was, however, a major source of intermediate-term credit available
in the International Monetary Fund--a source that had never been used
by the U.S. for balance of payments purposes.
To open up that source
would be consistent with the frequent statements by U.S. spokesmen
to the effect that the Fund should be the major source of interna
tional liquidity in the future, and it would have a number of
advantages.
Specifically, at present it would enable the Federal
Reserve to repay short-term drawings on two swap lines--$60 million
with the National Bank of Belgium and $168 million with the Bank of
Italy--before those drawings ran on for periods long enough to be
potentially embarrassing to the U.S. and to the foreign central
banks involved.
He had raised the question of a possible Fund
1/ Mr. Furth, Consultant to the Board of Governors, joined the
meeting for the discussion of this subject.
6/15/65
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drawing with the Treasury, and while there had not been an official
response as yet, he understood that the prospects were good.
Also,
he had been advised that the Treasury had no objection to the
System's embarking on discussions with the European central banks
concerned.
Accordingly, he had discussed the matter with officials
of the National Bank of Belgium and the Bank of Italy.
They had
taken the initiative on the subject some morths ago, and were
favorably inclined toward the proposal.
In Mr. Coombs' judgment,
the thinking at both the National Bank of Belgium and the Bank of
Italy in connection with the use of international credit facilities
for dealing with problems of international liquidity was close to
the philosophy of the System and the U.S. Treasury.
As yet he had no official response from the Treasury on his
second suggestion, Mr. Coombs continued.
That suggestion was to seek
arrangements with certain foreign central banks under which they would
extend credit lines in favor of, say, the Bank of England and the
Bank of Japan if either of those countries encountered difficulty
in coming months.
Problems could arise suddenly, as was demonstrated
in the case of Britain last November and in the case of Italy
earlier, and it was desirable, in his judgment, to give close study
to possibilities for making advance arrangements to aid a country
in difficulty.
Last November's crash program of help for Britain
had been successful, but he did not think anyone would want to go
6/15/65
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through such an operation again.
Nor was there any guarantee that
such an effort would succeed if tried a second time; it might fail
simply because responsible officials of certain central banks
happened to be unavailable at the moment.
He did not propose large
scale interrational negotiations involving all central banks in the
swap network; what he had in mind was approaching a few of them
discreetly and informally, so that if there were an international
crisis there would be a nucleus of central banks available to handle
it until a larger operation could be mounted.
In response to Mr. Hickman's question as to what central banks
would be approached, Mr. Coombs said that in connection with a
possible drive on sterling he would suggest the Banks of Canada,
the BIS; and possibly the Banks of Austria and
Italy, and Germany;
Sweden.
In the case of the Japanese yen he would again suggest the
Banks of Italy and Germany, and the BIS; and possibly the Banks of
Canada and Sweden.
He would hope to secure, on an entirely informal
basis, an understanding that they would be sympathetic to extending
credit lines to the British or Japanese in the event of sudden crisis
for either currency.
If the countries approached felt that such
understandings would enlarge their short-term comitments undesirably,
the System would undertake to reduce the maximum amounts it would
draw on its swap lines with those banks by equivalent sums.
Such
arrangements would cost the System nothing; in effect, other central
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6/15/65
banks would be extending credits that the System might otherwise be
called on to grant.
Mr. Wayne said he thought the Banks of England and Japan had
a role to play in the negotiations since the object was to build
defenses for sterling and the yen, and asked whether they had been
consulted regarding the proposals.
Mr. Coombs said he thought developments in the recent
British and Italian crises demonstrated that the chances of success
in a rescue operation were greatly enhanced if the U.S. was
directly involved in the negotiations.
Foreign central banks looked
to this country to act as a catalyst in getting things moving.
He
had discussed his proposal with the Banks of England and Japan, and
had found that both would be pleased to have the Federal Reserve
do a certain amount of informal exploration, which would save them
from possible embarrassment.
If the Bank of England, say, were to
approach another country with respect to a swap line, the question
would
immediately become a matter for formal, official negotiations,
and the request might be taken to suggest that the British were on
the verge of serious difficulty.
The System, on the other hand,
could pose the question in an informal and quiet way, without
necessarily implying any reflection on the British situation.
Mr. Daane said he was fully in accord with the first proposal,
for a U.S. drawing on the Fund to clear up certain swap drawings.
6/15/65
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Such an action would validate the position
the U.S. consistently had
taken that Fund drawing rights were a usable reserve asset.
Noting
that a country drawing on the Fund normally had the right to use
the proceeds in any way it chose, he said there was some question
in his mind as to whether a clear link should be made in the first
instance between the Fund drawing and repayment of the swap
drawings.
But a Fund drawing would be appropriate, he thought,
with or without such a direct link, and could still be used for the
same purpose.
On the second point, Mr. Daane continued, he was sympathetic
with the objective of making some advance preparation to assure that
credit facilities would be available to countries in need of them,
and he thought it would be useful to open discussions in a limited
and exploratory manner as a precautionary measure.
As he had in
dicated at the previous meeting, if the matter was pressed too far
there might be an adverse reaction in the form of a belief that the
U.S. was trying to assure the availability of credit facilities to
Britain regardless of the policies that country followed.
the approach Mr. Coombs described seemed to be reasonable,
However,
Mr.
Daane thought the effort was worthwhile, although he was, perhaps,
less sanguine than Mr. Coombs about the prospects for success.
Nor was it entirely clear to him that the proposed arrangements
would relievepressure on the dollar.
There would be some initial
6/15/65
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relief of pressure in that the credit of another country would be
substituted for that of the U.S., but that effect would disappear,
he thought, orce the proceeds of any loan had been used.
Mr. Coombs agreed with Mr. Daane's final point, but said
that the proposal would have the advantage of making it unnecessary
for the System to do a certain amount of lending and an equivalent
amount of borrowing.
As to the prospects for success, he thought
the BIS was ready to go along with the proposal.
He was not certain
about the Bank of Italy, but felt they might also be agreeable; it
was their view that any breach in the present system would make
difficulties for all, including Italy.
In response to questions by Messrs. Mitchell and Hickman,
Mr. Cooms said he was not proposing to ask for unconditional com
mitments for credit extensions to countries in difficulty; indeed,
even drawings under the present standby swap arrangements were always
subject to the approval of the lending country.
Nor did he suggest
written documents in which the U.S. would agree to reduce its
maximum drawing rights under existing swaps by the amounts of any
credits extended to third countries.
He proposed only informal,
oral understandings to that effect.
Mr. Bryan remarked that he agreed with Mr. Coombs' first
proposal, for a U.S. drawing on the Fund.
He was not sure of his
position on the second proposal, but could see no reason for not
exploring that avenue.
6/15/65
-16Mr. Ellis observed that there obviously was a sensitive
relationship between the positions of the dollar and the pound,
but it was not clear to him that weakness in the yen, which was
not an international currency, would have serious implications for
the dollar.
He questioned whether a parallel should be drawn
between the situations with respect to the yen and the pound.
Mr. Coombs replied that the yen certainly did not play a
role such as that of sterling in international finance, but it
nevertheless was an important currency.
Japan had a large population,
was the world's third largest steel producer, and was a major
participant in world trade.
Accordingly, difficulties for the yen
could have repercussions on the whole pattern of international
trade and finance, including a possible sharp curtailment of U.S.
exports to Japan.
Moreover, with Japan's heavy borrowing in the
Euro-dollar market, a collapse of the Japanese credit structure
could have serious consequences in that market.
Such a collapse
thus could have far-flung effects.
Mr. Ellis then asked whether third countries might not be
willing to extend credits to Britain or Japan without informal
agreement by the U.S. to reduce its maximum drawings under existing
swap lines.
It would be preferable, he thought, to increase the
total volume of funds available on a standby basis in that manner,
rather than to shift U.S. drawing rights to other countries.
6/15/65
-17Mr. Coombs agreed that such a course would be better if it
was feasible.
But a number of countries had been reluctant to
offer standby facilities to nations other than the U.S.
He did
not think that the chances for successful negotiations would be as
good if the U.S. did not provide the inducement of assuring no in
crease in the total commitments of
the lending countries.
He
considered the proposal to shift some of this country's drawing
rights to others more or less as a useful tactical approach; the
alternative that Mr. Ellis described did not seem to be a realistic
possibility for the next two or three years.
In his judgment the
best hope for moving in that direction would be to increase further
the size of the Federal Reserve swap lines.
Mr. Ellis commented that a particular System swap line would
not be available for the defense of, say, the pound if it happened
to be fully drawn by the U.S.
Thus, he thought the System would
be leading toward an increase in its swap lines, if, in effect, it
made some of its drawing rights available to other countries.
Mr. Scanlon asked if the action Mr. Coombs was proposing
would impair the chances for eventual development of larger System
swap lines, and Mr. Coombs replied that he did not think so.
The
System was continually reappraising the size of its various standby
swap lines, and from time to time circumstances might suggest the
need for increasing particular swaps,
At the moment, for example,
6/15/65
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the line with the German Federal Bank appeared to be on the low side,
in view of the fact that the Germans had extended a $500 million
credit to the British.
The question here was what route offered
the best possibilities for getting the Germans to help the British.
Mr. Scanlon then asked about the long-run prospects for a
standby swap arrangement between Britain and Germany.
Mr. Coombs
replied that he had been optimistic on that score earlier but now
was rather pessimistic.
The atmosphere with respect to the British
had changed recently; other countries noted
the continuing
difficulties in the U.K. situation and were concerned that the
British were not taking sufficiently strong steps to deal with them.
In response to Mr. Swan's question about the probable
attitude of France toward the proposal, Mr. Coombs said he thought
the French would not be particularly surprised by it and were not
likely to have a strongly adverse reaction.
Chairman Martin observed that the discussions proposed were
exploratory in nature, and that everything possible had to be done
to promote unity and coherence in the international payments
mechanism.
He thought it was necessary to recognize the current
degree of interdependence in world monetary affairs and the
importance of psychological factors; a cautious approach was
required because of the risk of undesirable reactions.
In that
connection, he was sure the Committee could depend on Mr. Coombs'
negotiating skill.
6/15/65
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Mr.
Mitchell
remarked that the risks involved in the
proposed negotiations might be reduced by keeping the discussions
general rather than couching them in terms of possible future
difficulties for one or two particular currencies.
There were good
grounds for a general approach; Germany and Italy, for example,
might find themselves in trouble at any time.
Chairman Martin said he agreed with Mr. Mitchell's
suggestion.
The Chairman then proposed that Mr. Coombs be
authorized to explore the matter with other central banks in a
judicious manner, keeping the discussions in terms as general as
possible and. meanwhile, staying in close touch with the Treasury
and reporting back to the Committee from time to time on the status
of the negotiations.
No disagreement with the Chairman's proposal
was expressed.
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 25 through June 9, 1965, and a supplemental report for June 10
through June 14, 1965.
Copies of both reports have been placed
in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
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System operations during the past three weeks were
conducted against a background of declining bill rates
and rather congested long-term capital markets. In
maintaining steadily firm conditions in the money market
(with Federal funds trading mainly at 4-1/8 per cent and
member bank borrowing hewing close to $500 million), the
System injected a net of some $800 million of reserves.
In view of the condition of the bill and bond markets it
was both desirable and feasible to effect this reserve
injection through a variety of means. Thus, while
outright holdings of bills were increased by about $370
million, the System also bought about $230 million of coupon
bearing securities. Extensive use was made of repurchase
agreements through the period, resulting in a net
addition of about $200 million to reserves in this form.
The persistent demand for Treasury bills, which has
brought the rate on three-month bills down about 10 basis
points in the last three weeks and 20 basis points in the
last few months, remains quite remarkable in the face of
consistent firmness in the money market. Earlier this
year, the repatriation of funds placed abroad and
unusually heavy public fund buying appeared to be factors
of some importance. More recently, it appears that the
bill market and other short-term Treasury issues may also
have been affected by demand from investors who were holding
back in the placement of funds in the long-term market.
In addition, there may have been some purchases of bills
by sellers of stocks. Whatever the source of demand, it
has clearly been active enough to keep dealer positions
turning over so rapidly that financing costs have proved
to be no great burden.
Other short-term securities have not shared the
strength exhibited in the bill market, although there
have been some reports of switching from bills into other
investments such as acceptances, commercial paper,
certificates of deposit, and Government agency issues.
These other short-term investments have held about steady
in yield at the higher levels reached somewhat earlier
this year.
Recent developments in the longer-term debt market
offer a more or less typical example of reaction to
suddenly enlarged supplies. The "Fanny May" announce
ment of a $525 million sale of 1 to 15 year participation
notes was followed in quick succession by capital
offerings by two of the country's largest banks--aggregating
another $1/2 billion--and these announcements were
6/15/65
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augmented by additional primary and secondary stock
offerings, interspersed with a number of private place
ments of long-term debt. With this plethora of new
issues, it is not surprising that corporate bond prices
have declined, and that concessions have also been
required in order to distribute bonds from slower-moving
tax-exempt accounts.
Treasury issues retreated only slightly in price,
in part because official purchases helped to relieve
some of the overhang; dealers' holdings of Treasury bonds
remain quite large, however, as dealers absorbed some
selling by investors who were switching into corporate
issues. On the whole, the Government securities market
has performed quite well as the capital markets have
adjusted to shifts in the supply-demand balance.
In the last few days a better tore has developed in
the bond market--in part, because of the further drop
in stock prices. Corporate bonds seem to have found a
level where investors are willing to commit funds. Indeed,
the recent pickup in sales of slow-moving issues and the
good interest indicated in the $525 million Fanny May
issue being offered today suggests the market atmosphere
could improve substantially. Once underwriters have
waded through the current heavy backlog, the calendar
ahead--as far as things now stand--is much less crowded.
The next few weeks should be of more than routine
interest in the market on several counts. First, the
redistribution of reserves after today's quarterly tax
date may produce some increased pressure on money center
banks that in turn could be helpful in raising their
dealer loan rates and in holding up bill rates. Second,
there will be a further opportunity to test the viability
of the corporate bond market, and to see whether greater
investor interest may then develop in Treasury issues.
Third, with the projections pointing to a large reserve
need building up toward the July 4 week end, System
operations may have to be on a scale that crowds the
edges of the usual "marginal" role that it is preferable
to maintain. As in the past three weeks, the purchase
of coupon securities and extensive use of repurchase
agreements will have to be employed as well as outright
purchases of Treasury bills to meet these large needs.
6/15/65
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period May 25 through June 14,
1965, were approved, ratified, and con
firmed.
Chairman Martin called at this point for the staff economic
and financial reports, supplementing the written reports that had
been distributed prior to the meeting, copies of which had been
placed in the files of the Committee.
Mr. Brill made the following statement on economic conditions:
My appraisal of the economy at midyear can be sum
marized briefly: "Things are not as bad as they seem,
but they could become so."
Gyrations in financial
markets in recent weeks suggest, at a minimum, substantial
uncertainty about the near-term future, and at worst,
expectations of an imminent downturn. The worst may turn
out to be the case, but at the moment there is little
hard evidence of it in the facts we have on the recent
performance of the economy, or what we have in the way of
portents for the future.
True, the pace of economic and financial growth is
down from that in the first quarter. But few, if any,
observers thought earlier in the year that we could keep
up such a frenetic pace, induced by the aftermath of an
auto strike and anticipation of a steel strike. In the
event, production and sales have held up surprisingly well.
Steel output has increased after a modest decline, and
automobile sales appear to have leveled out at a very
respectable rate. Sales of consumer nondurable goods have
risen sharply, offsetting the drop in auto sales. In
aggregate terms, the change in GNP, both in total and
in major components, seems to be proceeding astonishingly
close to the staff projections made at the turn of the
year--about a $14 billion rise in the first quarter and
about a $7 billion rise in the second.
You will recall that the rest of the projection
suggested further steady increases over the balance of
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the year, at a dollar rate close to the $10 billion
average of the first half and a percentage rate only
slightly smaller. What clues we have as to the near
term future are, by and large, consistent with this
outlook. The latest surveys of business plans for
capital spending are, if anything, more buoyant than we
projected earlier, and surveys show consumer spending
plans for durable goods remaining strong. Consumption
bolstering reductions in excise taxes and increases in
Social Security benefits, both assumed in the projection,
are closer to realization.
It is difficult, therefore, to see cause for
immediate alarm. Yet, while alarm may be premature,
there are some disquieting possibilities that make one
cautious about deprecating the recent behavior of the
stock market. It may be just the semiannual recurrence
of an occupational ailment, but once again I find
myself seriously concerned about the possibility of
declining rates of resource utilization accompanied by
upward pressure on prices. Let me make it clear that
I am not talking of "inflation amidst recession."
Neither extreme seems likely. But I can see an economic
performance inadequate to absorb our growing labor and
plant capacity, yet accompanied by some further upcreep
in industrial prices.
As to the inadequacy of performance, gains in GNP
at the projected rate noted earlier, 5-1/2 per cent in
current dollars but less than 4 per cent in real terms,
would probably not match the rate at which industrial
capacity is expected to grow this year if the latest
spending plans are realized. Even during the extra
ordinary volume of output in the first quarter of this
year the average capacity utilization rate in manufacturing,
as best we can measure it, did not reach the peaks of the
mid-1950's, and the rate is likely to drift off from here
on out. Capacity could become underutilized rather
quickly; order backlogs are much smaller now, relative
to capacity, than at the peaks of activity in 1956. A
final settlement of the steel wage contract in the fall
could significantly depress activity in the later months
of the year.
Similarly, we haven't achieved as high a rate of
labor utilization in this upswing as in earlier cycles.
The unemployment rate has not gotten down as low as it
did in the mid-1950's, and expected growth in the labor
6/15/65
-24-
force is likely to keep it from doing so. The drop in
the unemployment rate in May is less heartening than
appears on the surface, since it reflected principally
a lagging growth in labor force rather than a spurt in
new jobs. Employment has not been rising as rapidly in
recent months as earlier. Slowing in the pace of
economic activity would limit job opportunities further,
resulting in larger reported and concealed unemployment,
particularly among the difficult-to-employ teenage
group--not a comforting outlook for the hot summer
months.
Yet these developments are not inconsistent with
some further price creep. To date, significant price
increases have been concentrated, mainly in commodity areas
that usually respond widely and sensitively to cyclical
forces, rather than diffused throughout the structure of
prices and costs. The nonferrous metal group, for example,
accounts for 40 per cent of the rise in the total indus
trial materials index over the past year. The rate of
wage increase has shown little tendency to accelerate, and
productivity has gained consistently and rapidly. As
a result, unit labor costs, even including large fringe
benefits, have drifted down.
But this decline in labor costs has depended impor
tantly on rapidly rising rates of production, as well as
restraint in wage settlements. In the 1954-57 upswing
unit labor costs in manufacturing declined over the first
year of expansion, when output was rising rapidly. But
the rise in production slowed markedly in 1956, while the
rate of wage increase accelerated. As a result, unit
labor costs also accelerated, and so d.d the price rise.
Prices and costs continued to drift up in 1957 even after
production turned down.
Once again we appear faced with the prospect of slower
rates of growth in production, the possibility of reduced
rates of increase in productivity, and the possibility
of large wage settlements. The outcome of the aluminum
wage negotiations is disturbing, particularly since it
may set the pattern for a steel settlement a few months
from now.
I do not assess the outlook as inflationary, in the
sense that term describes the mid-1950's. There do not
appear to be either the general economic preconditions
of the pervasive psychology to support a repeat performance.
Price pressures should continue selective--largely confined
6/15/65
to the metal areas, and for some time ahead, also to meats.
But in aggregate these selective pressures could well
produce a continued crawl in the total industrial price
index at about the 1-1/2 per cent annual rate we have had
since last fall.
Such price, production, and employment possibilities
as I have described would leave monetary policy impaled,
as usual, on the horns of the price stability-full
employment dilemma. It would be nice if there were some
tried and true textbook guide for policy in a situation
of mild but possibly persistent slackening in resource
utilization and mild but possibly persistent upcreep in
prices, but I don't know of any. I have faith in monetary
policy as a stimulant and as a restraint, but not in its
capacity to do both at the same time. Perhaps this is one
of those occasions when it is best to stand pat and wait
to see how conflicting forces seem to be balancing out,
before throwing the weight of our economic influence in
one direction or the other.
Mr. Hickman said he completely endorsed Mr. Brill's statement,
which he considered excellent.
He then asked if the industrial
production index for May was available as yet.
Mr. Brill replied that the May index, which would be released
tomorrow, was 141.3, up 0.5 from April.
Mr. Partee made the following statement concerning financial
developments:
The period since the last meeting of the Committee has
been an eventful one in financial markets. The stock market
has extended its decline--dating from mid-May--to a little
over 6 per cent, which amounts to a sizable technical
correction in average stock prices, The capital markets
have been confronted with an upsurge in new corporate
issues, and with continuing heavy inventories and indif
ferent retail demand in the tax-exempt area; yields in
both markets consequently have adjusted significantly
upward. And the Treasury bill market has continued
exceptionally strong, with yields on the 3-month issue
6/15/65
-26-
falling to around 3.80 per cent, partly in response to
the cut in the British Bank rate.
These developments, to some extent, are interrelated.
The strength in demand for bills, for example, probably
reflects in part shifts of funds by sellers of stocks,
particularly institutional investors. But, for the most
part, the adjustments that have been taking place appear
to me attributable to independent, and at least partly
temporary, pressures at work in each market. A good
case can be made for expecting stabilizing tendencies
to appear before long in each case, though the changed
yield relationships among markets that has emerged may
prove more enduring. If the market adjustments do in
fact prove progressive rather than limited, of course,
the implications for monetary policy would be quite
different.
In the stock market, technical corrections are to
be expected in the course of a long upswing in prices.
Five such corrections have occurred earlier in the current
bull market, the most recent one in November-December
1964. This year the market moved strongly upward again,
buoyed by excellent earnings reports and the ebullient
business sentiment of the first quarter. Over the whole
upswing, however, the price advance has considerably
exceeded gains in earnings, so that the ratio of prices
to earnings rose from 15 in the fall of 1962 to 18 times
estimated earnings for 1965 in mid-May. This is well
below the end-of-1961 relationship, but it is fully as
high--in fact, somewhat higher--than the ratios reached
toward the ends of earlier business expansions, in 1960
and 1957.
Therefore, it is not surprising that investors have
shown increased nervousness this year as the stock price
rise continued. The recent slowing in the business advance,
uncertainties about the international situation, and
sensitivity to statements, rumors, and other factorsall have induced some investors to play it safe and sell.
To date, however, the decline has been led by investment
grade rather than speculative stocks, and on relatively
moderate average trading volume. Stock market credit is
in good shape, and institutional buyers, with their
constant press of new funds, have become increasingly
important factors in the market. The price-earnings ratio
has already fallen one full point, to 17, and, given
the basic differences cited, the odds would seem to be
against a sharp cumulative sell-off such as occurred in
1962.
6/15/65
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In the bond market, the calendar of new publicly
offered corporate issues had already been running heavy,
with volume up 40 per cent from last year in the March-May
period. This larger volume was being moved only with
some difficulty, even before the two big bank offerings
were announced. At this point, the market broke and
yields rose around 10 basis points to the highest level
since the summer of 1961, when new offerings were also
unusually large. In addition, continuing high dealer
inventories and an apparent slackening of bank demand in
the municipal market brought an upward adjustment in
tax-exempt yields, also by roughly 10 basis points.
Government bond prices have changed little thus far,
perhaps mainly because there has been no evidence of a
volume market at slightly lower prices and because
dealers are able to carry their still substantial holdings
of the 4-1/4's and other issues at a small net profit.
We can expect a continuing large volume of new
corporate offerings, though with some seasonal slackening,
in view of rising capital expenditures and the probable
current leveling in earnings and internal cash flow.
But there has been no diminution in the flow of invest
ment furds, except possibly for bank buying of municipals,
and the volume of mortgage funds demanded and supplied
seems still to be slackening. Therefore, the upward yield
adjustment in capital markets is likely to be limited,
though new shocks could certainly have a further impact.
Whether the Government market will join in the adjustment
depends importantly on whether dealers will be able to
distribute the 4-1/4's in a gradual and orderly manner.
In the Treasury bill market, in addition to a
continuing good demand from public funds, corporations,
and other buyers, recent strength also reflects the
limited supply of bills available to the public. In May,
the total of bills held by the public declined by nearly
$700 million, as compared with increases or only small
decreases in the same month of other recent years. This
mainly reflected purchases for the Federal Reserve
Account, but there will also be a substantial decline in
June as the tax bills mature. An unusually high Treasury
cash balance suggests that there is no need for new
financing in the immediate future, and the cut in Bank
rate has given some in the market confidence that a some
what lower level of bill yields will be tolerable from
a balance of payments point of view.
6/15/65
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The relative shortness of bill supply has persisted
all year, and downward pressures on yields would doubtless
have seen stronger had it not been for large-scale selling
by commercial banks. Bank liquidation of bills through
April amounted to $3.1 billion, and we estimate that
net sales may have amounted to another $600 million in
May. Reflecting this continued liquidation, and also
a decline in net purchases of other securities, bank
credit in May again increased at an annual growth rate
of only about 8 per cent, well below the first quarter
and slightly less than the average for 1964. Bank loan
expansion also has moderated considerably since the first
quarter, and business loans, though still rising
vigorously in April and May, appear from the weekly
reporting bank fugures to have shown somewhat less
strength in late May and early June. The important
comparison in such loans is over the tax date, of course,
for which no information is yet available.
More moderate growth in bank assets has been matched
on the liability side by smaller exansion in private
deposits. Despite continuing sizable net sales of CDs
by the New York City banks, total time and savings deposit
growth slowed in May to a rate well below the 12-1/2 per
cent average for 1964. As for private demand balances,
the May decline appears to have been an aberration, and
already had been recouped by a sharp rise in late May
and early June. As of the first week in June, however,
the money supply was less than 1 per cent above the
December average, and even with substantial increases
in the next month or two, growth since year-end would
remain well below the apparent, increase in money trans
actions.
Given the recent moderation in the banking figures,
the uncertainty in securities markets, and the evident
exposure of the Government bond market, an unchanged
monetary policy seems fairly clearly indicated at this
time. To adopt a more restrictive policy could risk
serious market disturbances, which seems unnecessary in
view of the slower pace of bank credit and monetary
expansion already realized. Nor does it seem to me that
the financial indicators clearly call for an easing in
policy as yet, especially in view of other domestic
economic considerations discussed by Mr. Brill.
At the same time, this does appear to be an appro
priate occasion for the Committee to consider giving more
-29-
6/15/65
formal recognition to the possible provision of reserves
through operations in longer-term markets, as is implied
in the last parenthetical phrase of a:ternative A of the
staff's draft directives. 1/ Downward pressures on bill
yields may well be reasserted once the tax date is past,
and the Government bond market is, I think, in a vulnerable
position. Only a small proportion of the reserves
needed over the next four weeks could be accommodated by
purchases in the longer-term market, but these amounts
could potentially have an important conditioning effect
in both short and longer maturity areas.
In any event, an unchanged monetary policy would
seem currently to call for net borrowed reserves of
around $150 million and continued firmness in those money
markets closest to the reserve adjustment process. I
do not think that the term "money market conditions"
should be taken to encompass the whole range of instruments
traded at this time. If bill rates do continue in the
curent lower range, this could carry some other money
market rates, such as on finance company paper and
bankers' acceptances, down a bit as well.
Mr. Reynolds then presented the following statement on the
balance of paments:
It is now clear that the United States will have a
payments surplus in the second quarter of 1965. The "flash
report" for May, compiled yesterday, shows a surplus of
about $90 million on the conventional "regular trans
actions" basis. This brings the preliminary April-May
total to $230 million. And there was a further surplus
during the first 9 days of June, according to weekly
figures. We should be prepared for the possibility of
weekly deficits later this month when Large new foreign
security issues are scheduled, but they are unlikely to
wipe out the surplus for the quarter as a whole.
The figures for the balance settled by official
transactions will be similar to the conventional ones,
since net changes in foreign private balances in this
1/ The two alternative drafts of the directive prepared by the
staff are appended to these minutes as Attachment A.
6/15/65
-30-
country have been small so far this quarter. And net
seasonal influences on both balances are also small at
this time of year.
Thus, as a result of events already largely past,
newspaper readers seem assured of a steady flow of good
news about the U.S. balance of payments for some weeks
to come. They have already learned of the March and
April surpluses. They will learn in due course of the
May surplus, and perhaps even of a June surplus. The
preliminary second-quarter figures, to be published in
August and then refined in September, will be by far the
most cheerful in 8 years. They will no doubt set off
resounding echoes at the IMF annual meeting of the
unexpected praise for U.S. policies that has recently
graced the BIS annual report.
Yet I am afraid that I and my colleagues in the
Division of International Finance must continue to croak
Cassandra-like warnings in the weeks ahead. It is not
merely that one swallow does not make a summer. The
point is that we cannot yet be sure that we have seen
a swallow at all, in the form of any lasting turn for
the better. There have been so many strictly temporary
influences working in our favor, as noted in the staff
comment on the third question 2/ on today's agenda; and
there have been so few evidences of any underlying
improvement. Mere waning of temporary influences--quite
apart from seasonals--could plunge us back into deficit
by the end of the year unless underlying improvements
do take hold.
One striking new indication of the magnitude of
recent temporary influences is provided in detailed
balance of payments figures to be published in the June
Survey of Current Business in about 2 weeks. These
figures will show that U.S. direct investment outflows
rose to $820 million (seasonally adjusted) in the fourth
quarter of last year, and to an even more startling $1
billion in the first quarter of 1965. Thus, U.S. corpora
tions pushed out $1.8 billion of direct investment capital
in 6 months, nearly 70 per cent more than in the preceding
6 months. Clearly, they were acting in anticipation of
a possible imposition of controls or special taxes.
Clearly also, they can temporarily cut their outflows a
2/ Certain questions suggested for consideration by the Committee,
and staff comments on them, are given at a later point in these
minutes.
6/15/65
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good deal in the current quarter and in several later
quarters without this indicating any underlying change
in the previous uptrend of U.S. direct investment
outflows. In the direct investment sector, we simply
cannot know for months how the trend is going.
Merchandise trade is another sector where we have
been in the dark for months. Fortunately, we can hope
for a trend reading here fairly soon, as the dock
strike recedes into the past. A tentative reading from
data through April is disquieting. April exports,
while still reflecting effects of the port-strike
catchup, were already off considerably from the March
peak, and more so than imports, contrary to earlier
hopes. As a result, the trade surplus for the period
from December through April--a period during which
strike effects might have been expected to wash outwas less than $5-1/2 billion at an annual rate, compared
with $7 billion last fall. Exports in these 5 months
were only 2 per cent larger than a year earlier,
presumably owing to some slackening of demand from
Europe and perhaps also from less developed countries,
Imports meanwhile were up 10 per cent on the year,
having bulged in response to enlarged inventory demands
here and perhaps also as a result of keener competition
from abroad.
Obviously, trade trends will bear very close watching
in the next few months. So also, I think, will the
distribution of the payments deficits and surpluses of
foreign countries. As noted in the green book 3/, the
payments surpluses of continental European countries
diminished sharply in March-April. But temporary
factors were operating there as here. And Italy and
France have continued to run substant:al surpluses,
while Japan and Britain continue to show payments
weaknesses. As Mr. Coombs noted, we have just received
very disappointing U.K. trade figures for May, with
imports up to a new high and exports down a little.
A key question for international adjustment this
year will be whether Britain and Japan, in addition to
the United States, can strengthen their positions
while surpluses diminish in such countries as France and
Italy. If, instead, Britain and Japan continue to
3/ The report "Current Economic and Financial Conditions," prepared
by the Board's staff for the Committee.
6/15/65
-32-
experience difficulties, they may have to turn to us for
assistance, and may have to pursue policies that will
significantly depress world trade, including our exports
to them and to less developed countries. We must hope
that adjustments in international trade will come
largely via renewed expansion of demand in the surplus
countries (and maintenance of expansion elsewhere).
Since data for the summer months are usually unreliable
because of difficulties in allowing for seasonal
influences, it may well be autumn before we can judge
whether this hope is being fulfilled.
Prior to this meeting the staff had prepared and distributed
certain questions suggested for consideration by the Committee, and
comments thereon.
These materials were as follows:
(1) Business conditions--How do business developments since the
interim steel wage settlement alter the prospects for sustainable
economic expansion?
Expansion in business activity has slowed somewhat in the
six weeks or so since the interim steel wage settlement, confirming
earlier expectations, but on present evidence it appears that the
current pace is likely to be maintained. Most of the slowing
reflects the decline in auto sales from the exceptionally high
rates earlier in the year. The decline in auto sales seems to
have halted, however, with May sales about equal to those in
April. Moreover, consumer spending for nondurable goods recently
has risen appreciably.
Busiress accumulation of inventories is apparently con
tinuing at a rate not much below that in the strike-threat period.
Steel output has continued high and user inventories have not yet
been reduced. Order backlogs in the industry suggest that, after
allowing for seasonal changes, high operating rates and large
inventories will be maintained through early summer. Auto output
is also continuing at a high level even though sales have
declined.
Latest surveys of business capital spending plans indicate
that expenditures for plant and equipment will rise more rapidly
over the second half than in the year to date, and surveys of
consumer buying plans indicate a continued high level of demand for
6/15/65
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autos and other durable goods. While the effects of the prospective
excise tax cut and increased Social Security payments cannot be
estimated with any precision, they should, of course, operate to
buttress consumer demands. Thus, both recent and prospective
developments suggest continued economic expansion over the summer
months, although at a slower pace than in early 1965. Sustain
ability of the expansion beyond the summer depends importantly on
the sharpness of the prospective inventory adjustment in the steel
industry, and on whether growth in aggregate final demands will
keep pace with the large additions to industrial capacity now in
train.
(2) Prices--What do recent wage negotiations, changes in farm and
nonfarm prices, and proposals for excise tax cuts portend for the
course of prices over coming months?
Industrial price increases in recert months, concentrated
mostly in markets for metals and metal products, have continued to
reflect selective demand pressures relative to limited supplies,
rather than generally rising production costs. Unit labor costs
in manufacturing have moved lower, as gains in productivity have
continued to outrun rising wages. The aluminum wage settlement,
while above the Administration guideposts based on national pro
ductivity changes, was below the estimated productivity increase in
the industry. This suggests that the aluminum price increases--both
before and after the wage settlement--reflected principally strong
demands rather than the pressure of labor costs. The slower pace
of economic expansion in prospect over coming months should serve
to limit and keep selective any further industrial price increases.
The recent rise in food prices also reflects changing
demand-supply relationships, particularly in meat products. Reduced
production of meat at a time of rising incomes is being reflected in
a surge in ment prices, which are likely to continue upward to a
seasonal peak in the summer. Further rises in meats alone could
raise the total consumer price index by as much as .5 per cent.
The proposed excise tax reductions on a variety of goods
and services would provide a partial offset to the index-raising
effect of meat prices. The impact on the consumer price index, if
all tax cuts were passed on to consumers, could be as much as .5
per cent. Further reductions for autos through January 1, 1969,
could amount to an additional .2 to .3 per cent in the index.
6/15/65
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(3) Balance of payments--How close was the United States to balance
in its international transactions in April and May, after allowing
for influences that may be considered temporary?
Preliminary data indicate that the United States had payments
surpluses in both April and May, averaging perhaps $50-$100 million
per month on either the conventional "regular transactions" basis
or the "official settlements" basis. Net seasonal influences are
very uncertain, but adjustment would perhaps diminish the surplus
in these months.
Effects of the voluntary programs for restraint of capital
outflows, both by banks and others, were very substantial in the first
few months of the programs, producing sizable reflows of corporate
liquid funds in March and April and net repayments of bank credit
in April. Meanwhile, new issues of foreign securities exempt from
the I.E.T., which are expected to increase in later months, remained
relatively small through May. Strictly temporary favorable influences
of these kinds, together with the unwinding of the port-strike tie
up in merchandise trade, may have swung the balance toward surplus
by more than $200 million a month in April-May, so that without
them there might have been a sizable deficit, particularly on the
conventional basis of measurement.
Fragmentary evidence suggests that U.S. corporations may have
repatriated additional amounts of liquid funds in April, perhaps
around $100 million. If there were further reflows in May, they
probably were smaller, since corporations are approaching the goals
set for them in this sector. Also, indications that corporations
made sizable advances to direct investment subsidiaries in the early
months of 1965, covering future needs, suggest that direct investment
outflows since the voluntary restraint program began may have been
below normal.
U.S. banks reduced their outstanding credits to foreigners
by about $150 million in April. For all banks together, this left
scope within the VFCR targets for a renewed net outflow that could
average $30-$40 million a month during the rest of the year.
New issues of foreign securities sold to U.S. residents in
April-May were only $80 million a month, about $50 million below
the average rate expected for both the first half year and the year
as a whole. Particularly heavy offerings of about $300 million are
scheduled for June.
6/15/65
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As to merchandise trade, further progress was made in April
in clearing export and import shipments held up by the port strike.
The catch-up to be made by exports was greater than for imports,
and the trade surplus was still swollen in April, perhaps by as
much as $50-$100 million, despite an unexpectedly large drop in
exports. A similar relationship probably prevailed in May.
While the merchandise trade position has been unusually
favorable in a strictly temporary sense because of the strike after
effects, the underlying cycl.cal trends, now beginning to be discernible
with the April statistics, appear to have been a leveling off in
exports and a further rise in imports--the latter reflecting enlarged
inventory demands for steel and other materials. This recent
unfavorable development in U.S. foreign trade may prove temporary,
in a longer time perspective, but it is too early to venture a
judgment on this.
(4) Bank credit--How are banks adjusting to the combination of reduced
marginal reserve availability, slower saving deposit growth, and
less strong loan demand that has prevailed since the first quarter?
Banks are adjusting to changes in supply and demand condi
tions in part by seeking funds more aggressively in money and
capital markets and in part by shifts in investment policy. Earlier
in the year, banks, were able to accommodate peak loan demands ana
add substantially to their holdings of municipals with funds provided
by the exceptionally large inflows of time and savings deposits and
liquidation of short-term Government securities. Beginning in
March, inflows of time and savings deposits slackened, and more
recently, so have loan demands. With marginal reserve availability
also reduced, and with the bill yield remaining below the discount
and Federal fund rates, banks have continued to liquidate short-term
Governments, but in May, they also sharply reduced the rate of
acquisition of municipal and agency issues.
A few large banks, particularly in New York City, adjusted
to heavy actual and anticipated loan demands and to sizable basic
reserve deficits by aggressively issuing CDs. In New York City, as
a result, time and savings deposits increased in April and May at
an even faster rate than in the first quarter; borrowings at the
Federal Reserve have been reduced to nominal levels; and banks have
switched from being heavy net purchasers to small net sellers of
Federal funds. In contrast, in reserve cities outside New York,
the outstanding volume of CDs has changed little; borrowings,
recently around $375 million, have been about double the first
quarter level; and banks have been heavy net purchasers of Federal
6/15/65
-36-
funds. These differences are partly explained by indications
that loan demand has been less strong outs.de New York and that
issuance of CDs (by non-prime banks) may have been inhibited to
some extent by interest rate ceilings and other factors.
(5) Interest rates--What are the principal factors that recently
have raised interest rates in the capital markets and lowered
yields on Treasury bills, and how do these developments appear
to be influencing the near-term outlook for long- and short-term
interest rates?
To some extent, recent increases in corporate and municipal
bond yields and declines in Treasury bill rates have reflected
seasonal pressures, which tend to work in opposite directions at
the two ends of the yield spectrum at this time of year, but other
factors have reinforced seasonal influences. The current widened
yield spread now appears likely to persist, for a time at least,
barring unexpected increases in the supply of bills or other
securities or a change in monetary policy.
On the supply side, short-term Treasury securities
available to the public are being reduced by the largest net
repayment of Federal debt for any second quarter since 1957.
Substantial Federal Reserve purchases of bills have also reduced
the supply available to the public. At the same time, demands
for short-term securities by public funds and corporations have
been heavy, with corporate demands augmented by preparation for
tax payments on the exceptionally high corporate earnings so far
this year. Temporary investment of proceeds from heavy capital
market financing, repatriation of liquid funds from abroad, and
transfers of funds from the stock market also have been factors
in the recent demand for short-term securities. Net bill sales
by banks and by foreign accounts have only partly satisfied
these demands.
Such downward pressures on Treasury bill rates were
accentuated by the recent reduction in the British Bank rate,
following which the outstanding U.S. 3-month bill declined
almost 10 basis points to around 3.80 per cent. The market
appears to have adjusted to a lower bill rate range, at least
over the near term, than was believed sustainable earlier in
the spring.
6/15/65
-37-
During the period when bill rates eased there was
some slight reduction in dealer lending rates at New York
banks, reflecting in part their changed basic reserve position
(discussed above under Question 4), but other short-term rates
have remained firm. The unusually large spread between Treasury
bill rates and other money market rates that now prevails will
no doubt inhibit further declines in bill rates and may exert
some upward pressure.
The recent rise in corporate and municipal bond yields
has been associated with a bulge in capital market financing in
the second quarter. Such a bulge is not unusual at this time
of the year; in fact total new security offerings, stocks and
bonds together, were significantly larger in the second quarter
of last year. But particular pressures have been exerted on yields
this year by the sharp rise in the share of total offerings repre
sented by corporate bonds--particularly publicly offered issuesand by an apparent cut-back in the share of new municipal issues
being taken by banks.
Looking ahead, the immediate supply of municipal offerings
is expected to decline moderately. And there is as yet no evidence
of any large individual offerings for this summer similar to the
Treasury's advance refunding and the public power issues which
enlarged the summer calendar a year ago. On the other hand,
underwriters anticipate a heavy continuing volume of new offerings
of corporate securities through the summer. This expectation is
supported by projections of corporate sources and uses of funds
showing rising investment outlays and dividend payments in the
face of an expected level of profits below the very high first
quarter rate. Moreover, a relatively large supply of U.S.
Government securities maturing in over 5 years--almost $700
million as of June 10--remains in dealer hands, and a heavy
supply of Federal Agency issues has come or soon will be coming
to market.
(6) Money market relationships--Assuming a continuation of current
monetary policy, what range of money market conditions, interest
rates, reserve availability, and reserve utilization by the banking
system might prove mutually consistent during coming weeks?
Continuation of current monetary policy, with net
borrowed reserves averaging around $150 million, is not likely
to be accompanied by any significant change in domestic interest
rates during the next few weeks, barring a shift in interest
6/15/65
-38--
rates in leading financial centers abroad or a sudden change
in investor psychology. In this environment, Treasury bill
rates could continue low relative to other money market rates.
After the mid-June tax and dividend pressures, a number
of market influences may be tending to exert downward pressure
on bill rates. Among these are a probable post tax-date re
surgence in corporate demand, reinvestment demands following
maturity of the June tax bills (the volume outstanding is
substantially in excess of the amount expected to be used to
pay tax liabilities), and sizable System buying for reserve
purposes in late June and early July. Working in the other
direction, a return to a more usual position of basic reserve
deficiency by New York City banks would put upward pressure
on dealer loan rates and, to some extent, on bill rates.
On balance, it appears that in the absence of any
significant change in the level of net borrowed reserves, the
3-month bill rate will remain in the 3.78 - 3.90 per cent
range that has prevailed over the past month, with the odds
seeming to favor the middle or lower end of the range. Bill
rates in this range obviously will not be transmitting upward
pressures to long-term rates, but current congestion in the
corporate and municipal markets will tend to keep long-term
rates at least around present levels over the near term.
Under the money market and marginal reserve avail
ability conditions postulated above, total bank credit
expansion in the months ahead would probably be no larger,
and perhaps somewhat smaller, than the 8 per cent rate of
April-May and the year 1964 as a whole. With respect to money
supply, data for early June indicate a sharp rebound after the
sharp May decline. Even with bank loan expansion moderating,
further substantial growth in the money supply is likely over
the summer months, as excise tax reductions and retroactive
Social Security payments result in a more than seasonal re
duction in the Treasury's cash balance. The rise in private
demand deposits over the next month or two is likely to be
substantially in excess of a 4 per cent annual rate, since
the influence of some of the factors that led to the slight
decline in these deposits through May has waned.
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:
6/15/65
-39-
Despite the current jittery state of the stock
market and the appreciable drop in stock prices in
recent weeks, the underlying business situation con
tinues to develop about as expected. Business is
strong, though growth is not quite so rapid as in the
first quarter, and prospects for further significant
expansion over the balance of the year remain good.
Though available production figures for May are mixed,
retail sales moved up sharply. Strong consumer buying
intentions and the latest reading of business spending
plans for plant and equipment support an optimistic
appraisal of the months ahead. It seems to me much too
early to conclude that the capital spending surge has
gone too far and is due for some readjustment next year.
The drop in unemployment in May to 4.6 per cent was
especially gratifying in view of the unusually rapid
growth of the labor force since the beginning of 1965.
(I am aware that here our research people have come to
a conclusion different from that of the Board's staff.)
The price situation continues to give cause for
concern. The overall industrial wholesale price index
moved up again in May, and the predominance of specific
price announcements on the upside indicates that pro
ducers feel the atmosphere contirues to be favorable
to testing markets. An example is the series of in
creases for aluminum products following the recent
labor contract settlement. Moreover, the settlement
itself has revived fears of a spreading pattern of wage
increases in excess of the Council of Economic Advisers'
guidelines. In taking a somewhat longer-run look at
movements in industrial wholesale prices, it is apparent
that the index has been on a mild but persistent up
trend for two years, following a four-year period of
gentle decline. While increased nonferrous metal
prices have been an important factor in this rise, this
is by no means the full story. Our analysis indicates
that two-thirds of the increase in the index in the
past year, and three-fourths of the increase since
September, reflects higher prices for items other than
nonferrous metals. Consumer prices probably moved up
even faster in May than in April--although the July cut
in excise taxes snould provide some partially offsetting
decline on a one-shot basis.
6/15/65
-40-
Preliminary statistics indicate that our international
transactions showed a small surplus in May. There are
indications that bank loans to foreigners declined, and
reports suggest that one important factor in this drop
was the sale by several large New York banks to their
foreign branches of parts of their loan portfolios in
order to get below their 105 per cent quotas. Without
such temporary factors as restraint in bank lending
abroad and in corporate investments in foreign money and
deposit narkets, our balance of payments would probably
have shown sizable deficits in both April and May.
There seems to be little doubt now that the rate of
growth of bank credit has dropped back from the very
rapid first-quarter pace to roughly the 8 per cent annual
rate that has been typical of the current expansion.
Business loan demand, both actual and projected, however,
continues strong and broad-based, although a little less
buoyant than it was. The slackening of bank credit growth
during the past two months has to some degree reflected
increasing pressure on the liquidity position of the
banking system. The dwindling holdings of Government
securities continue to be liquidated and loan-deposit
ratios are still rising. Recent data on the quality of
credit give no clear indications of any significant
deterioration. Although the money supply declined during
May on a daily average basis, it rose toward the end of
the month; and in viewing the virtual absence of growth
in the money supply during the first five months of
this year, I think we must give considerable weight to
the unusual rise in Treasury deposits during this period.
The effects of this build-up may be reversed by the
normal unwinding of Treasury balances after June 30.
In considering policy, I think we can regard the
business situation and outlook as clearly favorable;
and it seems to me that such weakening of sentiment
among some analysts as has occurred has been mainly an
over-reaction to the slowing from the abnormal first
quarter rate of expansion. While we cannot overlook
the possibility that the stock market's performance it
self could be a significant adverse influence, I doubt
very much whether we can regard it in this light today.
In the meantime, the balance of payments problem,
although continuing to show marked statistical improve
ment in response to the President's voluntary restraint
6/15/65
-41-
program, is still extremely serious. There is no
evidence as yet of more basic forces working toward
equilibrium, and this accentuates the disturbing
character of the stepped-up pace of price advances
in the last few months and the very real risk of added
wage and price pressures in the coming months. In a
sense, time is running out, since it will be harder
and harder to finance deficits without gold losses,
and the voluntary restraint program cannot be expected
to be effective indefinitely. The domestic economy
seems amply able to withstand a somewhat firmer policy;
and it is by no means clear that we have succeeded in
slowing the pace of bank credit growth to appropriate
levels.
Under these conditions, I think the Committee should
move toward a slightly firmer policy, symbolized perhaps
by an increase in borrowing from the Reserve Banks and
by net borrowed reserves fluctuating on both sides of a
$200 million average, rather than around $150 million.
I would expect swings on both sides to be rather wide
and am merely using these figures as illustrative of
some slight policy change. In view of the combination
of factors creating downward pressures on bill rates
and the doubtfulness of a near-term reversal of these
pressures, despite the June tax and dividend dates, it
would p-obably be unwise to set any particular goal in
terms of the bill rate. The Treasury's high balance
naturally hampers it in any move to increase the supply
of bills. However, I would hope that we could see a
gradual upward rate trend develop, partly because it
would provide valuable psychological support for the
voluntary restraint program.
The directive should be modifie to reflect a
slightly firmer policy, if the Committee agrees that
such a move is desirable. The staff's alternative B
seems quite satisfactory.
Mr. Shuford said the most recent data showed that the national
economy had not been advancing at the unusually rapid rate of last
winter.
He believed that such a change had been desirable; depend
able continued growth required a return to the rate of the past two
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6/15/65
or three years.
The recent progress of employment and production
had been possible despite the more restrictive fiscal situation and
the sluggish behavior of the money supply.
It seemed fortunate to
him that neither fiscal nor monetary conditions had been any easier.
As for the near future, Mr.
Shuford continued,
it
now
appeared that the fiscal situation would be easier in the second
half of the year.
Accordingly,
it
seemed to him that for the time
being the Committee might well keep monetary policy much as it
He would expect that posture to involve moderate growth in
bank credit,
and the money supply.
was.
reserves,
As the Treasury reduced its
balances with the commercial banks and as the new seasonal adjust
ment factors were adopted,
he believed it
had been some monetary increase.
would be seen that there
In his judgment a failure of the
money supply to show some increase over the next few months would
be undesirable.
As for interest rates, the recent weakness of bill rates
seemed to Mr. Shuford to have been due to an unusual demand, and
partly seasonal in nature.
He thought some strengthening in bill
rates might be expected.
Mr.
Shuford said he had been inclined to the view that the
country was experiencing an excessive total demand for goods and
services, evidenced in part by stronger wholesale prices.
He also
had thought it would be undesirable for total demand to continue to
6/15/65
-43
increase at the rate of early this year.
Now, however, while the
threat of price rises had not abated, he considered it appropriate
to continue recent moderate policies and to see what the next few
weeks revealed.
He did not believe that the international situation
required any other policy at this time.
Mr. Shuford did not favor a change Ln discount rate at
present and he found alternative A of the staff drafts of the
directive satisfactory.
He recognized the observations that Mr. Partee
had made with respect to the parenthetical final clause of that
draft, but, while he did not have strong feelings on the matter, he
would be disposed to exclude the clause in view of his position of
favoring no change in policy.
Mr. Bryan said that the pace of economic activity in the
Sixth District seemed to be well maintained.
The most eloquent
figure was that revealing a continued reduction in the rate of
insured unemployment; the figure fell to 2.4 per cent in the latest
report, for April--not a banner month in itself by any means.
Mr. Bryan did not detect from the reports of Reserve Bank
and branch directors that there had been any marked deterioration
of business sentiment in the District.
However, there did seem
to him to be less ebullience in sentiment nationally, and some slow
down in the rate of national economic advance.
Accordingly, speaking
in qualitative terms, he would advocate no change in policy at this
6/15/65
-44
time, esecially in view of existing uncertainties, which might
be partly psychological in character.
He advocated no change in
the discount rate, and he doubted that there should be any con
siderable change in the free reserve target.
Instead, speaking in
quantitative terms, he advocated a continuation of net borrowed
reserves in the $150-$200 million range for the short term.
Mr. Bryan remarked that he would comment on only two of the
questions posed for this meeting, relating to prices and the
balance of payments.
As the Committee knew, he had for some time
taken a dim view of price developments.
The staff at the Atlanta
Reserve Bank told him that the development of new plant capacity,
the wage guidelines, the decline in unit labor costs, and the fact
that price increases had been selective should be reassuring.
The
facts were, he thought, quite plain, as some of them had always been.
The wage guidelines were essentially meaningless, and elements of
Government policy fully attested to the fact that they would become
even more meaningless.
The classic creeping inflation of the
consumer price index was now being compounded by a rapid movement
in the manufacturers' wholesale price index, which was up on a
three-months basis at an annual rate of 2.8 per cent.
The con
sumer price index, which would have an upward trend even if the
wholesale index were entirely stable--as it had during periods
when the wholesale index in fact had been wholly stable--had to
-45
6/15/65
ride on the back of the wholesale price increases and reflect not
merely its own upward slant but the increase in wholesale prices as
well.
Accordingly, he looked for a combination of factors of either
the cost-push or demand-pull variety--probably both--to increase the
rate of price increases.
The thought of what that could do to the
American dollar in a brief span of, say, twenty years, was extremely
disturbing.
Mr.
Bryan remarked that he had come to the conclusion that
the policies of the Government made inflation ultimately inevitable.
He had one other comment--the so-called "selective" price increases
were exactly the kind of increases that consumers would not be able
to resist.
Mr. Bryan noted
With respect to the balance of payments,
that the Committee was confronted with good news of surpluses.
But
when those surpluses were cut down to size by obvious adjustments,
it
was clear,
he thought,
that the country's payments position was
not in as gooc shape as one would like to assume.
Quite obviously,
the voluntary restraining program was setting up countervailing forces
that would have their effect.
It should be remembered that tying
foreign aid dollars to onshore purchases of American goods, while
it
would be too much to describe as useless,
did not--for what were
now obvious reasons--produce the dramatic results that had been
hoped for.
He was frankly of the opinion that in the end measures
-46
6/15/65
other than the voluntary restraint program would have to be taken,
measures that would be distasteful.
Among such measures, he thought,
sooner or later there inevitably would have to be an extraordinarily
large reduction in the nation's nonmilitary grants-in-aid program.
Mr. Bopp reported that reserve pressures on Third District
member banks had increased markedly thus far in the second quarter,
relative to those prevailing in the first quarter.
On a daily
average basis, reserve city banks incurred a basic reserve deficit
in the second period over twice that which prevailed in the first
quarter ($88 million vs. $42 million), and in the past three weeks
those pressures had intensified even further ($144 million on a
daily average basis).
Pressures on country banks also had increased
with borrowing at the discount window for the latest reporting
period reaching the highest level since mid-1960.
The pressures had been intensified, Mr. Bopp said, by a
relatively strong loan demand in the second quarter, superimposed
on a leveling in time deposits and a sharp downturn in recent weeks
in the level of demand deposits.
Reserve pressures at the reserve
city banks had been funneled primarily into the Federal funds market,
with average daily borrowings in the second quarter almost double
those in the first.
On the labor relations front, Mr. Bopp continued, a dis
cussion with an outstanding authority this past week elicited his
6/15/65
-47
feeling that the steel settlement would not be quite so generous
as that in the aluminum industry.
However,
that authority thought
the companies would be anxious to avoid a strike--and perhaps pay
a little more to do so--in order to place Mr. Abel in a solid
position and thus hopefully bring greater stability to labor
relations in
the industry.
He was somewhat pessimistic over
prospects for longer-term success of the guidelines, feeling that
costs of fringe benefits were underestimated in
lines and that the guidelines
in
figuring the guide
general rested on too narrow a
base of agreement between Government, business, and labor.
Turning to policy, Mr. Bopp said that the moderate restraint
now prevailing appeared appropriate to the unfolding economic
situation, characterized as it
was by a slowdown from the very
rapid growth of the first quarter.
Although upward pressures on
wholesale prices had become evident in recent months, he continued
to be impressed by the moderate and selective nature of pressures
in
the industrial sector.
unemployment picture,
the recent slowdown in
He was encouraged also by the improved
although his encouragement was tempered by
the rate of growth of the labor force--a
situation which might reflect decreasing growth in job opportunitiesand by prospects for a large summer influx of teenagers into the
labor market.
A weighing of the merits of further restraint at
this time also had to consider the facts that rates of growth in
6/15/65
-48
money and bank credit already had declined and that there existed
some congestion in markets for corporate and municipal securities
as well as some concern over the future of common stock prices.
Given those factors, and also considering the apparent continued
success of the voluntary restraint program, he would make no change
at present in the general posture of nonetary policy.
He favored
alternative A of the staff drafts of the directive, including the
final clause.
Mr. Hickman commented that the pace of business activity
was in the process of leveling off, as the discussion in the green
book clearly indicated.
The slackening of the business advance
in April provided a hint of the types of readjustment the economy
would probably undergo later on this year.
On the other hand, the
figures for May could turn out to be deceptively buoyant,
ments in
as readjust
steel and autos had been delayed.
Mr. Hickman noted that auto sales, seasonally adjusted, had
declined for four successive months, but production remained high
and inventories were establishing new records.
Steel production
rebounded in late May, and to judge by early portents June might be
equally strong.
After several weeks of decline, incoming orders
were moving up once again, according to confidential reports
received from steel companies in the Fourth District.
Steel
inventory accumulation was renewed in May, partly because of the
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6/15/65
fear that the steel industry would take a strike rather than accept
the settlement in
the aluminum industry.
Mr. Wernick's analysis in
the appendix of the green book was particularly helpful in
evaluating
the present wide gap between labor demands and the steel industry's
ability to meet those demands.
Mr. Hickman remarked that additional light on changes in
the business climate was provided at a joint meeting last Thursday
of the directors of the Cleveland Reserve Bank and the Cincinnati
and Pittsburg branches.
For the first time in many months, the
industrial directors expressed uncertainty and nervousness about
the business outlook,
for reasons apparently not directly related
to the stock market slump.
rates in
Several directors noted that rising wage
the current expansion had been offset,
by an even stronger rise in volume.
sive lest a downturn in volume,
in unit labor costs,
Those directors were apprehen
coupled with rigid wages and other
costs, might result in a drastic squeeze on profits, which in turn
might trigger a decline in capital spending.
It was noted that the
most recent Commerce-SEC survey of capital spending showed no upward
revision from the previous survey,
and thus failed to confirm the
earlier optimistic McGraw-Hill release.
The recent softening of the 91-day bill rate could be explained
as a conjuncture of special circumstances, Mr. Hickman said.
For
one thing, liquid tax and dividend funds of corporations apparently
6/15/65
-50
increased more than seasonally this year, reflecting exceptionally
high first quarter profits.
Also, the demand of public funds for
short-dated securities had continued unabated.
In addition, the
recent Treasury advance refunding had reduced the supply of short
term issues in dealers' hands.
At the same time, long-term markets
had become congested due to the large volume of corporate and
municipal securities being brought to market and the open-end nature
of the advance refunding, which resulted in larger subscriptions to
the 9-year bond by dealers and speculators than could be absorbed
by regular investors.
The massive advance refunding lengthened the
maturity of the debt by a month or two, but it had less fortunate
effects on prices and yields of Government securities.
Thus, once
again, the System had been placed in the undesirable position of
trying to bail out the dealers in the long-term market, while trying
to prop up yields in the short-term market.
Unfortunately, there had
been only mixed success thus far.
Mr. Hickman went on to say that the present limited flexi
bility of monetary policy also stemmed in part from the fact that
the Committee had not done all that it should have last summer and
late last year.
He then had felt that greater restraint was needed
to moderate the unsustainable pace of the business advance, and had
recommended such restraint.
Because the Committee had not moved then,
it was less free to move in the opposite direction as the level of
business activity showed signs of turning down.
6/15/65
-51
Within the present environment of business and financial
uncertainty, Mr. Hickman recommended that for the directive the
Committee adopt the staff's alternative A, calling for no change
in policy, but he would instruct the Manager to resolve all doubts
on the side of ease.
Within the context of alternative A, he recom
mended that borrowings, on average, be allowed to drift down to about
$400 million and that net borrowed reserves be permitted to subside
to about $50-$100 million.
He added that the objective stated in
the last clause of alternative A might be difficult to achieve over
the next four weeks and for that reason it probably should be deleted.
In that connection, Mr. Hickman said, he would like to remind
the Committee that $3.2 billion of tax anticipation bills were due
to mature on June 22.
He would recommend that the Treasury, despite
its large cash balance, consider issuing additional short-dated
securities, preferably a strip of bills.
Mr. Maisel said he was in general agreement with the basic
staff presentation indicating that the expansion in business activity
had slowed.
It was clear from the index of industrial production,
as well as from most other current series, that the rate of expansion
had fallen.
Two most important conclusions might be drawn from the recent
period, Mr. Maisel observed.
First, prior levels of more adequate
monetary reserves did not lead to an excessive expansion in the
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6/15/65
economy.
Price pressures in spheres related to expansions of overall
demand were minimal.
Most increases could be related directly to
special situations such as in agriculture and beef prices and were
not such as to be responsive to monetary policy.
Secondly, Mr. Maisel continued, the present levels of pro
duction and current trends were following very closely the forecasts
made at the end of last year.
If the current and projected trends
continued, percentage utilization of plant capacity and the labor
force would decline.
There would still be a considerable gap between
actual production and the potential GNP for the economy.
At least
$30 billion or more of potential goods and services would not be
produced this year.
He believed that it would be improper to tighten
money when the prospects for the future showed no likelihood of
undue pressure on resources but rather a shortfall of demand below
capacity.
As he had indicated at the last meeting, Mr. Maisel said,
in situations such as this, when no clear movements had occurred,
he preferred to avoid changing the policy statement.
He hoped,
however, that as a result of its discussion today the Committee
could agree that net borrowed reserves during the next month would
move back closer to the Committee's initial concept under the current
policy directive.
That would mean that net borrowed reserves should
approach more nearly $100 million than their current levels.
6/15/65
-53
In order to return the directive as close as possible to
its initial form and to make certain that it was clear that no basic
change had been directed, Mr. Maisel would prefer alternative A.
However, in the first sentence he would retain the phrase proposed
for deletion, namely, "although at a somewhat slower pace," which
qualified the reference to continuing expansion of the domestic
economy.
He agreed that more of the additional reserves could be
supplied through purchase of coupon issues, but felt that the
addition of the last parenthetical phrase could be misinterpreted
as indicating a tighter general policy.
Therefore, he would omit
that phrase.
Mr. Daane said that like Mr. Maisel he agreed with the basic
staff presentation but perhaps interpreted it a little differently.
He understood the staff to be saying quite clearly that recent
developments on the domestic economic and financial scene as well
as in the U.S. balance of payments suggested the maintenance of the
status quo with regard to monetary policy.
gested,
As Mr.
the Co.mmittee should stand pat until it
various present cross-currents were sorted out.
Brill had sug
could see how the
In the current
atmosphere of uncertainty, and with the sort of psychology that
seemed to be prevailing--as evidenced by the over-reaction to
Chairman Martin's recent remarks at Columbia University--it was
particularly important that there be no change in policy, overt or
otherwise.
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6/15/65
If one looked beyond the factor of business sentiment,
Mr. Daane continued, one found reinforcement for the view that
policy should not be changed.
The rate of domestic economic ex
pansion had slowed down somewhat, although the pace of both recent
and prospective expansion was still substantial.
financial area,
In the domestic
bank credit and monetary expansion also had slowed
from the unsustainably rapid rates of the early months of the year.
The stock market decline probably had been the most noteworthy
event since the last meeting of the Committee.
While he would not
try to forecast stock prices, it seemed to him that the decline
reflected a reaction from the market's own long-sustained rise
to record highs more than a basic fear of imminent economic
reversal.
Mr. Daane found the April and May figures for the balance
of payments to be encouraging, although he agreed that in and of
themselves they did not mean the problem was solved.
At the moment,
however, the payments situation did not call for any increased
monetary restraint despite the recent decline in bill rates.
Recent
bill rate levels had not been an accurate indicator of conditions
in the money market; other money market measures indicated that
conditions had remained quite taut.
in bill
In any case, the recent decline
rates apparently had not prompted any significant short-term
capital outflows.
-55
6/15/65
Current conditions in bond markets, like those in the
stock market, also suggested the wisdom of holding fast to the
current course of monetary policy, Mr. Daane said.
Corporate and
municipal bond yields had risen in reflection of increased flota
tions.
Although thus far the rise had not affected the long-term
Government market,
that market was still
threatened by a relatively
large overhang of dealer holdings of bonds and by a low level of
retail demand,
To Mr. Daane such circumstances added up to an economic
situation that did not warrant a change in monetary policy in either
direction.
Whether one emphasized the underlying economic situation
or, as he would, the prevailing general uncertainties, the answer
was the same.
Neither the rates of domestic business and financial
expansion, which were reduced, nor the balance of payments situation,
which was improved, called for more restraint.
they did not call for less restraint.
On the other hand,
In view of the continuing
precarious state of the balance of payments, domestic conditions
should clearly call for more ease before the Committee actively
sought it.
He still believed that relative price stability was
the key to the eventual solution of the U.S. balance of payments
problem, and he shared Mr. Bryan's concern over price developments.
In his judgment, the Committee should continue to seek price
stability, although he recognized the difficulties of achieving it.
6/15/65
-56
Mr. Daane favored alternative A for the directive.
While
he clearly would be sympathetic to conducting operations as far as
possible in
bill
the coupon area to avoid putting downward pressure on
rates, he did not believe it
clause in
was necessary to include the final
the directive.
Mr.
Mitchell indicated that,
like some others,
he felt a
certain amount of uneasiness about the business outlook.
it
was not going to be easy to keep the economy expanding,
the difficulties were likely to increase with time.
stock prices had jolted confidence,
tinued it
He thought
and that
The decline in
and in his opinion if
it
con
definitely would have some effect on spending plans.
inventory situation also was somewhat alarming.
The
The continued
growth in steel stocks was unfortunate, and inventories seemed to
be getting a bit out of hand in
other areas.
The Committee's real objective, Mr. Mitchell said, was to
promote as full utilization of the nation's resources as possible,
in an environment of reasonably stable prices.
With the uncertain
business outlook and present state of psychology, he thought that
monetary policy at this time should be directed more to the problem
of resource utilization than to that of price stability.
Mr. Mitchell remarked that he found himself in agreement
with Mr. Hayes on the points that the balance of payments situation
appeared better than it actually was and that a basic cure was not
6/15/65
-57
in sight.
However, the voluntary restraint program was never
expected to be a permanent solution to the problem, but rather was
intended to buy time for the development of other solutions.
That
was exactly what the program was accomplishing; it was providing a
breathing spell, which was all that could be expected of it.
Mr. Mitchell preferred alternative A for the directive.
However, he thought that it would be appropriate at this time to
delete the rather sterile clause at the end of the first paragraph
reading, "while accommodating moderate growth in the reserve base,
bank credit, and the money supply."
In place of that clause he
would simply say "while accommodating resumption of growth in the
money supply."
There had been no increase in the money supply or
in its demand deposit component through May of this year, he noted,
but the staff anticipated an increase in June as Treasury deposits
were drawn down.
He thought it would be desirable for the Committee
to be on record as favoring such an increase; a five-month inter
ruption in money supply growth was long enough.
Mr. Mitchell added that he would omit the last clause of
the second paragraph.
The Account Management had performed re
markably well recently, giving proper regard to conditions in both
the bill and bond markets, and the Manager had indicated that it
was his intention to buy coupon issues during the coming weeks, as
implied by the clause in question.
Omitting the clause would give
6/15/65
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a little more emphasis to reserve objectives and less to bill rate
fluctuations.
Mr. Shepardson said he agreed in large part with the staff
analysis of the domestic economy, except that he felt more concern
about the price situation than the staff had indicated.
He was
disturbed by the continuing, and apparently accelerating, advance
of prices--not only from the standpoint of the domestic economy
but also because price stability was a vital factor in achieving
improvement in the balance of payments.
Some of the causes of the
currently favorable payments statistics were temporary, and the
underlying situation was still one of great concern.
Notwithstanding the indications of less ebullience in the
economy, Mr. Shepardson observed, the balance of payments and price
situations inclined him toward a further slight firming of policy,
as indicated by alternative B of the draft directives.
However,
certain other considerations suggested alternative A.
Those were
the overall uncertainties and the general state of psychology
existing at the present time, and the fact that a slightly firmer
policy now probably would not have significant implications for
longer-run balance of payments prospects.
As had been stated
repeatedly, a fundamental solution to the balance of payments
problem would have to come largely from sources other than monetary
policy.
His position was close to the line between the two
6/15/65
-59
alternatives.
On the whole, however, despite the factors inclining
him toward alternative B, he felt that it
.ight be preferable to
adopt alternative A today.
In Mr. Shepardson's judgment the last clause of alternative
A was unnecessary; the Manager presumably would continue to operate
as he had recently.
As to Mr. Mitchell's suggestion for replacing
the final clause of the first paragraph with a statement on resump
tion of growth in the money supply, Mr. Shepardson noted that the
money supply often fluctuated in the short run as a result of a
variety of factors not related to monetary policy actions.
It
was true that the money supply, narrowly defined, had not grown
recently, but time deposits had continued to increase at a signifi
cant rate and so had total bank credit.
He considered the
original phrase appropriate and would leave it unchanged.
Mr. Robertson made the following statement:
Domestic business activity seems to have been in
the process of shifting gears--downward to a slower but
hopefully more sustainable rate of economic expansion.
I judge this slowdown is undeniable--the only point for
debate concerns how much. Some may feel the deceleration
of demand is sufficient to call for a little pre
cautionary anti-recession planning at this juncture.
My own feeling is that such concern is not yet necessary.
I think current levels of demand are likely to prove
adequate to sustain the economy through the summer,
particularly with the impetus of major steel inventory
liquidation apparently deferred until fall and some
added fiscal stimulus scheduled this summer. We shall
need to keep a careful watch over developments this
fall and winter, however, for a considerable variety
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-60-
of influenes could then be combining to exert more
significant deflationary pressure on the economy.
I think these overall prospects for business
activity are not sufficiently strong to either engender
or sustain a general price spiral. At the same time,
I do recognize that some recent price increases have
been occurring. I am not so troubled about the live
stock price advance, for such increases usually give
rise to market supply responses that soon provide a
natural correction. The aluminumwage and price
increases, however, are typical of the kind of mark-ups
we can yet experience in some industries, even though
the worst of demand pressures on resources may already
be behind us. I think we are already evolving the
kind of environment of market demands that will
constrain this type of price action, and so I would
not favor any further monetary tightening as a
gesture of resistance. On the other hand, I would
not want to take any major easing step, at this
particular time, that might tend to give succor to
business and labor inclinations to try for big
administered wage and price increases.
This analysis of the domestic business situation
leads me to advocate a policy of "no change" in the
monetary sphere. Such a policy seems equally
appropriate to national and international financial
developments. Our international payments have been
about in balance for three months now. How temporary
that improvement may be only time can tell for sure.
But I do not believe such temporary improvement would
be rendered more permanent by tightening monetary
policy further now.
In the domestic financial sphere, bank loan and
deposit expansion have slackened significantly. While
these magnitudes continue to fluctuate considerably
over short spans of time, I think the changes in the
six or seven weeks since late April are distinctly
more moderate than previously in the year. I believe
our policy at this meeting has to take into account
such a slowing down in bank performance. When that is
done, I believe the logical conclusion is that, under
current demand conditions, the monetary policy adopted
at the end of the first quarter is about as restrictive
as should be tried.
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6/15/65
Thus, on all counts I end up favoring a monetary
policy of "no change" between now and the next meeting
of the Committee. Accordingly, I would approve the
alternative A directive as drafted by the staff--but
deleting the final parenthetical phrase worrying about
the bill rate. As analyses presented to this Committee
have repeatedly demonstrated, the bill rate has not
been a reliable indicator of general money market
conditions this spring, and it also seems increasingly
less pertinent as a basis for comparing international
rate differentials. I take its latest decline to
reflect, perhaps as much as any other single factor,
temporary buying interest of a hedging nature by investors
who have been made cautious for a time by the uncertain
ties in long-term debt and equity markets. As we found
out on previous occasions, the most tnerapeutic
treatment for this kind of buying is to allow the
resultant lowering of bill rates to exert its natural
and gradual deterrent effect, and consequently I
propose deleting the final parenthetical phrase.
I would also suggest that in the first sentence of
the directive where we refer to the continuing expansion
of domestic economy, we retain the words "although at
a somewhat slower pace" and add "than in the first
quarter." This would seem to be in line with the actual
situation reflected in the analyses of current economic
data.
Mr. Robertson added that he agreed with Mr. Hickman that
the Manager of the Account might be directed to resolve doubts on the
side of ease.
He also agreed with the suggestion of Mr. Mitchell
that the Committee might well use this opportunity to delete the
phrase it had used for so long in the directive--"while accommodating
moderate growth in the reserve base, bank credit, and the money
supply."
He would substitute the phrase, "while accommodating
growth in the money supply."
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Mr. Wayne reported that Fifth District business continued
to improve, although at a slower pace than earlier in the year.
Employment apparently was rising at about a seasonal rate, but
insured unemployment continued to decline more than seasonally.
Contract awards rose to a new all-time high in April after a
mediocre first quarter.
Retail trade increased moderately in May,
as indicated by a new high in department store sales and favorable
reports from retailers on the Richmond Reserve Bank's survey panel.
Survey respondents in general were less optimistic than five
weeks ago, but manufacturers describing current developments in
their own industries showed that distinct improvements had occurred
since the previous round of reports.
The evidence included recent
increases in factory orders, shipments, employment, and hours.
A special questionnaire on prices paid, included in the latest
survey, showed that about two-thirds of the respondents were now
paying more for materials and for factory and office supplies,
while nearly three-fourths reported prices up for machinery and
equipment.
From one-half to two-thirds anticipated additional
increases in the near future in those same prices, and three
quarters expected wage increases.
Nearly nine out of ten believed
that prices would rise in the months immediately ahead in the
national economy as a whole, but in their own industries only half
of the respondents thought that price increases were imminent.
6/15/65
The interim wage settlement in steel reduced somewhat the
pressure under which the economy had been operating, Mr. Wayne
commented.
The smooth and mild adjustment which took place after
the settlement indicated substantial basic strength and a stable
equilibrium in the economy.
The small increase in defense
expenditures which had already occurred, and the prospects of much
larger increases, should help support economic activity in the
second half of the year.
Economic strength was indicated also
by the high level of manufacturers' new and unfilled orders, the
continuing high levels of business investment plans and consumers'
buying intentions, some renewed strength in construction
especially in the residential sector, and the record level of retail
sales in May.
were the high
Two potentially troublesome developments, however,
level of consumer and mortgage debts with their
rapid increases in recent months, and the growing upward pressures
on wages and prices.
Upward price pressures were likely to continue, Mr. Wayne
said.
The wage settlements in the can, aluminum, and rubber
industries had already been reflected in the selective price in
creases and carried disturbing implications for the steel
settlement.
The southern textile industry was making its third
wage increase of 5 per cent within 18 months.
Those increases
probably reflected a decision to pass on profits resulting from
6/15/65
-64
"one-price cotton" in wages rather than prices.
Short supplies of
several major farm commodities should keep farm prices on the rise.
The increases in farm prices as well as those in metals and other
industrial raw materials could push through to the retail level.
Finally, increased Government spending for defense and welfare
would add to demand.
The recent modest improvement in the balance of payments
was encouraging to Mr. Wayne.
The available evidence suggested,
however, that most or all of that improvement stemmed from the
working of the voluntary foreign credit restraint program or from
temporary influences such as the unwinding of the dock strike
situation.
Thus, the basic problem of the balance of payments
was still unresolved and in view of the probability of new strains
on the international financial system in the next few months, that
must remain a matter of deep concern to the Committee.
Loan expansion had slowed somewhat in the second quarter,
Mr. Wayne observed, but there was little evidence that the growth
of bank credit had been restricted by monetary policy.
Banks had
now developed so many ways of mobilizing reserves and of shifting
reserves among banks that the effect of traditional credit
restraint measures was considerably diluted.
In the policy domain, it seemed clear to Mr. Wayne that
the rate of financial expansion definitely slowed in April and
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May, accomparying a similar reduction in the rate of business
expansion.
The abnormally low bill rates and net sales of Federal
funds by New York banks, among other things, would suggest that
the slower financial growth was the result of lower demand rather
than reduced reserve availability.
As for proper policy for the next four weeks, it seemed
to Mr. Wayne that the overall situation did not require any
additional restraint at this time in view of the slight reduction
in rates of growth in both business and financial areas in the
past two months.
Accordingly, he would favor continuing present
policy with a recommendation to the Desk, in supplying reserves,
to use all possible methods to avoid depressing the bill rate.
Alternative A seemed appropriate to him.
The proposed addition
to the concluding sentence seemed unnecessary; he would leave
that matter in the hands of the Manager.
Mr. Clay said that under present circumstances it would
appear best to continue the monetary policy of the last three
weeks.
The transition in the domestic economy from the surge of
the first quarter had brought a more moderate pace of activity.
While it was expected that the economy would continue to advance
in the months ahead, there was no assurance that the present
transitional phase had been completed.
In any event, the pace of
future advance would be slower than early in the year.
While
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6/15/65
there had been some firming of industrial prices, it had been on
a selective basis.
Moreover, the slower rate of business advance
should help to limit upward price pressures, particularly in view
of the continuing expansion in industrial capacity.
Changes in both economic activity and in special situaticns
affecting the first quarter also had brought a slower rate of growth
in bank credit and in its business loan component, Mr. Clay noted.
It remained to be seen whether still further adjustments might be
under way in the rate of bank credit expansion.
Evaluation of current developments relative to the inter
national payments problem obviously was very difficult, Mr. Clay
continued.
The voluntary credit restraint program had brought
substantial gains in the last three months, but there was a
question as to what proportion of those early gains were relatively
easy to accomplish.
Granting the limitations of such a program,
it appeared probable that there would be significant continuing
gains.
Without arguing that that program would solve the U.S.
international payments problem, it did afford additional time to
develop new avenues to deal with the problem and currently
facilitated the continuation of present monetary policy.
Mr. Clay believed that money market conditions and reserve
availability should be continued within the range of recent weeks.
If Treasury bill rates should rise relative to other short-term
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6/15/65
open market rates, that would be entirely acceptable, but reserve
availability should not be restricted in
upward movement of Treasury bill rates.
.n attempt to force
In view of the bill rate
level, operations should be conducted in longer maturities as
feasible to reduce pressure on bill rates.
The present sensitivity
of longer-term interest rates should make it possible to carry out
such operations.
Alternative A of the draft policy directive appeared
satisfactory to Mr. Clay, and he thought it would be appropriate
to include the last phrase, on minimizing downward pressures on
Treasury bill rates.
Presumably the latter would come within the
general money market conditions and reserve availability of recent
weeks, however.
Mr. Scanlon remarked that he was in general agreement with
the comments the staff had prepared on the questions suggested
for consideration at this meeting.
As far as the Seventh District
was concerned, substantial declines in ou:put of steel and autos
in the second half of 1965 had been taken for granted since the
start of the year.
Now that the first half was ending and those
declines were closer at hand, they appeared to be playing a
larger role in current thinking about economic prospects.
That
was somewhat surprising in view of the fact that output estimates
for both of those industries had been raised since early this year.
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Local steel analysts now anticipated production at a new
record of 128 million tons of steel ingots in 1965, Mr. Scanlon
reported.
Cutput was expected to decline about 10 per cent in the
third quarter, and about 16 per cent in the second half.
The usual
July plant-wide shutdowns had been eliminated by the major producers
as orders for steel had accelerated again in recent weeks, perhaps
indicating renewed concern about a possible strike.
The increase
in orders had been rather general and, surprisingly, included the
auto industry, which had been believed to have ample stocks of steel.
Capital goods producers in the Seventh District continued
to report increases in order backlogs, Mr. Scanlon observed.
Inventories of components were said to be moderate and producers
of "stock" components, who normally experienced declines in orders
about six to nine months before machinery producers, were still on
a rising trend.
There continued to be a strong interest in locations
for new industrial plants.
A factory locating service, headquartered
in Chicago, reported a very strong demand for its services.
Mr. Scanlon reported that evidence on employment trends,
personal saving, and retail sales indicated no substantial change
from the favorable picture of recent months.
Credit outstanding at District banks had expanded at a
moderate pace since the end of April, Mr. Scanlon continued.
Loans
rose by about the same amount as a year ago, with a large portion
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due to borrowing by finance companies.
Business loan growth had
continued at the slower pace evident in April.
The major Chicago
banks had not acquired any additional funds through CDs, and their
outstandings remained in the narrow range that had prevailed since
the beginning of the year.
They had reported some loan contraction
and their investments were also cown somewhat.
been
While two banks had
rather heavy buyers of Federal funds, another bank had main
tained a substantial net selling position since late April.
Those
large banks in Chicago had borrowed very little at the discount
window, although other District banks had stepped up their borrowing.
A. to policy, Mr. Scanlon thought the System should provide
the normal seasonal amount of reserves in the weeks immediately
ahead.
He recognized that this would pose serious problems for the
Manager, who, he thought, had to be given substantial latitude in
which to operate.
Mr. Scanlon certainly would not retreat from the
position that had been attained in recent weeks; as a matter of
fact, he would resolve doubts on the side of firmness.
However,
he would not change policy under current conditions, and he found
alternative A of the directive drafts acceptable but would delete
the final phrase.
Mr. Galusha remarked that he would report first on
agricultural prices in the Ninth District, and, in particular, on
livestock prices.
While the index of District crop prices was
6/15/65
-70
below its year-ago level, the index of livestock prices was up
sharply from last year and from mid-April as well.
For livestock
producers that was heartening, although, of course, it was
unlikely that the recent increase in livestock prices, being
largely the result of reduced supplies, would result in a dramatic
increase in District farm income.
Ninth District personal income was virtually unchanged in
April, Mr. Galusha said.
That constancy concealed a variety of
minor offsetting changes, however, including an interesting increase
in wage and salary disbursements of manufacturing firms.
On the
whole, the outlook for the District's nonagricultural economy
appeared favorable.
An impressive increase in output apparently
was recorded in May, with durable goods producers seemingly leading
the way.
Moreover, businessmen seemed to be optimistic about the
third quarter of 1965.
The Minneapolis Bank's most recent opinion
survey suggested that a considerable majority of businessmen were
expecting further increases in output and employment and, surprisingly
enough, in profits.
The great majority of the survey respondents
continued to report no price changes for their products, but some
were reporting higher raw materials prices.
Mr. Galusha commented that the new cars sold in such large
quantities recently would be on the road this summer, if travel
bookings were any indication.
The increase in reservations at
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western National Parks had continued, and at several it was now
impossible to get reservations for July and August.
Mr. Galusha noted that the Reserve Bank recently had made
an informal survey of the consumer and trade credit situation.
The
respondents reported that the totals outstanding of consumer and
trade credit had increased considerably in recent months, but that
they were, perhaps surprisingly, not at all concerned.
To date
there evidently had been no increase in default experience,
although it might be too early to expect such a development.
On
a related point, the credit deterioration evident in the agricultural
sector earlier in the year had been relieved somewhat by the
improvement in the livestock situation.
District member bank credit increased in May, Mr. Galusha
remarked, but on a seasonally adjusted basis it apparently declined.
Also, the rise in total credit fell far short of the sharp expansion
recorded in May 1964.
At reporting banks total credit actually
fell a bit in the past month, so the increase was experienced by
nonreporting banks.
The latter, it appeared, were now in a fairly
tight position, with their average loan-deposit ratio higher now
than at any time in the period from 1960 to date.
Reporting banks
were only slightly better off; their position appeared to be tight
in large part because they did not experience the usual May
increase in time deposits, but a decrease.
On the whole, then,
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District member banks appeared to be under some pressure, and it
was doubtful that they were still aggressively searching out new
loans.
In Mr. Galusha's view monetary policy, defined in terms of
the average level of free reserves, should remain about as it had
been of late during the coming several weeks.
He saw little reason
for changing policy, and certainly none for increasing monetary
restraint.
He thought the decline in the bill rate was not a cause
for alarm and noted that the recent reduction in the British Bank
rate was of considerable significance in that connection.
The
domestic outlook seemed to him to be for moderate growth over the
remaining part of 1965, and for a rate of growth of demand no
greater than the rate of increase of capacity.
Whether growth
would be sufficient to keep the unemployment rate from creeping
up during the summer and fall, he did not know.
Recent price
increases might be disturbing but he believed that sharp increases
had remained rather selective--too selective to warrant application
of further general monetary restraint.
And such widespread creep
in prices as there had been of late was a reflection not so much
of the current economic situation as that of the recent past.
Nor
did recently-struck labor bargains seem sufficient to warrant action
at this time.
In particular, they did not seem to be indicative
of a sharp jump in the rate of increase of money wages.
In sum,
6/15/65
-73
Mr. Galusha favored no change in monetary policy and alternative A
for the directive.
Mr. Swan reported that in May the rate of unemployment
dropped in California--the only District State for which data were
as yet available--as it had in the nation, but still continued well
above that of the country as a whole.
The level of private housing
starts declined sharply in April following improvement in February
and March.
While a one-month development of that type was not
necessarily significant, in view of the earlier improvement it was
worthy of note as indicating that weakness in the housing area
had not disappeared.
The District's weekly reporting banks had shown a less
rapid rise in loans than those in the country as a whole for most
of the year to date, Mr. Swan said.
However, in the three weeks
ending June 2 the increases in both loans and total bank credit at
District banks were much more rapid than nationally, and they also
were much greater than in the District a year ago.
District banks
were under considerable reserve pressure, and their borrowings
from the Reserve Bank continued at a relatively high level.
Mr. Swan remarked that, along with others, he was impressed
by the recent slowdown in the pace of national economic activity
and by the slackening in the growth of bank credit.
Price increases
were a real cause for concern, but among industrial commodities
6/15/65
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they still were largely confined to metals and metal products,
and the increase in meat prices was primarily a result of reduced
supply.
While the factors producing the recent improvement in
the balance of payments might be temporary, the facts remained that
the U.S. currently was experiencing a continuing surplus and that
immediately unfavorable developments were lacking.
Those considerations, Mr. Swan continued, along with the
decline in the stock market and the uncertainties generated thereby,
as well as the current congestion in capital markets, all indicated
to him that the Committee's policy should not be changed.
Consequently, he favored alternative A of the draft directives.
He would go along with Mr. Robertson's suggestion that the domestic
expansion should be described in the first sentence as proceeding
at a slower pace than in the first quarter.
As to Mr. Mitchell's
suggestion, there was some attraction in the proposal to change
wording that had been used for some time.
Nevertheless, he would
not want to confine the reference in the final phrase of the first
paragraph to the money supply.
For one thing, there were shifts
in the money supply resulting from factors beyond the Committee's
control, such as changes in Government deposits.
Secondly, the
Committee remained interested in accommodating moderate growth of
bank credit and the reserve base.
As to the parenthetical phrase
at the end of the second paragraph, he did not think it belonged
6/15/65
-75
in the directive.
As others had noted, the Committee could rely
on the Manager to conduct operations in
the manner indicated.
Mr. Irons reported that conditions in the Eleventh District
generally were very strong, and the prevailing mood was of
confidence and optimism.
According to the Reserve Bank's estimates,
the production index for the District probably rose two percentage
points in the past month, partly because of an increase in crude
oil production.
Construction contract awards had moved up
substantially and employment was slightly higher.
Retail trade,
as reflected by department store sales, had increased, and auto
mobile sales were unchanged at a high level.
Agricultural conditions had improved, Mr. Irons continued,
and generally were good.
Developments with respect to livestock
prices were highly encouraging to livestock people.
Heavy, wide
spread rains had helped range conditions.
Mr. Irons went on to say that loan demand at District banks,
while not as strong as in the first quarter, was still strong, and
total loans were at a high level and rising slightly to moderately.
There had been an increase in demand deposits but the volume of
CDs outstanding had declined.
District banks apparently were under some reserve pressure,
Mr. Irons said, and they were becoming reconciled to the necessity
of buying deposits rather than getting them gratuitously.
Banks
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had been heavy net buyers of Federal funds, with purchases running
about $750 million per week and sales about $500 million.
Borrowings from the Reserve Bank were not particularly excessive.
The large banks tended to rely mainly on the Federal funds market,
coming into the discount window only when necessary.
Some of the
smaller banks, however, were borrowing.
The national situation seemed to Mr. Irons to be one of
strength, and the outlook was favorable for further expansion
although at a rate below that of the first quarter.
some noticeable edging up of prices.
There had been
Defense expenditures and
business outlays for plant and equipment could be expected to
increase, and consumer spending was heavy.
From all reports,
businessmen were optimistic.
Mr. Irons doubted that the basic international situation
had improved much, if at all.
The balance of payments appeared
better as a result of the favorable consequences of the voluntary
credit restraint program, but whether the gains made would be
held remained to be seen.
Given those domestic and balance of payments situations,
Mr. Irons said, the choice between the policies described by
alternative A and B for the directive was a close one.
At the
same time, the differences in the policies called for by the two
alternatives did not strike him as being highly significant.
In
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view of the uncertainties that existed at present, and of the fact
that the economy was undergoing a transition from its earlier
unsustainably high rate of expansion, he was inclined to make no
change in policy at this time but, rather, to favor a continuation
of conditions in the ranges that had existed during the past three
weeks.
He would like to see net borrowed reserves in the area of
$150 million or above--he certainly would not want to have them
worked down to lower levels--and would expect borrowings to be
in the $450-$500 million range.
He would accept alternative A for
the directive, with the understanding that it called for no
lessening of the degree of firmness from that existing in the past
few weeks, and no overt strengthening from that degree.
If there
were to be deviations, he was inclined to Mr. Scanlon's view that
they should be in the direction of firmness rather than ease.
Mr. Ellis remarked that he could make a capsule description
of economic conditions in New England by reporting that strengthening
manufacturing activity was being translated into widespread
strength in employment, income, spending, and credit generation.
In April, for the first month in a considerable time span, the
seasonally adjusted index of manufacturing production for New
England matched the year-to-year gain in the national index, which
was 8.4 per cent.
Credit for that achievement had to go to the
nondurable industries of textiles, apparel, and leather, each of
which gained several percentage points from March to April.
6/15/65
-78In the financial sector, Mr. Ellis said, perhaps the most
notable--and still unexplained--development was that all District
banks outside Boston had just completed their fifth consecutive
week of negative free reserve positions, joining the Boston banks
in a debtor position the latter had held since February (except
for a two-week zero position in April).
Despite that tightness,
member bank loan positions had continued to expand in the three
weeks ending June 2, with each category except business loans
showing plus signs.
Turning to the policy issues highlighted by the staff
questions and comments, Mr. Ellis said that the issues posed by
the first three questions were so interwoven that he would consider
them as a composite.
In his judgment the wording of the third
question tended to direct attention too narrowly to the preliminary
and obviously distorted developments of the first two months of
the voluntary foreign credit restraint program, months in which
the initial effects of that program were registered.
Perhaps it
was inevitable that the Committee should lean most heavily on very
recent data in seeking to project what was ahead, but it was
necessary to dwell simultaneously on longer-range and more basic
factors.
He complimented the staff on the fact that in its
comments it had avoided the trap of exclusive focus on short-term
considerations.
One of the most troublesome of the long-range
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factors was the possibility that continued upcreep of domestic
prices would take some of the edge off of this country's competi
tive position in export markets.
And the immediately past and
forthcoming wage negotiations on balance would strengthen the
trend of price advances.
The prospects for sustainable economic expansion undoubtedly
were brightened by a return to the "ordinary" boom conditions of
last fall, Mr.
Ellis remarked, in contrast with the first quarter
credit explosion.
To paraphrase a remark of Mr. Brill's, things
were not as bad as they could have been, but might become so.
Still unanswered was the question of the potential cumulative effect
of long-continuing expansion of bank credit in excess of real growth
rates.
Concerning the areas of bank credit, interest rates, and
money market relations, Mr. Ellis commented that each area might
be registering the cumulative effect of a long-continuing high rate
of bank credit expansion, and of an active and long-continuing
joint effort by the System and the Treasury to support short-term
interest rates.
Past relationships suggested that a net borrowed
reserve level of $150 million traditionally had been associated
with lower short-term rates.
The gradual decline in Treasury bill
rates in the past six weeks probably confirmed the view that a
bill rate of 3.90 per cent or higher was not consistent with net
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borrowed reserves of $150 million.
On the other hand, commercial
bank holdings of Treasury bills had been so reduced that a further
lowering of reserve availability might very well be found not to
promptly release bills in a volume that would materially affect
short rates.
As an additional complication to the unknown
amount of repatriated capital lodged in the bill market, there
now was the probability that a substantial volume of funds withheld
from the stock market was temporarily lodged in the bill market
awaiting more permanent commitment.
To the extent that some
investors were anticipating future increases in long-term bond
rates, it was probable that they were holding funds in bills while
awaiting clarification of the outlook.
As he looked to the immediate future, Mr. Ellis said, he
saw two forces in the market that were likely to depress short-term
bill rates in addition to those he had mentioned.
First, in July,
traditionally, bill demand was strong and :he Treasury conducted
a financing.
Absent that financing because of the strong Treasury
cash position, rates were likely to sag.
Secondly, before the
Committee next met seasonal factors, including currency outflows,
would require injection of $1.1 billion of additional reserves.
Mr. Ellis went on to say that it was stimulating to
speculate on the advantages of meeting the seasonal reserve needs
by a reduction in reserve requirements, and face the happy prospect
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of later reabsorption by sales of bills.
In the absence of such
an approach, his personal choice would be to continue intermittent
purchases of coupon issues as available; to meet the seasonal need
as much as possible by repurchase agreements; to adopt a net
borrowed reserve target range centered on $200 million; to expect
borrowings to range from $500 to $600 million; and to be reconciled
to the prospect that even with such an approach bill rates might
shade off a few points further.
His discussion had centered around rate prospects, Mr. Ellis
continued, but it was premised on a recognition that, while weekly
and monthly gyrations tended to obscure the basic strengths, the
excessive rate of credit expansion of the first quarter had
dropped back in April and May only to an annual rate of 8 per cent.
While that rate was somewhat less than earlier, in his judgment it
was still excessive at a time when GNP was growing at an annual
rate of 4.7 per cent.
His analysis was that the fever had subsided
but the temperature remained high; and his conclusion was that
medication should be continued in the form of further probing
toward firmness.
Accordingly, alternative B of the staff drafts
was his choice for the directive.
However, if alternative A was
adopted, he would hope that the concluding phrase of the first
paragraph would not be confined to the narrowly defined money
supply, neglecting the reserve base and bank credit.
6/15/65
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Chairman Martin commented that there appeared to be a
large measure of agreement in the views that had been expressed
today.
In his judgment there had been no significant change in
the economic situation since the previous meeting of the Committee,
except possibly with respect to psychology; many people who had
been over-confident a few weeks ago now were less so.
That was
not necessarily a good thing, but it was not necessarily bad.
With respect to policy, he was in complete agreement with the
judgment that the suggested alternative A was the preferred
directive for the next four weeks, while the Committee awaited the
opportunity to make a better assessment of conditions.
The Chairman added that he became concerned whenever he
heard comments such as those that had been made in the discussion
today about resolving doubts on the side of ease or firmness.
Such comments, of course, were made from time to time to reflect
shades of difference in views on policy.
In his judgment,
however, the objective should be for the Manager to make no mis
takes at all and not to deviate in either direction.
As to the comments on the money supply, the Chairman said,
he had to admit that his understanding on that subject was not as
full as he would wish; the more he thought about it the less
confident he was that he understood all of the elements of money
supply determination.
In any case, he thought that the three
6/15/65
-83
measures--the reserve base, bank credit, and the money supplyprovided a better basis for policy formulation than the money
supply alone, and he did not favor Mr. Mitchell's suggestion that
the concluding phrase of the first paragraph of the directive be
confined to the latter.
Chairman Martin then noted that some members had suggested
retaining the phrase indicating that the domestic expansion was
proceeding at a slower pace.
While he did not consider the matter
to be of great importance, he would prefer Mr. Robertson's
suggestion--retention of the present clause and addition of the
words, "than in the first quarter."
more precise.
The statement then would be
He did not favor including in the second paragraph
of the directive the final parenthetical clause shown in the
suggested alternative A.
Mr. Hayes noted that the phrase "but with gold outflows
continuing" had been deleted from alternative A but retained in
alternative B. The facts were not changed by the policy decision
of the Committee, he said, and if the statement would be warranted
under the policy indicated by alternative B he thought it belonged
in alternative A also,
In response to Mr. Mitchell's question about the prospects
for gold outflows, Mr. Coombs said there was likely to be another
sizable reduction in U.S. gold holdings by the end of this month.
6/15/65
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As he had indicated earlier, France probably would buy at least
$50 million of gold in
June,
and there also might be purchases by
other countries.
Mr.
Mitchell then asked if
the staff would explain the
rationale underlying the deletion of the phrase in question from
alternative A and its retention in
alternative B.
Mr. Noyes responded that there was no question about the
facts; there had been some gold outflow recently and some was still
in prospect.
At the time the draft was drawn up, however, it
appeared that the rate of outflow would be somewhat less this
month than it had been earlier.
The staff had felt that members
who favored further firming would do so partly because some outflow
was continuing, and therefore would want to refer to that fact in
the directive.
B.
It
Accordingly,
the reference was retained in
was omitted from alternative A,
on the other hand,
alternative
because
it was thought that members favoring no change in policy would tend
to place primary emphasis in
their thinking on the reduction in
the
rate of outflow, and might consider the reference to be no longer
appropriate.
Several members indicated that they thought the reference
in question should be retained in the directive even if the decision
was to make no change in policy.
6/15/65
-85The Chairman then proposed that the Committee vote on a
directive based on alternative A, but incorporating the phrase
relating to gold outflows, including the statement that the
domestic expansion was continuing at a slower pace than in the
first quarter, and omitting the final parenthetical clause.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
Federal Reserve Bank of New York was
authorized and directed, until otherwise
directed by the Committee, to execute
transactions in the System Account in
accordance with the following current
economic policy directive:
The economic and financial developments reviewed
at this meeting indicate continuing expansion of
the domestic economy, although at a somewhat slower
pace than in the first quarter, and maintenance of
earlier 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 four weeks shall be conducted
with a view to maintaining about the same conditions
in the money market as have prevailed in recent weeks.
Mr. Hayes said that, while his inclination toward further
firming was clear from his earlier comments, he had voted in favor
of the directive because he thought that under present conditions
there was much to be said for unanimity in any policy action the
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5/15/65
Committee might take.
Messrs.
Ellis and Shepardson commented that
they wanted to associate themselves with Mr.
Hayes' statement.
It was agreed that the next meeting of the Committee would
be held on Tuesday, July 13, 1965, at 9:30 a.m.
Thereupon the meeting adjourned.
Assistant Secretary
CONFIDENTIAL (FR)
ATTACHMENT A
June 14,
1965.
Drafts of Current Economic Policy Directive
for Consideration by the Federal Open Market Committee
at its Meeting on June 15, 1965
Alternative A (no change in policy)
The economic and financial developnents reviewed at this
meeting indicate continuing expansion of the domestic economy and
maintenance of earlier improvement in our international balance
of payments.
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 four weeks shall be conducted with a view to main
taining about the same conditions in the money market as have
prevailed in recent weeks (, while minimizing such downward
pressures on Treasury bill rates as may develop).
Alternative B (firming)
The economic and financial developments reviewed at this
meeting indicate continuing expansion of the domestic economy
with some upward pressure on prices, a large expansion of bank
credit thus far this year, and maintenance of earlier improvement
in our international balance of payments, but with gold outflows
continuing. In this situation, it is the Federal Open Market
Committee's current policy to reinforce the voluntary restraint
program to strengthen the international position of the dollar,
and to avoid the emergence of inflationary pressures, by moderating
growth in the reserve base and bank credit.
To implement this policy, System open market operations over
the next four weeks shall be conducted with a view to attaining
slightly firmer conditions in the money market.
Cite this document
Federal Reserve (1965, June 14). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19650615
@misc{wtfs_fomc_minutes_19650615,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1965},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19650615},
note = {Retrieved via When the Fed Speaks corpus}
}