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, July 13, 1965, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston
Bryan
Daane
Ellis
Galusha
Maisel
Mitchell
Robertson
Mr. Scanlon
Mr. Shepardson
Mr. Trieber, Alternate for Mr. Hayes
Messrs. Bopp, Hickman, Clay, and Irons, Alternate
Members of the Federal Open Market Committee
Messrs. Wayne, Shuforc, and Swan, Presidents of
the Federal Reserve Banks of Richmond, St.
Louis, and San Francisco, respectively
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Garvy, and Koch, Associate
Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Messrs. Partee and Williams, Advisers, Division
of Research and Statistics, Board of
Governors
Mr. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics,
Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
7/13/65
Mr. Patterson, First Vice President of the
Federal Reserve Bank of Atlanta
Messrs. Eisenmenger, Eastburn, Mann, Jones, Tow,
and Green, Vice Presidents of the Federal
Reserve Banks of Boston, Philadelphia,
Cleveland, St. Louis, Kansas City, and
Dallas, respectively
Mr. Lynn, Director of Research, Federal Reserve
Bank of San Francisco
Mr. Monhollon, Assistant Vice President,
Federal Reserve Bank of Richmond
Mr. Geng, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. MacLaury, Manager, Foreign 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
meeting of the Federal Open Market Committee
held on June 15, 1965, were approved.
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Open
Market Account on foreign exchange market operations and on Open
Market Account and Treasury operations in foreign currencies for the
period June 15 through July 7, 1965, and a supplemental report for
July 8 through July 12, 1965.
Copies of these reports have been
placed in the files of the Committee.
In comments supplementing the written reports, Mr. MacLaury
It
said that the gold stock would again remain unchanged this week.
now looked as though the extra $100 million in gold transferred to
the Stabilization Fund at the time of payment of the U.S. gold
subscription to the International Monetary Fund at the end of June
7/13/65
-3
should meet requirements through the remainder of July.
gold sales of any significant size in
The only
prospect at the moment were
$34 million to France and $12.5 million to Austria.
During June,
Mr.
MacLaury observed,
London market was generally lower than it
demand for gold in
had been in
the
earlier months
this year, and the pool was able to nake some progress toward re
couping its
previous deficit.
By the end of June,
sufficient gold
had been accumulated for the Bank of England to make a distribution
of $44 million,
of which the U.S.
received half.
There was some
further accumulation during the early part of July, but last
(July 9) demand again picked up temporarily,
high as $35.11-1/2 after the fixing.
Friday
sending the price as
At the moment, the pool's
position was about the. same as at the end of June--a net deficit of
approximately $150 million--and the price
had now fallen back below
$35.10-1/2.
Mr. MacLaury noted that supplies of gold coming onto the
London market this year had been augmented to a considerable extent
by South African sales of gold from their reserve holdings,
from new production,
deficit.
apart
reflecting that country's balance of payments
Whereas sales from South African reserves added only about
$60 million to market supplies in
all
of 1964,
they had added some
$200 million during the first half of this year alone.
Thus, while
Russian sales had continued to be conspicuously absent for over a
year, the gold market had benefited from a source of supply that
could not be counted on indefinitely.
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7/13/65
In the exchange markets, Mr. MacLaury said, attention con
tinued to focus on sterling, and on the figures that gave clues to
its prospects.
For example, it was the disappointing trade figures
for the month of May, reldased at the beginning of the current
reporting period, that touched off several days of selling pressure
and cost the Bank of England more than $150 million in support
operations.
More recently, the spot rate had held pretty much on
its own, and in fact had withstood some fairly heavy pressure from
official operations by the Bank of England designed to roll over
maturing forward contracts.
extended,
U.K.
it
Not all the maturing contracts were
and paying off a part of them put an additional burden on
reserves.
Given the keen market interest in U.K. statistics,
was decided to draw on the Federal Reserve swap to the extent of
$360 million at the end of June to reduce the published reserve
decline to $67 million.
As it turned out, the market was not
visibly affected one way or the other by the reserve announcement,
despite the fact that the public statement said that use had been
made of the swap arrangement.
Subsequently,
Mr.
No figure, of ccurse, was given.
MacLaury continued,
the U.K.
repaid $85
million of its drawing from unutilized proceeds of its previous IMF
drawing, reducing the amount presently outstanding on the Federal
Reserve swap to $275 million.
The market was once again focusing
on the trade figures which had been released today.
imports down noticeably from their swollen May level.
They showed
But exports
7/13/65
-5
also were slightly lower,
ment.
thus failing to show the hoped-for improve
The market's preoccupation with those figures--not just for a
single month,
standable.
of course,
but over a period of time--was quite under
The Chancellor of the Exchequer had himself indicated that
developments in
the next few months would be of crucial importance in
determining whether further measures were required.
On the continent, Mr. MacLaury observed, currency rates
fluctuated somewhat in
response to changing money market conditions
in Germany, Switzerland, and the Netherlands.
On balance, however,
the System had been able to make substantial further progress in
reducing its
commitments in
guilders and Swiss francs,
case partly through the use of marks.
in
the latter
Specifically, the drawing on
the Bank for International Settlements swap, which was $55 million
at the beginning of the period, had been entirely liquidated.
Roughly
$15 million equivalent of the necessary Swiss francs were purchased
from the Swiss National Bank when that Bank needed dollars.
The
remaining $40 million equivalent were obtained through the BIS by
selling marks against Swiss francs on a covered basis,
using marks
acquired either in the market or from the Bundesbank, which had
undertaken some support operations as the mark rate softened.
In
effect that meant that while the System still had $40 million
equivalent of forward commitments in Swiss francs, it had improved
its overall position in foreign currencies by the $40 million
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7/13/65
equivalent of marks acquired.
Apart from that operation, the
System also purchased $8 million equivalert of Swiss francs from
the Swiss National Bank and paid off the last of its market forward
commitments in Swiss francs.
As the Committee would recall, those
commitments were initially entered into last December to provide
cover for Swiss commercial bank dollar investments that otherwise
would have been sold to the central bank.
Similarly, Mr. MacLaury continued, during the period the
System was able to buy some $52 million equivalent of guilders from
the Netherlands Bank which had sold dollars in its market apparently
mainly in connection with commercial demand.
Those guilders were
used by the System to pay off maturing forward contracts, reducing
the amount outstanding in guilder market forwards to only $2.5 million,
which matured later this month.
It was expected that the System's
remaining forward guilder commitments would be liquidated by the end
of July.
In addition, the System had beer. able to reduce its $10
million equivalent sterling-guilder swap by half during the period,
also purchasing the required guilders from the Netherlands Bank.
All in all, it was evident that considerable progress had been made
in reducing System commitments in those particular currencies without
recourse to funding or gold sales.
In the case of Italy, Mr. MacLaury said, the picture was
quite different.
The Italian authorities had been taking in
dollars at a very rapid rate.
Reserves had not risen more than
7/13/65
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they had mainly because of the very large swap transactions between
the Exchange Office and the Italian commercial banks.
In effect,
some $900 million had been shifted back out of official reserves
through such operations during the first half of this year.
The
present prospect, however, was that the Italian balance of payments
would be in surplus by more than $1 billion this year.
Unrelated to
market developments, but of interest to the Committee, was the fact
that the System had been able to pay down $5 million equivalent to
the Bank of Italy during the period through acquisition of lire from
Ceylon, which in turn had drawn them from the IMF.
There was still
a strong likelihood that the System's remaining drawings on the Bank
of Italy, in the amount of $163 million, would be liquidated by the
end of July as a result of a U.S. drawing of lire on the IMF and
issuance of a lire-denominated bond by the Treasury.
Likewise,
it was hoped that most, if not all, of the U.S. debtor position
under the Belgian swap arrangement--which during the period fi.st
rose by $20 million to $80 million and subsequently (on July 12) was
reduced by $10 million--could be liquidated by similar means.
Finally, Mr. MacLaury noted that the Canadian dollar had
had a softer tone in the spot market recently, dropping on Friday
to $0.9219 and eliciting some support from the Bank of Canada.
On
the other hand, the premium on the three-month forward Canadian
dollar at one point rose to well over 1/2 per cent, although it was
now back down to levels around 1/4 per cent.
The fluctuations in
7/13/65
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the forward rate appeared to be related to the bunchings of
repatriations of U.S. funds from Canada, and did not seem to
have generated any significant movement of funds in the reverse
direction.
Mr. Daane asked about the implications of the transaction
Mr. MacLaury had described, in which the System in effect had
converced $40 million of its Swiss franc debt to the BIS into a
third-currency swap of marks against Swiss francs.
Mr.
MacLaury replied that there was a distinction--although
one that should not be pushed too far--between a System debt incurred
by drawing on a standby swap arrangement and a third-currency swap
such as had been arranged with the BIS.
In the former case, the
System was simply in a short position on a foreign currency; in the
latter case, its net position was not a short one.
In the trans
action in question an opportunity had arisen for the System to
acquire marks, and it had appeared desirable to use those marks to
reduce the System's short position in Swiss francs.
Because the
transaction was a covered one there remained an obligation to pay
Swiss francs to the BIS in three months, but on a balance-sheet
basis an offsetting asset now existed in the form of a liability
of the BIS to pay the System an equivalent amount in marks at that
time.
The need for transactions of this type arose mainly because,
while other countries could settle debts to third countries by
transferring dollars, the U.S. could not directly pay a debt in,
say, Swiss francs by use of another currency such as the mark.
7/13/65
In response to questions by Mr. Hickman, Mr. MacLaury said
that under the arrangement made the System was exposed to the risk
of loss in the unlikely event of devaluation of the mark.
Since
there was a similar risk in connection with outright holdings of marks,
however, the System's exposure in this respect had not been increased
by the transaction.
Dollar limits were, of course, set both on the
System's spot holdings of foreign currencies and on forward trans
actions by the Committee's continuing authority directive for foreign
currency operations.
Mr. Shepardson noted that at the previous meeting of the
Committee there had been some discussion of System drawings under
the swap line with the National Bank of Belgium.
At that time Mr.
Coombs had indicated that the one-year period in which drawings were
to be fully liquidated,
in
under the terms of the Committee's guidelines,
the Belgian case would elapse in
August.
Mr.
Coombs also had
expressed the hope that the account with the Belgian Bank would be
cleared up in the first week in July.
Manager's supplementary report,
However, in the Special
distributed this morning,
it
was
indicated that a maturing $5 million drawing on the Belgian Bank
had been renewed yesterday for three more months.
He asked whether
that renewal implied that the Belgian account would not be cleared
up shortly.
Mr. MacLaury responded that the three-month period of the
renewal was a technical matter--all drawings and renewals under
the standby swap lines had three-month terms--and it did not imply
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7/13/65
that the drawing actually would be kept on the books for that period.
The Account Management hoped to have the Belgian drawings liquidated
by the end of July, but the precise timing depended on the date of
the prospective U.S. drawing on the IMF.
It was his understanding
that for technical reasons the Treasury had postponed the planned
Fund drawing, but was still expecting to make it in the month of July.
Mr. Shepardson then asked what would be done about the drawings
on the Belgian line in the event that the Treasury decided not to draw
on the IMF.
Mr. MacLaury replied that if it were not possible to acquire
the Belgian francs necessary to repay the drawings within the one
year limit the ultimate means of settlement would be by sale of gold.
In his opinion, however, the Treasury would prefer to arrange for
settlement through an IMF drawing.
Mr. Shepardson commented that when the Committee began its
program of reciprocal currency arrangements the understanding had
been that drawings would be used to counter temporary flows that
were considered likely to be quickly reversible.
While he realized
that the one-year limit established in the guidelines had not yet
elapsed in the case of the present drawings on the Belgian swap
line, in his judgment those drawings were being extended beyond what
had been originally contemplated.
Chairman Martin remarked that it would be desirable for the
Committee to continue to watch the situation with respect to the
Belgian swap line closely.
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7/13/65
Thereupon, upon motion duly made
and seconded, and by unanimous vote
the System open market transactions in
foreign currencies during the period
June 15 through July 12, 1965, were
approved, ratified, and confirmed.
Mr. MacLaury then asked the Committee's approval of renewal
of four standby swap arrangements that would mature soon, with no
changes in size or maturity.
The arrangements in question were
those with the Austrian National Bank, maturing July 26, 1965, in
the amount of $50 million, for a term of 12 months; with the Bank
of Japan, maturing July 30, in the amount of $250 million, also for
a period of 12 months; with the German Federal Bank, maturing August
9, in the amount of $250 million, for six months; and with the Bank
of France, maturing August 10, in the amount of $100 million, for three
months.
In response to questions by Mr. Mitchell, Mr. MacLaury said
that one drawing had been made on the Austrian swap arrangement since
its initiation, and that the Austrians had been following a program
of regular gold purchases from the U.S. since February, buying $12-1/2
million of gold each month.
He understood, however, that their gold
purchase program would be completed within a month or two.
Mr. Mitchell then remarked that he had had some question
about the desirability of a swap arrangement with Austria, and his
doubts were reinforced by the fact that the Austrians were buying
gold rather than utilizing the swap line.
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7/13/65
Mr. MacLaury commented that, as Mr. Shepardson had indicated,
the initial intent was to use swap drawings to deal with temporary
and reversible flows.
The one drawing the System had made on this
swap line had proved not reversible, and accordingly had been settled
in gold; and the Austrians' program of gold purchases this year was
related to earlier dollar accruals that did not appear to be reversible.
In his judgment there was no conflict between the existence of the
standby swap arrangement and the gold purchases Austria had been
making.
Mr. Daane remarked that he thought there was an advantage to
the United States in the System's swap line with the Austrian National
Bank.
Renewals of the standby swap
arrangements with the Austrian National
Bank, the Bank of Japan, the German
Federal Bank, and the Bank of France,
as recommended by Mr. MacLaury, were
approved.
Mr. MacLaury then recommended renewal for three months of a
swap drawing on the Bank of Italy, in the amount of $50 million,
that would mature on August 18.
Such approval would be a precaution
in the unlikely event that the prospective U.S. drawing on the IMF
was not made; he contemplated that the drawing on the Italian swap
would be paid off before the end of the month.
Possible renewal of the $50 million
drawing on the Bank of Italy was noted
without objection.
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7/13/65
Chairman Martin then invited Mr. Daane to comment on
developments at the three meetings he had attended in Paris the
past week.
Mr. Daane said he would not do more than touch on the
highlights of the meetings, which were of the Group of Ten Deputies,
Working Party 3 of the Organization for Economic Cooperation and
Development, and the Economic Policy Committee of the OECD, taking
place in that. order.
Only two substantive issues were discussed at
length at the Group of Ten Deputies meeting.
The first concerned
the question of renewal of the General Arrangements to Borrow; and the
second involved the disposition to be made of the so-called "Ossola
report"--the report of the Study Group on Creation of Reserve Assets.
As he had mentioned on a previous occasion, Mr. Daane said,
the General Arrangements to Borrow expired in October 1966 but their
renewal was required by October 1965.
It had been obvious in the
preliminary discussion by the Deputies at their meeting in May that
while the general sentiment was in favor of an extension, there was
considerable dissatisfaction with the structure of the GAB.
In
particular, opinions had differed with respect to duration.
Those
divergencies in view were carried forward to the recent meeting; all
of the Deputies agreed that the GAB should be renewed, despite some
dissatisfaction with certain technical aspects, but there was a sharp
division on the question of duration.
The original GAB had a four
year term, and the United States, Britain, Canada, Japan, and Sweden
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7/13/65
favored renewal for another four years.
France, Germany, the
Netherlands, and Italy favored renewal for only two years, on the
grounds that the longer term would imply too great a degree of
permanence to the GAB and would inhibit technical changes in the
Arrangements themselves.
More directly, Deputies from the latter
countries thought it would be unwise to extend the GAB for more
than two years since a study was under way of possible reforms of
the international monetary system.
Under Secretary Deming and others
presented the view that the Arrangements were not permanent since
they could be amended or terminated at any time, and could lie dormant
if not needed.
One of the major reasons advanced for a four-year
term was the possible effect on confidence of a shorter renewal.
The U.S. representatives directly rejected the view that there was
a tie between the term of the GAB and possible monetary reform.
Mr. Deming indicated that such a view implied much too inflexible
a timetable; it suggested that "new" monetary arrangements would be
in effect within two years.
Mr. Daane noted that the question of renewal of the GAB would
now go forward to the Ministers of the Group of Ten when they met in
Washington in September in connection with the World Bank-Fund
meetings.
The IMF view, as expressed by the Managing Director,
favored a four-year extension, on the grounds that the GAB dem
onstrated the existence of collective support for the international
monetary system and, more importantly, it made $6 billion of additional
resources available for the Fund.
7/13/65
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On the question of the disposition of the Ossola report,
Mr. Daane said, there was virtually unanimous agreement that the
report should be published, with France alone dissenting.
It was
decided to have the Secretariat group, including Robert Solomon
of the Board's staff and George Willis of the U.S. Treasury, work
out some minor changes in the format of the report, and to have
each country give its assent or not on the question of publication
by July 26,
Mr. Daane's personal expectation was that the report
would be published and available no later than sometime early in
the fall.
At the WP-3 meeting, Mr. Daane continued, the principal
focus was, of course, on the situation of the United Kingdom.
The
Working Party was unanimously of the opinion that the time had come
for Britain to consider implementing the earlier commitment by
Chancellor Callaghan, in his letter to the Managing Director of
the IMF, to the effect that further measures would be taken if
needed.
There was a growing lack of confidence in the private
financial ccmmunity with respect to the measures taken thus far.
Even the British Government's own forecasts now indicated a larger
deficit in the U.K. balance of payments this year than had been
expected.
British foreign trade developments were disappointing
and today's announcement showed that exports had declined further
in June.
Internally, wage and employment developments were not
satisfactory.
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7/13/65
The British representatives seemed to be somewhat surprised
by this Working Party attitude, Mr. Daane remarked.
They felt that
it was too early to expect substantial results from the measures
that had been adopted, and they thought there were indications
that those measures were beginning to take hold.
In that connec
tion they noted the flattening in the trend of retail sales,
evidencesof a slowdown in industrial production, declines in
housing starts, and a return of unemployment to its January level.
In their judgment the U.S. voluntary restraint program was having
an adverse impact on Britain's situation.
In any case, it was
the clear conclusion of the Working Party that the British should
be reviewing their situation and measures, and the British in
dicated that they were currently doing so.
There was considerable discussion at the WP-3 meeting of
the effects of the U.S. balance of payments program on international
liquidity, Mr. Daane said.
The Germans and the Swiss, in particular,
noted that they were pleased with any resultant reductions in
liquidity that were occurring, and the Germans thought that the
U.S. goal should be to attain a surplus in its international
payments.
There was some puzzlement expressed regarding the effect
of the program on liquidity in this country; the continental
representatives found it hard to understand why the repatriation
of U.S. funds had not added significantly to credit availability
in the United States.
7/13/65
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Mr. Daane went on to say that there were the usual country
reviews at the WP-3 meeting.
The paper by the OECD Secretariat
projected a surplus in the Italian balance of payments this year
of $1.4 or $1.5 billion, and a French surplus of around $3/4 billion.
The Italians were quite unhappy about the estimate for their country;
they indicated that they expected a substantial surplus but not one
as high as predicted.
The French, on the other hand, not only
accepted the Secretariat's estimate, but conceded that there also
would be a surplus in the franc area, of about $250-$300 million,
leading to a total surplus on the order of $1 billion.
The most interesting country presentation, in Mr. Daane's
judgment, concerned Germany.
It was clear that the Germans were
still struggling with an overheated econony and that they had no
intention of diminishing the degree of credit restraint being
exerted.
On the other hand, there was no intention of increasing
restraint ei:her, although there was some indication that if any
change were to be made it would be in the direction of further
tightening.
The discussion at the meeting of the Economic Policy
Committee of the OECD was, as usual, more formal than at the WP-3
meeting since the group was considerably larger, Mr. Daane remarked.
The theme was the general slackening of growth rates.
For most
of the countries represented, the 1965 growth rate was projected
to be below that of 1964.
Overall, the projected 1965 rate still
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7/13/65
averaged about 4-1/2 per cent, but projections for 1966 indicated
further slackening.
A great deal of concern was expressed by
speakers, including Mr. Ackley of the U.S., as to whether suf
ficiently expansionary policies were being followed.
For the
first time in the FPC in Mr. Daane's experience, France was
roundly criticized on that score; there was considerable discussion
of so-called stagnation in the French economy.
The representatives
of that country felt that their economy was recovering and that a
number of policy actions had been taken to assure recovery.
The
general tenor of the discussion, however, was contrary to that
view.
There also was a feeling that economic growth in the U.S.
would be slowing down, and that this country should follow a more
expansionary fiscal policy.
Indications that the U.S. authorities
stood ready to take additional budgetary actions to stimulate the
economy if necessary were noted with approval.
As to monetary
policy, as uual the U.S. was urged to tighten further.
The Germans
in particular felt that a firmer monetary policy now would give U.S.
monetary authorities additional elbowroom if it became necessary
to move toward ease before the end of 1965 or in 1966.
The discussion of the British situation at the EPC meeting
was simply an echo of that at the WP-3 meeting, Mr. Daane said.
The British were urged to take any further measures needed "in good
time" to achieve equilibrium in their balance of payments by the
end of 1966.
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7/13/65
Following Mr. Daane's remarks, Chairman Martin reported
briefly on discussions that had preceded the proposal for an
international conference on world monetary reform made in a speech
by Secretary of the Treasury Fowler on the preceding Saturday
(July 10), on a draft of which the Chairman had been invited to
comment.
He went on to note that the advisory committee on
monetary reform recently appointed by President Johnson would
meet for the first time on Friday, under the Chairmanship of
former Treasury Secretary Dillon.
Discussions of the matter
would be proceeding in coming weeks, Chairman Martin observed.
As he had advised Secretary Fowler before the latter's speech,
he was sure that the System would be as helpful as it could in
assuring that they proceeded in the best way possible.
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
June 15 through July 7, 1965, and a supplemental report for July
8 through July 12, 1965.
in the files
Copies of both reports have been placed
of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
7/13/65
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The money market was active in the past four weeks as
the banking system responded to heavy credit demands over
the June corporate tax date and beyond, passed through the
June 30 statement date, and met the large currency needs
associated with the July 4 holiday. The major money market
banks came under increased reserve pressure, and their strong
bid for Federal funds kept the rate at 4-1/8 per cent on
most days.
Indeed, given the magnitude of reserve needs and
the uncertainties of a period of large financial flows,
there was some trading of nominal amounts of Federal funds
for the first time at 4-1/4 per cent, and member bank bor
rowing from the Reserve Banks rose above $1 billion on two
days. Federal funds became redundant on one occasion as
well, and relatively large reserve excesses remained unused
at money center banks at the close of each statement week,
attesting to the complications banks experienced during this
period in managing their reserve positions.
The uncertainties, stemming from the large and, at
times, unexpected ebbs and flows in demands placed upon the
money market during the period, also posed difficulties for
the System in meeting the substantial reserve needs that
emerged. Nevertheless, the System was able to meet these
needs with only limited recourse to purchases of Treasury
bills in the market. The Treasury's willingness to run its
balances at the Reserve Banks below the $900 million level
that ordinarily prevails was a major help in supplying
reserves, and, fortuitously, various foreign operations
turned out, on balance, to supply reserves when they were
most needed. Even so, open market operations still had to
supply $564 million reserves net over the four weeks, and
day-to-day operations involved transactions of much greater
magnitudes as the System sought to avoid placing downward
pressure on Treasure bill rates.
Over $2.3 billion repurchase agreements against Govern
ment securities and bankers' acceptances were made and
terminated during the interval, and a total of $280 million
Treasury bills were purchased directly from foreign accounts.
In addition, the good availability of coupon issues throughout
the period enabled the System to provide $245 million reserves
through this medium, mainly during periods when prices were
steady or declining slightly. In fact, availability was such
that the largest daily amount of purchases ($81 million)
could be accomplished by means of a full market-go-around.
Purchases of about $250 million Treasury bills were made in
the market on June 16, but part of these acquisitions repre
sented weekly and tax anticipation bills which were permitted
to mature soon thereafter, and no bills were purchased in the
market after that date.
7/13/65
-21-
Treasury bill rates moved generally lower in the
first part of the period, as reinvestment demand arising
from maturing June tax bills was augmented by commercial
bank demand for bills
prior to the June 30 statement date.
The 3-month bill
declined to 3.77 per cent bid at one
point.
Subsequently, the return flow of bills
from
banks, higher dealer financing costs, and disappointment
at the lack of expected large-scale System buying caused
bill
rates to back up about 10 basis points.
The
absence of System demand at this time was all the more
important since dealers had built up inventories in
anticipation of such buying.
With inventories high,
dealer bidding in the last few weekly bill
auctions was
more cautious. Rates for the 3- and 6-month bills
in
yesterday's auction were set at about 3.88 and 3.93
per cent, 9 and 6 basis points higher than four weeks
earlier.
In the capital markets, the period was marked by a
further decline of stock prices and a subsequent re
covery. In contrast, prices of Treasury notes and bonds
were narrowly mixed. Quotations tended to move higher
at times when investment buying appeared but tended to
recede whenever activity receded.
There has been an
underlying confidence among market participants, however,
in the viability of current interest rates--a feeling
that drew strength from the uncertainties reflected in
the stock market.
Dealers have generally acted to
maintain their positions in coupon securities at a
high level.
The tone in the corporate and municipal bond
markets has improved somewhat since the last meeting
as a large volume of business has been transacted
around recent price levels. More recent additions of
new corporate issues to the calendar, and the possibility
that new offerings of bank capital notes may be in
the works, have prevented any major improvement in
Tax-exempt bonds remain
corporate bond prices, however.
in plentiful supply, and while investors appear willing
to place funds around current levels, they do not
seem ready to chase prices higher.
I might mention at this time that the Treasury's
August refinancing, involving somewhat over $3 billion
public holdings, will be undertaken before the next
meeting of the Committee. The advisory groups will
convene in Washington on July 27, and an announcement
of the terms might be expected the following day.
7/13/65
-22-
Market participants feel that the operation will be
routine. In view of the still-sizable supply of
longer bonds undistributed, the market expects the
Treasury to confine its financing to the short-term
area--possibly a single issue in the 2-year range.
As was reported to the Committee in the written
reports, we have ceased trading with C. F. Childs &
Company, which terminated its operations in Government
and certain other securities on June 30 after more
than half a century of activity. This withdrawal
followed capital losses in recent years in activities
unrelated to the Government securities market. The
withdrawal was accomplished gracefully and had no impact
on the market or its operations.
Thereupon, upon motion duly
made and seconded, and by unanimous
vote, the open market transactions
in Government securities and bankers'
acceptances during the period June 15
through July 12, 1965, were approved,
ratified, and confirmed.
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 have been
placed in the files of the Committee.
Mr. Noyes made the following statement on economic condi
tions:
You have probably seen, as I have, quite a bit
lately in the press and elsewhere about the "new economics."
Let me suggest that we have a "new semantics" to go along
with it. In this new semantics we refer to things as
unchanged when they are increasing at the same rate as
they were in the previous period, and as going up only
when they are going up faster than they were going up
before.
There is nothing wrong with this, so long as we
are careful to be sure that we understand one another.
It should be clear that when we say things were down a
bit from the first to the second quarter what we mean
is that they were up less, and when we say they were
7/13/65
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substantially unchanged from May to June, we mean that
they were expanding at about the same pace.
In the day-to-day production and distribution of goods
and services, we have not seen any of the pyrotechnics that
turned up in the financial and international areas in the
last four weeks. In fact, the broad aggregate measures of
income, expenditure, and physical output are almost all
continuing to move frighteningly close to the rates pro
jected around the turn of the year by our own staff, and
by most other careful analysts of the economic outlook.
This is true of GNP, which we now expect to be up about
$7 billion in the second quarter; of industrial production,
which has leveled off at the advanced 141-142 rate; of
personal income, which is actually running a bit ahead of
expectations; and of unemployment, which is a bit lower--that
is, better than--expected. As with the balance of payments,
however, we are warned that at least a part of the improvement
in unemployment is not basic. "Basic" is another word that
occupies a prominent place in the new semantics, but I must
confess I am not able to define it satisfactorily for you.
The "on track" performance by the real economy might
be presumed to provide some grounds for confidence--if not
downright optimism--as to the future. But, in fact, one
does not even have to venture out into the turbulent
financial markets or the troubled international waters to
lose any complacency he might have mustered. Both the
recent behavior of prices and apparent rate of inventory
accumulation are enough to give one pause.
I have spoken about both of these troublesome
areas on several occasions in recent months. I do not
want to seem to be crying a wolf that never comes, but
they continue to be a cause for concern, if not alarm.
Despite the slowdown in the economy (note that
here again I am employing the new semantics referred to
earlier), prices have continued to creep up. From time
to time, chere have been signs that the advanced prices
of some of the basic industrial materials, especially
the nonferrous metals, might have reached their peak
and be about to move down a little, but significant
declines have failed to materalize.
As Appendix C to the green book 1/ points out,
the upward pressure on prices has not yet been diffused
1/ The report, "Current Economic and Financial Conditions,"
prepared by the Board's staff for the Committee.
7/13/65
-24-
through the whole structure of prices and costs. One
important reason that this has not occurred has been
the general absence of inflationary expectations. The
restoration of a climate of stable price expectations
is much to be desired, and, is at least one benefit
that we can hope will flow from current moderation in
the pace of expansion.
The other major concern to which I would draw your
attention is that we have had, even in the official
statistics, a considerable inventory buildup, and there
is impressive evidence that even a greater share of
recent output than these data indicate remains in the
hands of processors and distributors. Like price
stability, the absence of rapid inventory buildup
had been, until last winter, an unusual feature of
this period of expansion, and one which contributed
importantly to its sustainability.
It is very hard for me to ascribe either recent
price behavior or the recent pace of irventory
accumulation to a maladroit monetary policy. It is
equally difficult for me to find convincing evidence
that there is any cause-and-effect relationship between
the modest restriction of reserve availability earlier
this year and the slower rate of increase in real out
put since April, especially in the light of the latest
credit developments which Mr. Koch will discuss.
Under present policy, I think it i. not unreasonable
to hope that the recent upward price movements will
turn out to be only a flurry and that we will return to
the more stable pattern which characterized this expansion
up to the third quarter of 1964. We can also hope the
accumulated inventory may be absorbed without untoward
repercussions. It is hard for me to see that a change
in policy in either direction at this time would signif
icantly increase the chances that either of these things
will happen. I am reasonably certain that a change now
would get more blame than it deserved if we subsequently
find ourselves in either an inflationary spiral or the
downphase of an inventory cycle.
Mr. Hickman asked whether Mr. Noyes had May developments in
mind when he referred to the "recent" upward movement of prices.
Mr. Noyes replied that his thinking had been based primarily on
appendix C of the green book, which generally included data
7/13/65
-25
through May.
However, some estimates of price developments in
June were given in the appendix and also in the body of the green
book.
The June estimates had struck him as being neither more
disturbing than those through May nor particularly reassuring;
they indicated that average prices were continuing to rise.
Mr. Hickman said he thought that June price developments
definitely were not disturbing.
Omitting meats and livestock,
which were responding to supply conditions, price movements in
June appeared in the main to be down rather than up; yet the
discussions in the press, like Mr. Noyes' comments, suggested a
continued bubbling up of prices.
He did not see such a situation
in the latest figures although, of course, it might appear in
data for subsequent months.
Mr. Noyes said that price movements in June evidently
were mixed, but he agreed that the rise in the overall index
probably would be due largely to increases
components.
in the agricultural
It was true the most recent flurry of increases was
a May rather than a June phenomenon, but the uptrend in average
industrial prices actually had been in process since the third
quarter of 1964.
He certainly hoped that this trend was flattening
out.
Mr. Swan asked whether Mr. Noyes felt that rapid inventory
accumulation was still concentrated primarily in a few areas or was
7/13/65
-26-
becoming more widely diffused.
Mr. Noyes replied that the official
inventory data were difficult to interpret; among other problems,
they were reported late and the original figures often were revised
substantially.
As a result, there was some risk of over-interpretation.
Unquestionably, accumulation had been rapid at steel and durable
goods manufacturing industries and, recently, at automobile dealers.
Members of the Board's staff agreed that inventory growth recently
had been rapid in the aggregate and reasonably widespread, but there
were differences of view about degree.
Some thoughtful analysts on
the staff felt that the accumulation had been much larger and more
widespread than the official figures indicated.
Mr. Ell.s noted that there was a reference in the staff
materials to the large additions to industrial capacity coming on
line as capital expenditures continued high.
He asked whether an
estimate was available of the current rate of capacity utilization
in manufacturing.
Mr. Noyes replied that present guesses of the rate of capac
ity use were in the neighborhood of 90 per cent.
However,here also
he was highly skeptical of the advisability of pressing the figures
very far.
The margins of error in capacity figures were quite large,
particularly relative to the sizes of the changes that might occur in
the short run.
From what was known about additions to capacity and
changes in the rate of production, it seemed to be a reasonable
presumption that presently and for some time to come capacity would be
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7/13/65
growing faster than output; that was about as far as he was prepared
to go.
Mr. Hickman commented that business cycles often originated
in inventory developments, and in his judgment the inadequacies of
present inventory statistics placed the Committee in the dangerous
position of having to guess about the nature of actual events.
He
noted that the Federal Reserve was in process of discontinuing data
collection for department stores, and indicated that it might be
desirable for the System to undertake to learn more about inventory
developments than presently available data revealed.
Perhaps the
Board's staff might explore the possibilities of such a program
and make recommendations.
Mr. Noyes observed that the inadequacies of present
inventory data did not result primarily from lack of resources
for compilation--the Government was devoting a substantial volume
of resources to that purpose--but from the intransigence of the
statistical problems.
Thus, there was some doubt in his mind
about the amount of improvement that could be achieved by the
addition of System resources to those presently available.
However,
he would be happy to ask the Board's Division of Research and
Statistics to make some preliminary investigations of the possibilities
for data improvement.
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7/13/65
Mr. Hickman remarked that the System might have one
possible advanage in that businesses frequently were willing
to report information to it that they were reluctant to reveal
to others.
Chairman Martin noted that inventories had long been
recognized as one of the most seriously deficient areas in the
body of available statistics.
He recalled that in the mid-1950's
the Board had sponsored a study by a consultant committee of the
problem in that area, as well as in certair others, at the request
of the Subcommittee on Economic Statistics of what was then known
as the Jcint Committee on the Economic Report of the Congress.
agreed that it would be desirable to continue work in the area.
Mr. Koch then made the following statement concerning
financial developments:
Several months have now elapsed since the two modest
moves in the direction of monetary restraint taken in
February and March. Therefore, I should like to address
my brief remarks this morning to three questions: (1)
What have been the apparent results of these moves; (2)
with the benefit of hindsight, have these results, on
the whole, been appropriate; and (3)what do they suggest
as to the most appropriate posture for current policy.
Recert policy can appropriately be characterized
as one of moderate restraint. The oft-maligned but still
useful short-run guide to policy, free or net borrowed
reserves, has changed from a positive figure of about
$100 million on average over the three months ending with
January to a negative figure of between $150 and $200
million recently. Member bank borrowings have risen
from about $300 million to almost $600 million. Changes
of almost $300 million in these indicators are large ones
for such a short period of time.
He
7/13/65
-29-
This rather sharp increase in the degree of pressure
on bank reserve positions has been occasioned by a desire
to achieve tauter money market conditions, conditions
more consistent with the 4 per cent discount rate adopted
last November. Even so, we have seen the Treasury bill
rate become quite disassociated, for a time at least, from
more restrictive bank reserve positions and other indicators
of the tone and feel of the money market. Most recently,
though, bill rates appear to be rejoining the money market
team.
Turning to the more basic financial indicators of
policy, events of the recent past indicate once again how
much financial developments depend not only on monetary
policy but also on market forces as well as other policy
measures. With the liquidity of business corporations
becoming more limited relative to financing needs, their
demand for bank loans has continued strong, and they have
stepped up the volume of their capital market financing in
recent months. This has occurred at a time when banks
have been under somewhat more reserve pressure, when
their liquidity has declined to a relatively low level,
and when time and savings deposit grcwth has slackened,
following the initial rapid inflow last winter when
interest rates on these deposits were raised.
Banks have had to liquidate Government securities
and on balance have apparently reduced their rate of
acquisition of other securities in order to meet the
strong loan demands. There was a sharp rise in bank
holdings of securities other than U.S. Governments in
June, but the rise was concentrated at New York City banks
and was no doubt associated in large part with a temporary
and unu:ual spurt in Federal agency and municipal tax
warrant financing.
The end result of all of these banking developments
has been a continuing quite rapid rate of expansion of
total reserves and credit, but with a larger proportion
of the reserves having to be obtained by borrowing and
with credit obtainable only at somewhat higher costs and
under somewhat more restrictive lending terms. Money
supply growth has been quite moderate for the year to
date, about 2-1/2 per cent, almost all of which was
concentrated in June.
The cost and availability of most types of capital
market financing, as well as bank financing, has become
a little more restrictive in recent months, due in the
7/13/65
-30-
main to a large increase in new flotations of corporate
and municipal bonds, and to the public's reappraisal
of stock values. Thus, yields on both new corporate
bonds and on outstanding State and local government
bonds have risen about 25 basis points above the early
year levels.
Average stock prices are down about 5
per cent from their mid-May peak, and therefore dividend
yields are up about 20 basis points.
So much for what has happened. Has this been
appropriate? I think so. We have permitted sharp
expansion in bank reserves and bank credit to occur, but
have allowed these expansions to have some self-limiting
effects, through pressure on member bank borrowings in
the case of reserves and on interest rates and other lending
terms in the case of bank credit.
Some of the recent credit expansion has been due to
temporary factors such as the prolonged steel strike threat.
Moreover, most of the expansion is but one side of a financial
coin, the other side of which is savings--savings the holders
of which wish to hold in liquid form.
We need much more
information and analysis of who owes the increasing volume
of credit and the resources they are likely to have to
service and repay it, before we can conclude from the total
credit figures, or from the bank proportion thereof, that
the recent large credit rise poses a threat to further
sustainable economic growth.
As for the relationship of recent policy to inter
national financial flows, whatever domestic credit easing
effects might have resulted from reduced U.S. foreign
lending and investing and the repatriation of liquid funds
previously held abroad have been more than offset by the
combined restraining effects of our policy and strong
domestic credit demands.
Finally, what does all this suggest as to the most
appropriate policy under current conditions? In my view,
the restraining effects of past policy changes and market
developments have not yet all been felt. For some time
business and bank liquidity have been declining gradually
but steadily; now bank credit terms and terms for long-term
financing are becoming more restraining. These are the
financial terms that most directly affect decisions to
spend and invest.
Under these circumstances, my own preference is for
no change in policy at the present time. I say this with
recognition of the facts that the full effects of policy
7/13/65
-31-
come only after substantial lags and that we may be in the
later stages of the current economic expansion. Further
restraining action strikes me as too risky, both because
of the uncertain basic strength of the domestic economic
situation and because of the uncertainties, at least for
the short-run, created by recent stock market developments.
In any case, because of the upcoming Treasury financing,
any further restraining move would have to be prompt in
timing and moderate in nature.
Easing action also seems to me to be premature. With
lasting balance of payments improvement still a hope rather
than a reality, the domestic economic situation should more
clearly call for easing before we actively seek it through
monetary policy.
Mr. Hersey then presented the following statement on the
balance of payments:
In evaluating the present state of the balance of pay
ments, the two chief considerations to bear in mind are
that the initial impacts of the President's program have
been large, and that a very substantial deterioration has
occurred since last autumn in the current account--specifi
cally, a shrinkage in the merchandise trade surplus.
Just because the initial impacts of the President's
program on the capital account have been large, the
program cannot be expected to hold down the deficit later
in the year in anything like the degree it has done so
up to now.
The shrinkage in our trade surplus since last autumn,
which amounts to more than $2 billion at an annual rate,
has been hidden from casual view by the distortions of
foreign trade movements caused by the dock strike. These
distortions made the second-quarter trade surplus larger
than it would otherwise have been, and, along with the reflux
of bank credit, this produced a balance of payments surplus
in the second quarter instead of a deficit.
With data now in for the six-month period December
through May, it is evident that the shrinkage of the trade
surplus has gone farther and faster than was anticipated
in projections of the balance of payments made by an inter
departmental group not very long ago. Imports have been
rising sharply. In the second quarter, after adjustment
for the strike distortion, they were probably already above
7/13/65
-32-
the $20 billion annual rate projected for the year.
Exports, on the other hand, have remained near last autumn's
high level, and below the lower edge of the wide range that
was allowed for in the export projection.
The various considerations I have mentioned make it
likely that the balance of payments deficit for the full
year 1965 will be nearer $1-1/2 billion than $3/4 billion.
(These were the two ends of the overall deficit projection.)
With a seasonally adjusted net deficit of $1/2 billion
behind us in the first half, a seasonally adjusted deficit
of the order of magnitude of $1 billion lies ahead in the
second half.
It would be premature to interpret the leveling off
in our exports since the autumn of 1964 as a sign of a
deteriorating competitive position for the United States.
In part, it has been due to agricultural rather than
manufactured exports. In part, like the British, we are
being affected by the leveling off in import purchases
of nonindustrial countries. A sign of more fundamental
trouble may be the sharp rise in our imports of consumer
goods and capital equipment, as well as of steel and
other materials.
As the autumn period of seasonal strain on sterling
approaches, the question of its possible impact on the
U.S. balance of payments is going to become acute. I
should like to say a little about this.
Whatever shadings of views there may be about Britain's
problems--whatever the degree of pessimism about Britain's
ability to work out of its difficulties in the longer run,
and whatever the degree of optimism that Britain's present
policies will deal successfully with :he immediate crisiseveryone can agree on one thing, and that is that British
im:orts are going to fall significantly before long. Hopes
of a marked acceleration in British exports are diminishing
in the present world trade situation, and the urgently
needed short-run adjustment in Britain's trade balance
must therefore be made mainly in imports. British imports
are either going to fall as a result of present policies,
or, if not, then as a result of more drastic measures which
will become necessary.
The fall in British imports may come at a time when
U.S. imports may be leveling off after the steel settlement
has been reached, French and Japanese imports may not yet
be rising, and anti-inflationary policies may be having
increasing success in Germany and other countries. Under
such conditions, a large fall in British buying abroad, no
matter how it is produced, will have a depressing influence
7/13/65
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in the world economy. An apparent dilemma will then be
posed for U.S. monetary policy:
it will be more evident
to everycne than it is right now that the U.S. balance
of payments needs strengthening yet drastic anti-inflation
ary measures by the United States at that time might cause
still further retardation of economic expansion throughout
the world, and even more difficulty ahead for our exports.
It seems to me that that will be a time above all
for us to accept a temporary further worsening of our
balance of payments, if it comes, without precipitate
counteraction. Under such circumstances we should rely
primarily on inter-central bank cooperation for defense
of the dollar, rather than on drastic restriction of
credit. I would like to add to this one other observation.
Our experience of a massive outflow of direct investment
and bank loans last January and February shows how im
portant it is that we definitely rule out exchange controls
from our chinking and that changes in the I.E.T. be completed
and go into effect before they are needed,
lest anticipatory
capital outflows be provoked again. And still one more
thing should be added. If, despite all expectations and
intentions to the contrary, sterling devaluation is forced
upon the British Government and British imports are reduced
in that way instead of some other, our dilemma would still
be essentially the one I have outlined, though heightened
by chances of speculative outflows; and the dangers for the
world, and for ourselves, of resolving the dilemma by
drastic credit restriction might be even greater.
I do not think that future possibilities of deflationary
strains in the world economy should influence Federal Reserve
policy in the meantime. How the British pull through
depends now primarily on what happens to the current account
in their balance of payments. Small interest rate variations
are of very minor consequence at present for capital move
ments to or from sterling. What happens to their current
account depends primarily on themselves, in the short time
perspective with which we are now concerned. So it seems
to me that Federal Reserve policy should be determined
now, as at any time in the last several years, by the
possibilities of gaining long-run benefits from moderate
slowing of bank credit expansion: benefits for price
stability, for economic growth uninterrupted by boom or
recession, and for the gradual approach of international
equilibrium. This way of looking at the policy problem
will continue to be relevant, it seems to me, until a
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7/13/65
time when it becomes clear that business cycle forces are in
a position such that continued restraint would precipitate
an otherwise avoidable recession.
Mr.
llis said he gathered from Mr. Hersey's remarks that the
surplus in the U.S.
trade account in 1965 would be less than the $6.7
billion recorded in 1964.
He asked whether Mr. Hersey would hazard
a guess as to what the 1965 figure would be.
Mr. Hersey replied that he would expect the trade surplus
this year to be on the order of $5 billion.
In his statement he had
noted that the shrinkage thus far this year from last autumn had
been over $2 billion at an annual rate,
but the surplus in
the autumn
had been at a higher rate than in 1964 as a whole.
Mr. Balderston commented that, as he understood Mr. Hersey's
remarks, he (Mr. Hersey) thought that domestic goals should be
stressed in formulating current monetary policy; that selective
controls should be abjured in dealing with the balance of payments
problem; and that in the event of devaluation of sterling or a
worsening in the U.S. balance of payments, main reliance should be
placed on cooperation among central banks for the defense of the
dollar.
If that was an accurate summary, how did Mr. Hersey think
it would be possible to obtain the cooperation of foreign central
banks if they already held all of the dollars that they wanted?
Mr. Hersey responded that he had not meant to imply that
U.S. monetary policy now or in the near future should be determined
solely on the basis of domestic considerations.
In his judgment it
7/13/65
-35
was important to continue to work toward states of credit availa
bility and capital market conditions that would facilitate approach
to equilibrium in the country's international payments; and he
believed that domestic price stability was of crucial importance
to the balance of payments.
As to inter-central bank cooperation in the hypothetical
event of sterling devaluation, Mr.
factors should be borne in mind.
be strong after devaluation,
Hersey continued,
he thought two
First, sterling presumably would
and Britain would be among the countries
able to assist in the defense of the dollar.
Secondly, much of the
reflow of funds to Britain that probably would develop would be
from the
continent, and insofar as it involved dollar holdings it
would come, to a great extent, from the Euro-dollar market.
cordingly,
even though foreign commercial bank holdings in
Ac
the U.S.
might tend to be drawn down, the Euro-dollar market would be tight
and that tightness would be communicated to national money markets
on the continent.
Given the kind of world outlook at that time
that he had outlined and that had been pictured at the recent Paris
meetings, he thought it would be not impossible to get the continental
central banks to agree that a tighter U.S. monetary policy was an
improper prescription for dealing with the situation that would then
face the United States.
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7/13/65
Mr. Maisel asked whether Mr. Hersey would agree that the
kinds of price increases that had occurred recently, such as in
industrial materials, served to improve the competitive position
of the United States and thus were favorable to the U.S. balance
of payments.
Mr. Hersey replied that increases in prices of steel and
machinery would not help the U.S. payments balance.
Mr. Hickman
remarked that price increases for nonferrous metals presumably
would be helpful to the extent that this country was a net exporter
of such metals.
Mr. Hersey said he doubted that the U.S. was a
net exporter of nonferrous metals at present.
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.--What, on balance, are prospects for economic
activity in the second half of the year, taking into account such
influences as the recent behavior of the stock market, the continued
accumulation of steel inventories, and Federal fiscal measures?
On balance, the most likely prospect continued to be for a
moderate rate of expansion in aggregate output in the second half
of the year. GNP appears to have increased some $7 billion in the
second quarter to an annual rate of about $656 billion. As demand
forces can now be assessed, gains in the next two quarters may be a
little larger than this, but are not likely to be large enough to
prevent some increase in the unemployment rate and some decline in
the rate of capacity utilization in manufacturing.
The recent stock market decline apparently has had little
effect on business activity. Consumer purchases of autos rose
sharply in June and total retail sales remained strong. No
7/13/65
-37-
important reappraisals of business plans for fixed capital
expenditures have been reported.
Recent inventory developments continued to be dominated
by the buildup of stocksof steel and autos. The rate at which
steel users are accumulating stocks of that metal has slowed markedly
since April, but total steel stocks continue to rise rapidly as
mills restore inventories depleted earlier. Steel inventories are
now as high in relation to consumption as at the peaks of both the
1962 and 1963 buildups, and are considerably higher in absolute
terms. The prospective sharp decline in steel output after the
conclusion of present wage negotiations will be a contractive
influence on the economy, but its effect on the rate of overall
expansion should be moderated by a more expansive fiscal policy
and continued strength in other areas.
In this connection, recent surveys suggest continued high
levels of consumer spending for durable goods and rising business
expenditures on new plant and equipment; and outlays by State and
local governments no doubt will continue to advance at a steady
pace. Consumer spending will be stimulated by fiscal policy
measures, including the large and retroactive increases in social
security benefits expected to be enacted shortly and the recent
reduction in excise taxes. The Federal budget position on a
national income (annual rate) basis is likely to shift from a
surplus in the second quarter estimated at $1.3 billion to a
deficit in the second half of the year of almost $4 billion.
Similarly, the full employment surplus will show a large decline.
(2) Productivity and costs.--What do recert and prospective develop
ments in productivity and costs portend fcr prices and profit margins
in the next few months?
Recent tendencies in productivity and unit labor and materials
costs have been a little less favorable than earlier this year.
These tendencies as well as prospective developments, however, do not
in themselves appear to foreshadow widespread increases in costs and
prices, or any appreciable lowering of corporate profits and profit
margins from the high levels reached in the first quarter and
probably in the second quarter also.
The advance in productivity in manufacturing may have
slackened somewhat in the second quarter as growth in output slowed.
Meanwhile wage rates continued to advance at about the same pace as
earlier. As a result, the sizable further decline in unit labor
costs which occurred in the first quarter may not have been extended
7/13/65
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in the second. Costs of some industrial materials rose further but
large increases were confined mainly to nonferrous metals and mill
products.
On the assumption that output will continue to expand
moderately in the near future, productivity should continue to
rise, although probably less sharply than earlier in the expansion.
Unit labor costs are expected to be relatively stable. Although
future wage increases cannot be predicted, there is a chance of
a larger-than-guidepost settlement in steel, which might firm labor
demands in other contract negotiations. Recent settlements, however,
continue to show substantial diversity, reflecting variations in
specific industry conditions, with little spreading of the larger
than-guidepost increases that have occurred in some industries.
Wages, particularly of the 2 million workers covered by
escalator clauses, also will be affected by the step-up in consumer
prices arising mainly from reduced supplies of meats and of some
fruits and vegetables. Some of these supply and price developments
are temporary, but higher meat prices could persist into next year.
To some extent, the rise in consumer prices is being moderated by
the recent excise tax reduction.
With competition continuing active, management has held a
fairly tight rein on both overhead and direct costs. The high and
rising level of expenditures for new plant and equipment this year
will result in larger additions to industrial capacity than last
year. With the labor supply expected to grow more rapidly, manpower
supplies should be ample except for a few specialized skills.
In the steel industry, a package settlement above the
guideposts is possible, and the companies have indicated that an
increase as large as that in aluminum would be followed by a price
rise. There is a real question, however, whether such a price
increase could stick under the market conditions that are likely
to prevail for some time after a settlement; production will be
curtailed as large inventories are liquidated, and foreign
competition will continue.
(3) Foreign trade.--In the light of current economic and financial
trends in other countries, what can be said about the outlook for
world trade, and for U.S. exports in particular?
Key questions about the outlook for world trade and U.S.
exports concern the extent and timing of the adjustment of Britain's
payments position, the pace of economic advance in other industrial
7/13/65
-39-
countries, and the payments positions of the nonindustrial nations.
Common Market imports in the near term are not likely to be affected
by the controversies recently in the news.
On the whole, the probability of rapid growth in world
trade over the rest of the year appears small.
Strengthening of
demands in a number of industrial countries may be counterbalanced
by reduction of demands in Britain, necessitated by its payments
deficit, and perhaps also by slowing of import growth in non
industrial countries.
In the circumstances, prospects for
significant increases in U.S. exports in this period seem poor.
The gain over 1964 levels may well be substantially less for
exports than for imports.
From the end of 1962 through 1964 world trade expanded
by 25 per cent and U.S. exports by somewhat more. Behind this
rapid expansion of trade lay an upsurge in activity in all
industrial countries, beginning in 1963, which contributed also
to higher export earnings of the nonindustrial countries.
In
1964, growth in aggregate world trade and in U.S. exports owed
a good deal to expanded purchases by the nonindustrial countries.
Slower growth of activity in industrial countries abroad during
1964--with recessions in Italy and France and a slowing of the
previously very rapid Japanese expansion--was accompanied by less
rapid expansion of trade among the industrial countries; purchases
by these countries from nonindustrial countries also rose less
rapidly.
Britain has now taken measures restricting demand but the
impact of these measures on domestic activity and the external
Imports in the three months
position has sc far not been large.
March-May were not much changed from the rate of the fourth quarter
Existing
of last year, and the trade deficit remained large.
measures may reasonably be expected to have an increasingly
restrictive impact on imports as the year goes on, but more drastic
measures may still prove necessary.
In continental Europe, recovery from recession was firmly
established in Italy by the turn of the year and guarded optimism
about future trends of activity in France began to appear in early
spring. Stimulative policy measures taken by these countries in
the past three months should help assure a stronger demand situation
Elsewhere on the continent, demands
in the latter half of the year.
have on the whole continued to press on plant capacity and labor
supplies, and little alteration in these conditions is in prospect.
7/13/65
-40-
Anti-inflationary efforts, aided by higher imports from North
America, have been having some success; export price advances
may be slowing down in Europe whereas U.S. export unit values
were beginning to show increases late last year.
In Japan, activity leveled out around the end of 1964
after monetary policy had been tightened because of payments
difficulties and overbuilding of inventories and fixed investment.
However, Japanese exports began to rise rapidly during 1964 and
monetary policy has been eased this year; these developments
should eventually lead to renewed rises in activity and in imports.
In the nonindustrial countries as a group, imports had
by late last year caught up with the earlier expansion of their
export earnings, and reserve positions began to weaken, par
Imports of nonindustrial
ticularly in Australia and South Africa.
One possible indication
countries can now be expected to level out.
that a leveling out has already begun is that recent U.S. exports
to this group as a whole apparently have been below the advanced
levels of last autumn. At best, the nonindustrial countries are
not likely to be adding much to total world demand in the second
half of 1965.
(4) Federal finance.--What will be the likely implications of
Federal cash needs and debt management for credit markets in the
second half of 1965?
The Federal Government's demand on credit markets are
likely to be relatively moderate in the second half of 1965.
Because of the large cash balance at the end of June, the
Government probably will need to raise less new cash this year
than it did in the second half of 1964, even though the cash
deficit may be little different.
As in 1964, most of the new cash is likely to be raised
in the bill area, principally in the form of tax bills which can
be paid off out of the relatively large cash surplus expected
for the first half of 1966. However, the net increase in out
standing bills from Treasury operations in the second half of
1965 may turn out to be somewhat smaller than in the same period
of last year, when it was $5.5 billion. Nevertheless, the
effect of the increase will probably be sufficient to exert at
least seasonal upward pressure on bill rates from the supply
side as the year progresses.
7/13/65
-41-
With respect to long-term markets, the Treasury accomplished
enough debt lengthening through its January advance refunding and
May refinancing to keep the average maturity of the debt at the
end of this year about the same as at the end of 1964. Therefore,
the pressure to engage in further debt lengthening is not as great
currently as it has been in the past. This does not, of course,
preclude such an action if market conditions are propitious. In
view of the present state of the bond market, including relatively
heavy dealer inventories of bonds, however, the Treasury is un
likely to consider major debt lengthening operations in the period
immediately ahead.
In the relatively moderate-sized Augus: refunding
(the public holds only $3.2 billion of the maturing securities), it
seems likely that the Treasury will stay in the short-or snort
intermediate-term area.
(5) Bank credit and money.--What factors lie behind the sharp
increases in bank credit and money in June, and are such factors
likely to continue to operate over the near term?
The sharp June increases in bank credit and money stemmed
in part from temporary or unusual circumstances. Nevertheless, the
underlying forces influencing both series clearly appear expansionary.
The unusually heavy June borrowing by business is one indication of
the current strength of loan demand. However, owing to liquidation
of the June 30 loan bulge and in the absence of Treasury financing,
change
the end-of-month bank credit series is likely to show little
or decline on a seasonally adjusted basis in July.
Part of the $3.5 billion bank credit rise in June was accounted
for by temporary loan expansion in the last week of the month. This
included substantial borrowing by securities dealers to cover
redemption of maturing RPs held by nonfinancial businesses. As
usual, these borrowings were repaid within a short period; nearly
all of the security loan increase had been liquidated by July 7.
In addition, there was a sharp and unusual rise in bank holdings
of securities other than U.S. Governments in June. The rise was
concentrated at New York City banks and was no doubt associated in
large part with two large new Federal agency financings and the
issuance of a sizable New York City tax note.
The strong upward trend in business demands for bank loans
could moderate somewhat over the near term; corporations may divert
more of their external financing from banks to the capital markets.
This possibility is suggested by the fact that bank financing has
been used to a far greater extent than might normally have been
expected to finance this year's growing external needs, particularly
7/13/65
-42
in view of the continued firming in interest rate and other lending
policies at the large city banks.
Prospective declines in steel
and auto inventories, and possible further reductions in the rate
of accumulation of other stocks, also would tend to moderate demand
for bank loans.
With respect to the money supply, the sharp June rise helped
to meet the need to add to cash balances in view of the steadily
increasing volume of money transactions.
Money supply growth was
limited early in the year by a large buildup in time and savings
deposits and subsequently by higher than usual Treasury balances
at commercial banks.
The projected rapid drawdown of Treasury balances in late
July and early August will tend to increase private money holdings.
Even with the sharp rise in June, growth in the money supply in the
first half of the year as a whole, at about 2-1/2 per cent, was at
a considerably lower rate than the increase in GNP. This suggests
some further need to rebuild cash balances for transactions purposes
in the months ahead.
(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?
In recent weeks net borrowed reserves have remained within
the $150 mill.on to $210 million range that has prevailed since
rates and
But during the past two weeks Treasury bill
early May.
persistently
have
traded
funds
dealer loan rates have risen, and Federal
The 3-month
at 4-1/8 per cent, with occasional trades at. 4-1/4.
Treasury bill has moved above 3.85 per cent, up from 3.77 per cent
in late June, as relatively heavy bill inventories pressed against
smaller than expected public and official demands. In the past
week New York City banks have returned to a basic reserve deficiency
position of more usual size.
Assuming net borrowed reserves continue in the recent range,
bill rates seem likely to remain between 3.80-3.90 per cent, with the
odds favoring the upper end of the band. At present, no substantial
downward bill rate pressures appear in the offing. The early summer
period of heavy needs for reserves has passed and the System is not
likely to be a major market factor over the next four weeks. The
Treasury's August refunding is likely to be routine and to have
little effect on bill rates. The exceptional recent tautness in
7/13/65
-43-
the Federal funds and dealer loan markets may lessen in the period
ahead, but these markets may be expected to show more tightness
than in June.
The money market conditions specified above are not likely
to be associated with significant pressures on long-term interest
rates, although the municipal market remain,. heavy and upward
yield pressures there may persist. Congestion has eased in the
corporate market, at least temporarily. The Treasury will probably
not test the long-term Government market in the August refinancing.
The race of expansion in bank credit and money over the
next few months probably will fall off from the high June rate, as
discussed under Question 5. Private demand deposits, which showed
little net change during the first 5 months of the year, are likely
to increase, but much less rapidly than in June. Perhaps, on balance,
a growth rate of around 4 or 5 per cent would be a reasonable expec
tation for the July-September period. In the same months last summer
private demand deposits grew at a 7 per cent rate.
Chairman Martin then called for the go-around of comments and
views on economic conditions and monetary policy, beginning with
Mr. Treiber, who made the following statement:
Business activity continues to expand, and further
growth is in prospect. We have been seeing a more cautious
reassessment of future prospects, and in some quarters a
considerable amount of pessimism. But in our view the
underlying sources of strength in the economy remain intact
despite the prospect of some inventory liquidation later in
the year. The positive factors include good business profits,
business plans for further increases in plant and equipment
spending, the stimulus to consumer sperding expected from the
recent excise tax cut, and a further expansion in combined
spending of Federal and State and local governments on goods
and services in the months ahead.
Even though the statistics on gross national product
show a much higher rise in the first quarter than in the
second quarter of 1965, after adjustments are made for
special factors related to the steel and automobile indus
tries the advance in the second quarter was probably as
great as that of the first quarter. It appears probable
that the overall performance of the economy during the
second half of 1965 will be in line with the projections
made by the Council of Economic Advisers and our own
expectations at the beginning of the year.
7/13/65
-44-
Trends in domestic prices, both wholesale and retail,
are disturbing. There continues to be a noticeable upcreep
in prices for industrial commodities; while the rate of
advance is still modest in comparison with the inflationary
surge of the mid-1950s, it contrasts with the stability
achieved during the early portion of the current expansion.
Labor costs per unit of output in manufacturing are still
below a year ago but they have not been declining for the
last several months. Against this background the wage
negotiations in the bellwether steel industry are highly
important. A settlement that would increase costs could
have serious repercussions on the overall cost structure
at home and on the international position of the dollar.
On the international side, an unusually favorable
second quarter has followed an unusually unfavorable first
quarter. For the first time in many years we are seeing
a quarterly balance of payments surplus. But this second
quarter surplus rests largely on special, and nonrecurrent,
factors. There is little evidence of a fundamental improve
ment in our basic balance of payments position. A slowing
down in the rate of economic expansion in some industrial
countries and balance of payments problems in a number of
nonindustrial countries make it difficult to expect our
exports to grow at the rate they have in recent years. On
the other hand, our imports have been increasing more
rapidly in the light of the high general demand at home,
augmented by a special demand for steel. Indeed, so far
this year our trade surplus has been considerably less
than last year. It is not clear how much the reduction
is due to the dock strike, but it is clear that our costs
at home are a basic factor in the effort to improve our
balance of payments position.
As for the credit situation, banks have been meeting
heavy loan demands somewhat more selectively and on
moderately tighter terms. Rising loan-deposit ratios,
declining holdings of Government securities, and sub
stantial net borrowings from the Reserve Banks are
indicative of pressures on bank liquidity positions.
So far, however, the continuous deterioration of those
indicators of bank liquidity does not seem to have
materially affected the willingness of the banks to
accommodate customers. Banks have been adding to their
loan portfolios without reducing total investments. Bank
credit has continued this year, as it has in recent
years, to expand more rapidly than has overall production.
In fact, the rate of expansion so far this year has
been faster than in the preceding years.
7/13/65
-45
It seems to me that in view of the continued strength
of domestic business accompanied by further price advances,
the absence of signs of a fundamental improvement in our
balance of payments, and an excessive growth in bank credit,
monetary policy should move toward a somewhat firmer tone.
The Treasury will be announcing a refunding in the last
week of July. This should be a routine operation, and
therefore should not inhibit any change an monetary policy
now.
In view, however, of the need for an "even keel" policy
in connection with the financing, any change in monetary
policy should be modest.
Mr. Ellis said that, to borrow Mr. Noyes'
new semantics,
the
most noteworthy economic news in New England was of "no change" in
employment--that is, a steady and strong employment expansion.
Commencing last fall, jobs in durable goods factories expanded right
through the period of the automobile shutdown and had continued upward
ever since.
Expanded operations in shipbuilding
and aircraft engine
manufacturing had lifted the regional transportation equipment index
some 20 points in 12 months.
The durables index was up 15 points in
eight months.
Quite naturally, Mr. Ellis continued, that strength had been
translated into lower unemployment and longer work weeks.
work week, at 41.1 hours,
just matched the U.S.
In May the
Unemployment
average.
rates in May ranged from 2.6 per cent in New Hampshire to 4.6 per cent
in Massachusetts, with a 4.2 per cent regional average.
Insured un
employment at mid-June reached the lowest point recorded since November
1956.
Also reflecting the employment expansion were the reclassifications
of three New England cities, leaving the region with only one city in the
"labor surplus" category of 9 per cent or more unemployed.
7/13/65
-46Mr. Ellis remarked that the aggregate regional measures of
consumer income, consumer spending, orders to manufacturers, manu
facturing output, and construction had "fallen off" in terms of the
new semantics--they all continued to move upward, according to the
latest data, but generally at more modest rates than typical of the
first-quarter trends.
The financial counterparts of the trends also
continued to show substantial expansion rates, all reflected in
some way in the single statistic that total loans and investments of
First District weekly reporting banks during the three weeks ending
June 30 averaged a plus 9,5 per cent in year-to-year comparisons.
Evidence of how the District's banks were using the reserves being
created showed up in the 21 per cent year-to-year gain in real
estate loans at weekly reporting banks.
Turning to issues of policy, Mr. Ellis offered the view that
one of the most critical elements of the economic outlook was the
rate at which additional industrial capacity would come effectively
on line in the next 6-9 months.
Although the country was entering
the fifth year of rising capital goods outlays, capacity utilizatior
rates had continued to rise to their present level of 90 per cent
or higher on average.
Of course, that implied that specific and
important individual industries had been running measurably above
90 per cent.
7/13/65
-47Mr. Ellis noted the long awareness of the historical
evidence that cost-push inflation pressures edged prices upward at
such utilization levels.
The pervasiveness of industrial price
advances since last fall and the strengthening in their trend--as
shown in the green book appendix--offered evidence that the economy
might well be traversing the jagged edge of inflation.
that, on page 11 of part II, the green book said:
He noted
"The index for
industrial commodities, which had risen 0.2 per cent in May, edged
up another 0.1 per cent in June.
The increase through the first
half of the year amounted to 0.7 per cent--almost the same as the
rise in the fourth quarter of last year."
All of this emphasized
the critical importance of new capacity coming on line faster than
the foreseeable increases in demand stemming from the effect of
the social security program superimposed on steadily rising consumer
spending, which already was running 7 per cent above year-ago levels.
In that context, Mr. Ellis said, perhaps he should feel
somewhat relieved by his own judgment that the U.S. trade balance
this year was likely to fall substantially below the $6.7 billion
level of 1964.
That would help in a small way to relieve domestic
supply pressures.
Such a result would be of little comfort, however,
in view of the country's need to maximize the trade component of
its balance of payments.
-48-
7/13/65
As usual, Mr. Ellis remarked, a choice of monetary policies
for the period ahead had to recognize two major unknowns:
(1) the
strength of credit demands that would emerge, and (2) the lag in
impact of existing and recent monetary policy.
Concerning future
credit demands, bankers had reported in the credit survey that
they saw no letup in the recent unusually strong demands.
Coupled
with that was some evidence that business liquidity had reached a
point requiring increasing reliance on bank financing, as Mr. Koch
had noted.
Concerning the lag in policy impact, Mr. Ellis noted that
that constrain: gained importance the closer in time the cyclical
inflection points in the trend of the economy were approached.
That fact in turn seemed to reinforce a natural tendency to make
no policy change--to wait and see.
In that context, Mr. Ellis found both reassurance and some
guidance by looking at the course of the Committee's policy over the
past twelve months.
In successive probing actions, the Committee
had moved from a posture of slight monetary ease, characterized by
net free reserves of $78 million and member bank borrowing averaging
$278 million, to slight restraint, with net borrowed reserves of
$174 million and borrowing of $539 million, using 4-week averages.
Except for the discount rate move timed with the U.K. rate action
last fall, at no single point had it been clear to all that an
7/13/65
-49-
overt, major policy move was appropriate; but, as Mr. Koch had
observed, the small incremental moves the Committee had made added
up to a significant total change.
He concurred in Mr. Koch's
judgment that those policy moves had been appropriate; the Committee's
position was much better today than it would have been if it had not
made successive small moves in the past twelve months.
token,
By the same
he believed the Committee would be in a sounder position six
and twelve months hence if it continued that basic probing action.
It was Mr. Ellis' understanding that within the framework
of unchanged money market conditions the Account Manager was working
with a net borrowed reserve target range centered at $150 million,
a target first adopted at the Committee's May 25 meeting.
In his
judgment it was appropriate to make a further slight step along the
path the Committee had been following.
Accepting the staff's
description of the recent money market relationships in which net
borrowed reserves had remained within a $150-$210 million range for
nine weeks and, therefore, not expecting substantial impacts on
money rates or money market conditions, Mr. Ellis recommended
establishing a net borrowed reserve target centered at $200 million.
Over time, member bank borrowing should be expected to average around
$550 million if credit demands continued to show their recent strength.
The real objective of such a move, Mr. Ellis said, was to
continue the course of gradual probing the Committee had followed.
-50
7/13/65
If credit demands strengthened in the fall, the Committee's policy
would have been firmed slightly to hold the surge within bounds.
If credit demands weakened in the fall, it would have established
a base from which a sharp policy move could be expected to have
more impact.
Mr. Irons reported that there had been further expansion of
economic activity in the Eleventh District recently and business
conditions were strong.
The index of industrial production for the
District was up more than one percentage point from May to June,
A substantial part
and a further increase was expected in July.
of the rise was due to increased output of crude oil; gains in
manufacturing production were moderate.
Construction contract
awards continued to rise and were at a new high despite some weak
ening in residential contracts.
Employment and unemployment were
little changed, showing only slight gains.
and new car sales were strong.
Department store sales
The outlook for agriculture was
generally reported to be good after recent rains.
On the whole,
according to most of the major economic indicators, the District
economy was operating at a level that on almost any basis other than
comparison with the first quarter would be considered very high.
Financial conditions in the District were tight, Mr. Irons
said, and District banks, including some of the smaller banks,
were much less liquid now than they were not too long ago.
Bank
-51
7/13/65
loan demand was very strong, especially in the commercial and
industrial categories.
substantially.
Both demand and time deposits were up
Banks were attempting to maintain their reserve
positions by buying Federal funds when they were available, but
coming to the discount window when funds were difficult to obtain
and, in some cases, when the rate on Federal funds was above the
4 per cent discount rate.
At the national level, Mr. Irons continued, the outlook for
the next few months seemed to be expansionary.
Gains would be
stimulated by rising consumer, Government, and business spending.
The advances would be accompanied by some dangers, of which the
most important were possible developments in Viet Nam and in the
balance of payments situations of the United States and Britain.
Adverse developments in those areas could change the outlook
substantially.
Also worrisome were inventory developments and the
accumulation of wage and price increases.
On the whole, barring unfavorable developments in Viet Nam,
the U.S. balance of payments, or the position of sterling, Mr. Irons
felt that the economic situation would be strong in the next six
months.
Banks were making every effort to meet, and perhaps to
foster, strong loan demands, despite their general lack of liquidity.
They were seeking funds from various sources and, in the Eleventh
District at least, were employing various devices to attract time
-52
7/13/65
deposits.
Certificates of deposit were being sold on a considerable
scale in both the District and the nation, and borrowings from the
Federal Reserve were high.
It seemed to Mr. Irons that except for Treasury bill rates
money market conditions had been reasonably firm, and even bill
rates had moved up recently.
Other shcrt-term rates probably gave
a better picture of conditions in the money market, and it was
possible that those conditions were firmer than had been thought.
But with banks willing to pay the price necessary to get funds, and
continuing to solicit loan business, net borrowed reserves probably
were not very meaningful at present for policy target purposes.
As banks made loans required reserves increased and net borrowed
reserves rose; the System supplied additional reserves which the
banks put to work; and the cycle continued.
The Committee's present
policy was supposed to be one of moderate restraint, but in fact it
did not seem to be working out that way.
In such circumstances, Mr. Irons doubted that a small
increase in net borrowed reserves would be very effective.
He
thought the point was approaching at which the discount rate would
have to be raised if further restraint was considered necessary.
For the time being, he would continue present policy without
significant change and without too much concern about the level of
net borrowed reserves.
Meanwhile, the Committee could continue to
watch the situation closely.
7/13/65
-53
Mr. Swan reported that business activity in general seemed
to be continuing to advance in the Twelfth District.
In May employ
ment rose somewhat more rapidly in the District than in the country
as a whole.
Tentative figures for the June rate of unemployment in
California showed a rise of one-tenth of a percentage point--as the
national figures did--but basically the economic situation in the
District seemed to be much the same as a month earlier.
District savings and loan associations recently had been
advertising extensively, Mr. Swan said, especially those that earlier
had raised the rates they paid and then had brought them down under
prodding by the Federal Home Loan Bank Board.
Most of the associations
reducing rates recently had adopted other procedures to the advantage
of the shareholder, such as compounding interest daily and crediting
deposits to the date of withdrawal.
In their advertising they were
attempting to demonstrate that the overall interest return to the
shareholder was now a few basis points higher than before the rate
reduction.
Those actions suggested that the associations were mak: g
an effort to regain the ground they had lost to commercial banks in
the competition for savings deposits, at least in a relative sense.
In the four weeks ending June 30, Mr. Swan continued, there
was a substantial increase in bank credit at weekly reporting banks
in the District.
As had been the case through most of 1965, the
percentage gain was somewhat less than at all weekly reporting banks
-54
7/13/65
in the country.
However, there still was considerable evidence of
pressure on reserve positions.
District banks were net buyers of
Federal funds and were still borrowing in substantial volume at the
Reserve Bank.
With respect to the national economic situation and policy,
Mr. Swan's conclusions were about the ,;ame as Mr. Irons'.
In the
immediate situation, and given the expected Treasury financing, it
seemed to him that even a slight degree of firming was not indicated.
With the recent increase in Treasury bill rates and some continuing
uncertainties in capital markets and the stock market, he was inclined
to think that the Committee should not make any policy change at this
point.
Having said that, Mr. Swan remarked, he would add that a
number of things were of considerable concern to him, including the
sharp increases in reserves and bank credit in June in the face of
somewhat higher member bank borrowings and net borrowed reserves,
the expected shift in the position of the Federal budget from
surplus to substantial deficit in the third quarter, and the fact
that the prospects were not bright for further improvement in the
U.S. balance of payments in the months ahead.
He found it surprising
that nonborrowed reserves, which had declined at an annual rate of
1.2 per cent in May, rose at an 8.4 per cent rate in June despite the
fact that borrowings and net borrowed reserves were higher in the
latter month.
7/13/65
-55
In view of the factors he had mentioned, Mr. Swan said, he
was somewhat closer to the conclusion that
it would be desirable to
move to a tighter policy than he had been before.
Like Mr. Irons,
however, he had questioned the value of a vry limited move at this
point.
in
He would prefer to wait to see whether the views expressed
the staff comments on questions 5 and 6 proved justified; namely,
that "The sharp June increases in bank credit and money stemmed in
part from temporary or unusual circumstances"
and that "The
rate of
expansion in bank credit and money over the next few months probably
will fall
off from the high June rate."
If
the staff's
expectations
were fulfilled, he would feel somewhat differently; but if they were
not he probably would be inclined to pursue the possibility of a
firmer policy at a subsequent meeting.
Mr. Ga..usha commented that the Ninth District economy,
buoyed by sharply higher levels of residential and commercial
construction activity, seemed to be growing at a more rapid rate
than the national economy.
And the outlook was that the present
rate of growth would be sustained,
months.
at least over the coming few
District banks, city and country alike, increased their
loans outstanding quite sharply during June.
Country banks were
presently more fully loaned up than at any time in the last five
and a half years.
And the average loan-deposit ratio for city
banks was down only very slightly from the record high established
last April.
-56-
7/13/65
The outlook for the national economy appeared to Mr.
Galusha
to be for some slight lessening of resource utilization over the last
half of 1965.
He believed that a moderate increase in the unemploy
ment rate--to, say, 5 per cent at year end--was likely.
So was a
slight decline in average capacity utilization rates; the odds were
not great that manufacturing output wculd grow as rapidly as capacity
during the third and fourth quarters of 1965.
It therefore was Mr. Galusha's guess that economic expansion
would certainly continue and at an impressive rate, but not at a
rate sufficient to prevent some slight lessening of pressure on
resources.
Accordingly, he saw upward pressures on prices as
moderating somewhat in
monetary policy.
coming months,
even assuming no change in
There might continue to be some very modest in
creases in prices, particularly during the third quarter of this
year.
Mney wages evidently were rising a bit more rapidly at
present than they had earlier in
the recovery.
record corporate profits of the first
And no doubt the
half of the year would
continue for awhile to take their toll.
Against whatever upward
pressure on money wages existed at the moment,
however,
it was
necessary to set the downward pressure generated by some reduction
in resource utilization which he, at least, saw coming in the
immediate future.
7/13/65
-57
Mr. Galusha complimented the Board's staff on the excellent
appendix on prices contained in the current issue of the green book.
He had found it most helpful,
and, to a point,
reassuring.
It
was
interesting to note that price increases of the recent expansion
had so far been smaller than those experienced in the recovery of
1959-60.
It also was interesting to note that, in the nonagricultural
sector at least, the most dramatic of recent price increases--in
nonferrous metals and elsewhere--had not onl. been selective, as many
had observed, but also were of the sort that would give the United
States' international competitors little if any advantage.
Adjusting
for those dramatic price changes, he saw not too pessimistic a price
performance.
Of course, Mr. Galusha said, were the fundamental economic
outlook for greater expansion than he foresaw, he would have to
favor some increase in the degree of monetary restraint.
His
expectations about coming months, however, made him favor no change
in policy at this time.
Nor did Mr. Galusha think that the U.S. balance of payments
position, superficially so much improved, would in present circum
stances benefit perceptibly from a modest move in the direction of
greater monetary restraint.
Beyond the boundaries of the United
States the most pressing problem remained sterling, but he did not
see the Committee's monetary posture as offering immediate help.
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7/13/65
Going to the Board staff's unanswerable final question,
Mr. Galusha remarked that what little evidence he knew of suggested
that if free reserves remained in the range of recent weeks and if
discount rates remained unchanged, the bill rate would locate in
the range of 3.80 to 4.00 per cent, and most likely around 3.90 per
cent.
Putting his view differently, he knew of no special circum
stances that would suggest a marked change in the bill rate, assuming
the level of free reserves was not altered sharply.
Mr. Scanlon reported that economic prospects in the Seventh
District for the rest of 1965 remained favorable.
A strong demand
for workers was reported in nearly all District centers, reflecting
the boom in autos, steel, and machinery.
In some areas labor
markets were the tightest in a decade or more, with unemployment
at very low levels (2.7 per cent of the work force in the Chicago
area for May) and business firms making intensive efforts to
recruit workers.
Unemployment compensation claims continued to
decline in all District States.
Current worker recruitment problems were increased by the
decision of some firms to forego usual plant-wide shutdowns in July
or August because of present demand pressures, Mr. Scanlon said.
Because of liberal vacation plans for their permanent work force,
many of those firms were taking on temporary summer workers as
well as seeking permanent additions to their payrolls.
7/13/65
-59
Mr. Scanlon remarked that declines in new orders in the
District for some types of capital goods in the past month or two
and slower increases in shipments were related to stretch-outs in
promised delivery time as well as to shifts in orders for defense
and steel.
In some cases there had been a spillover of demand
into the used equipment market; sales of used machine tools had
been reported at prices close to original cost.
Orders of structural
steel fabricators were at a record high in May, and demands were
pressing on capacity to an extent that work in progress at some
District plants was falling behind schedule.
Demands upon men and resources had been accompanied by an
upward creep in prices, Mr. Scanlon said.
People with whom he
talked felt that in those circumstances labor was probably becoming
less efficient on the average, with an accompanying slowing of
productivity gains.
There was little evidence, however, that
profit margins were being eroded appreciably.
Of course, to the
extent that the pressure upon resources was related to the
abnormally high rates of production of steel and motor vehicles,
relief from current stringencies should be noticeable during the
second half of 1965.
Farm cash receipts in the District States were expected to
continue the 4 to 5 per cent increase over a year ago,
observed.
Mr. Scanlon
That expectation reflected higher prices for meat animals,
corn, and soybeans, and an increase in production of crops.
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Mr. Scanlon went on to say that the rate of savings increase
at financial institutions, while below last year's high rate, did
not compare unfavorably with years prior to 1964.
Consumer spending
apparently was about in line with income increases this year.
In June, Mr. Scanlon continued, bank credit expansion in
the district was somewhat less vigorous than in the nation but
was moderately larger than in June 1964.
A 3 per cent rise for
business loans in June indicated a resurgence in credit demands,
at least temporarily.
The District loan increase had been less
broadly based than that of the nation, with large increases in the
metals category--doubtless reflecting inventory accumulation--and
in the public utilities group, where changes tended to be related
to the timing of security issues.
The Chicago Reserve Bank's June quarterly survey showed a
slight rise from March in average interest rates on business loans
for all size groups and for term loans, Mr. Scanlon reported.
Four
of the eight banks in the lending practices survey stated that their
rates were firmer than three months ago.
Four reported that loan
demand was stronger than three months ago and seven said it was
stronger than a year ago.
"Increased loan demand" had been cited
more frequently as a reason for using the discount window in recent
weeks.
Although the major Chicago banks had been meeting credit
demands without severe strain, their basic positions had declined
7/13/65
-61
rather sharply over the past two weeks.
part of the CDs that matured in June.
They had replaced only
Borrowings by other reserve
city banks had been rising noticeably, with some indication, he be
lieved, of reluctance to pay 4-1/8 per cent for Federal funds.
As to policy, Mr. Scanlon said he found the choice between
the two suggested alternatives for the directive a difficult one
today.1/ He believed that the possible change in policy under dis
cussion was a very small one.
Conditions in the Seventh District
would certainly encourage his support of such a move.
On the other
hand, like Mr. Irons, he doubted that a small increase in net
borrowed reserves would be very effective in restraining the rate of
expansion in bank credit.
Moreover, he felt that any further firming
would move the Committee a step closer to forcing a technical adjustnent
of the discount rate.
Indeed, it might be that a Federal funds rate
consistently at the 4-1/8 to 4-1/4 per cent level might, in itself,
force that adjustment.
It seemed to him that it would be desirable
to make no charge in policy today and to see whether the trends
indicated by the June figures continued.
On that basis he would
prefer alternative A of the staff drafts of the directive.
1/ Two alternative drafts of the directive prepared by the staff
are appended to these minutes as Attachment A.
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7/13/65
Mr. Clay commented that, in general, the domestic economy
continued to perform in accordance with the pattern of activity that
had been anticipated.
As such, it involved a pace of expansion that
was considerably slower, and that probably would continue to be
considerably slower, than the pace of the first quarter.
While the
rate of expansion was more moderate, the growth of manpower and
industrial capacity continued to make productive resources more
available.
That combination of developments should be a restraining
factor on nonagricultural commodity prices, tending to prevent any
marked upward movement of prices in the period ahead.
Price
developments on both the demand and cost sides would bear watching,
however.
Bank credit expansion, including the growth in business
loans, had been large, even though less than early in the year,
Mr. Clay noted.
The rate of growth in business loans should
moderate from the June pace.
On the other hand, business loan
expansion in recent months might reflect a greater dependence on
outside funds on the part of business, leading to larger credit
requirements to cover its needs, including receivables, inventories,
and capital outlays.
Under those circumstances, a given pace of
economic growth might require a larger increase in business credit
than earlier in the upswing when internally generated funds were
more adequate.
7/13/65
-63The international payments record obviously was better than
earlier, Mr. Clay said.
had been solved.
That did not mean that the payments problem
It did afford an opportunity to await further
payments developments and to devise additional methods of dealing
with the problem.
At the present time, it appeared best to Mr. Clay to continue
essentially the recent monetary policy.
In his opinion, the present
and prospective rate of economic expansion did not merit monetary
policy restraint.
The increases in agricultural commodity prices
were not business-cycle oriented, and other price movements were
not sufficient to call for a more restrictive policy under present
economic circumstances.
The growth in bank credit also needed to
be interpreted in terms of the outlook for a moderate rate of
economic expansion in the months ahead.
In Mr. Clay's judgment, the
international payments situation also facilitated the continuation
of recent monetary policy.
Alternative A of the staff drafts appeared
appropriate for the current economic policy directive.
Mr. Wayne said the current business picture in the Fifth
District looked quite similar to that in the nation.
High level
activity continued in all major industries, but the rate of expansion
apparently had slowed somewhat and business optimism had dimmed
noticeably.
Responses to the Richmond Bank's latest business survey
were less optimistic than at any time this year.
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Generally, the outlook for the second half was favorable,
Mr. Wayne remarked.
He expected the rate of improvement to
resemble the moderate pace of the second quarter, with business
capital outlays, consumer demand, and the government sector
providing the principal strength.
definitely been dampened in
Business optimism had quite
recent weeks, owing in part at least
to the recent stock market break.
It
seemed to Mr. Wayne that recent productivity and cost
developments would indicate continued high level business profits
and little pressure on product prices from the cost side.
Because
of productivity gains stemming from increasing capital spending,
labor cost per unit of output in manufacturing was lower now than
at the beginning of the current upswing.
Even in recent months,
following rather generous wage settlements in a number of industries,
the index of labor cost had moved up only fractionally.
Recent economic and financial developments in other countries
had resulted in a less favorable outlook for world trade and for
U.S. exports, Mr. Wayne noted.
The rate of expansion over much of
the continent had leveled off and the United Kingdom might well
be forced into measures which could hurt U.S. sales abroad.
The
uncertaintiesin the current situation, coupled with the recent
increase in U.S. imports, raised doubts respecting the contribution
of the trade surplus to a solution of the country's overall paymets
deficit.
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Mr. Wayne remarked that the sharp increases in bank credit
and the money supply in June were due primarily to heavy mid-year
business borrowing and to changes in Government deposits.
fluctuations of that kind were to be expected.
Short-run
He was more impressed
with the fact that, despite the large June increase, bank credit in
the second quarter expanded at a rate somewhat below that in the first
quarter.
He anticipated that continuing high levels of business
activity and consumer spending would result in strong demand for
bank credit over the near future, although he would expect this
demand to be less robust than in June.
Mr. Wayne saw nothing in either the domestic or the inter
national picture that warranted a change of policy at this time.
Therefore, he favored maintaining the present posture, seeking
neither more firmness nor more ease.
He would expect the seasonal
need to absorb reserves over the next two weeks to put upward pres
sure on bill rates, but he believed that somewhat higher rates were
desirable.
Mr. Wayne preferred alternative A of the draft directives.
Mr. Robertson then made the following statement:
The domestic economy, all things considered, has
performed pretty well in the second quarter, certainly as
well as might have been expected. We have not yet seen
any serious maladjustments arising out of the rapid first
quarter expansion. And taking the first and second quarters
together, the expansion in gross national product appears
to have been not far from the reasonably rapid pace that
developed after mid-1963.
7/13/65
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Whether such a pace can persist, I do not know. There
are cautionary signs, apart from the stock market, which at
the moment appears to be settling down. For instance, steel
inventories are still at advanced levels, and they may begin
exerting some downward pressure or steel output in the months
ahead. Also, whether the still high level of automobile
sales will continue is certainly a questionable matter.
The excise tax cuts might help some in that respect.
However, their full effect on the economy will depend not
merely on additional car sales, or jewelry sales, but also
on increased spending throughout the whole range of consumer
goods and services generated by the money saved when people
purchase that second car or that anniversary present which
it is very likely they were going to buy anyhow. And how
this will work in practice as a stimulus to production and
employment is something that is especially difficult to
foretell.
In the period ahead, the impact of excise tax cuts on
spending will be reinforced, however, by the new social
security program. And the two combined could serve as an
important expansionary force. At least the full employment
surplus data presented by the staff indicate that an
additional fiscal stimulus in the order of $6 billion can
be expected in the third quarter of the year, and without
much ground being lost in the fourth.
While the economy in the second quarter has performed
well in the sense that it seems to have been freer than
we might have hoped of inventory maladjustments leading
to a decline in economic activity, it has also performed
well with respect to inflationary pressures. Prices have
continued to rise slightly on average, it is true, but
supply factors in agriculture have been a major element
in that respect. Industrial prices have continued to creep
upwards, and while this has not yet signalized any sub
stantial build-up of inflationary forces, such price rises
do represent a possible trouble spot if they accelerate in
a rapidly expanding economy. This would be especially true
if we enter a period when our balance of payments no longer
reflects the initial (and, to a degree, one-time) benefits
of the voluntary credit restraint program and when, therefore,
we will have to look more searchingly at such factors as
our export performance if the improved payments position
is to be sustainable.
7/13/65
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My reading of present economic developments does
not lead me to suggest any change in the stance of policy
now--of either an easing or a tightening nature.
The
forthcoming Treasury financing, though it seems as if it
may be a routine affair, is a further consideration
leaning toward no change.
But with respect to policy, I would like to note
that net borrowed reserves have consistently run above
$150 million in the past few weeks--averaging about $175
million in June and coming in at $185 million (before
revision) in the first week of July. I have somewhat
mixed feelings about this. In general, I would prefer
to see them fluctuating on either side of $150 million.
However, in the past several weeks we have had a rapid
growth in money supply and in required reserves. Under
those circumstances, it is understandable if some of the
above normal or above expected growth in required reserves
absorbs additional free reserves as banks satisfy rapidly
expanding credit demands.
This being so, I would also anticipate that if
required -eserves begin to grow at a s.ower rate than
expected, net borrowed reserves would begin to come in
at less than $150 million,
In other words, it would be
only prudent then, with credit demands weakening, not to
exert quite as much restraint on bank reserve positions.
Mr.
directives,
Mr.
Robertson added that he favored alternative A of the draft
calling for no change in policy.
Shepardson said that the staff's
mation seemed
outlook.
reports and other infor
to indicate strength in the economy and a healthy
He thought that the policy the Com m ittee had been following,
of gradually moving to a somewhat firmer position, had been a con
structive one.
In his judgment, prospects for prices and for the
balance of payments indicated the desirability of further probing in
that direction.
Thus, he agreed with Mr. Ellis' recommendation for
moving toward some further lessening of ease.
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However, Mr. Shepardson continued, there was merit in
Mr. Irons' observation that such probing probably would not have
a great effect and that at some point it might be necessary to
implement a move toward less ease by a discount rate increase.
He would favor discount rate action if cred.t expansion continued
at its recent rate.
Meanwhile, a modest move toward a slightly
firmer policy would provide a more solid basis for a possible discount
rate change if that proved necessary.
On the other hand, if a definite
downturn should develop, he felt that the Committee could move much
faster toward easing than it had toward restraint.
He favored
alternative B of the draft directives.
Mr. Mitchell said that at nearly every recent meeting of
the Committee at least one person had referred to bank credit ex
pansion in the United States as being "unsustainable," and some
had implied that the economy would ultimately have to pay for this
credit binge.
He had borne the drip of this argument, which he
considered specious, in silence for a long time but today would
make a mild remonstrance.
Mr. Mitchell started with the comment that if the word
"unsustainable" was used, it ought to be associated with this
Cassandra-like condemnation on the consequences of credit or growth,
not with the growth of bank credit itself.
To him, it seemed clear
that much of the surge in bank credit over recent years was a
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one-shot affair and simply the result of enhanced competitiveness
of banking institutions.
The ability to buy deposits under current
Regulation Q ceilings enabled banks to out-compete other financial
intermediaries, and many money and capital narket instruments as
well.
Thus, to a large extent, what was being witnessed was a
substitution of bank credit for other forms of credit rather than
a net addition to credit available to the economy.
If the System should truly be concerned about the growth
in
bank assets, Mr.
Mitchell continued,
an antidote was at hand;
The
it was certain to work and it would show immediate results.
remedy was a reduction in the ceiling interest rates payable on
deposits under Regulation Q--a reduction below present market
rates.
That action would slow bank asset growth based on purchased
deposits to a whisper.
Mr.
Mitchell did not recommend such action even though he
was sure that not all recent bank investment had been wise or
conducive to stable economic growth for the United States.
banks as generalized lenders had,
However,
and by and large exercised,
the
potential for putting such savings of the economy as they could
attract to a greater range of alternative uses than most inter
mediaries.
For that reason,
he was prepared to see banks exploit
the competitive advantages that higher Regulation Q ceilings provided.
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7/13/65
Nor should the Committee use monetary contraction to
curb bank credit expansion, Mr. Mitchell said, if it was mainly a
substitution for other forms of credit--a substitution that
occurred as funds were channeled to commercial banks that would
otherwise have flowed to other financial institutions or directly
into market securities.
To spell out his reasoning a bit, Mr. Mitchell said he
would start by noting two changes in the rules of the game:
(1)
increases in allowable time deposit rates (effective dates of
change after 1936 were: January 1, 1957, January 1, 1962, July 17,
1963, and November 24, 1964); and (2) the recent development of
negotiable CDs.
Those changes had made possible the accelerated
growth of time accounts on the books of commercial banks.
where did those funds come?
From
Here it was useful to recognize both
the immediate and the subsequent effects.
Right after a change
in Regulation Q. there was some switching from other assets to the
now more attractive time accounts; for example, holders of demand
deposits might convert to time deposits or holders of Treasury
bills might sell them and acquire time accounts.
on, the flows of funds also would be altered.
As time went
Funds that would
have gone into market securities or to savings and loan associations
or into demand deposits went instead to time deposits at commercial
banks.
7/13/65
Thus, Mr. Mitchell said, the faster growth of time deposits
represented a diversion of funds from demand deposits, from other
savings institutions, and from market instruments.
The Committee's
problem was to try to estimate how much came from demand deposits
ard how much from the other two flows.
assumption,
Suppose,
to take an extreme
that the faster growth of time deposits had come completely
from demand deposits.
Since at any given time that represented simply
a change in the form of bank liatilities
rather than a diversion of
funds from other institutions or market instruments, it would not
in itself entail any change in the rate of growth of bank assets.
In that extreme case, it would, of course, free reserves proportional
to the difference in requirements and induce subsequent asset growth.
On the other hand, Mr.
Mitchell went on,
suppose that all
the additional funds going into time deposits represented a diversion
from Treasury bills and other market securities.
In that case,
banks
would be purchasing the additional Treasury bills (and other financial
assets) that the time depositors previously would have acquired
directly.
The accelerated growth of bank time deposits would be
necessary just to maintain the status quo in credit markets.
Similarly, Mr. Mitchell said, the additional time deposits
representing funds which otherwise would have gone to savings and
loan associations should be reflected in expanding bank assets.
Otherwise, the smaller acquisitions of assets by savings and loan
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associations--made necessary by the smaller inflow of funds--would
exert a restrictive influence.
Thus, in general, the extent to which
the more rapid bank credit expansion was stimulative or merely ac
commodating to a shift in the structure of financial flows depended
upon the mix of the sources of funds from which the additional time
deposits came.
As Mr. Mitchell looked at and analyzed the data, it appeared
to him that that mix was such that a relatively small part of the
extra build-up of time deposits in recent years had come from
demand deposits; most of the accelerated growth of time deposits
in the hands of the public had been at the expense of holdings of
securities and of accounts with savings institutions.
To that extent,
the accelerated growth of bank credit was necessary to prevent a
tightening in the availability of credit, in all forms together,
to the economy.
Further systematic work on those substitution relationships
needed to be done, Mr. Mitchell said,
and when results were available
the Committee needed to study them carefully.
Meanwhile, he hoped
it was clear that, by themselves, data on the annual rate of growth
of total bank credit as compared with, say, GNP gave little guide
to what monetary policy was or should be.
Turning to policy for the next month, Mr. Mitchell concurred
with statements that had been made that alternative A was appropriate
7/13/65
-73
for the directive.
Briefly, his reasons for favoring no change in
policy were that the present international
situation did not call
for action, ard that the domestic outlook was quite uncertain.
He
was becoming increasingly of the view that a downturn in activity
was likely in the latter part of the year; if any change was to
be made in
poicy, he would favor a snift toward ease.
Mr. Mitchell noted that the first sentence of alternative
A,
as drafted by the staff, read:
"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."
read, "although
He would revise the second clause to
at a considerably slower pace
facts that the second-quarter increase in
. . ."
in
view of the
GNP was now estimated
at about $7 billion, only half the first-quarter rise, and that
the industrial production index apparently would rise only by about
one point in
the second quarter,
about a point per month in
after averaging an increase of
the first
quarter.
It
might also be
well to work into the directive an acknowledgment of what,
he thought,
was the most likely source of disturbance to the economy--the inventory
However,
adjustment which he felt was in
the offing.
specific language to suggest in
that connection.
he had no
Mr. Daane said he favored no overt change in policy at
this time and would certainly prefer alternative A of the draft
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directives.
Having said that, however,
he would note that he had
some sympathy with those who expressed uneasiness about the price
developments, both recent and prospective, and--despite Mr.
Mitchell's analysis,
to which, he thought,
the Committee would
want to give careful attention--with recent developments in the
bank credit area.
To some extent his uneasiness had been reinforced
at the Paris meetings, where he had first
described the Committee's
policy as being "mildly restrictive" and then had found himself
adding that the current pace of U.S. bank credit expansion, while
below the first-quarter rate, was still above last year's high
rate.
Mr. Daane thought that it had been useful for Mr.
Irons
to remind the Committee that the maintenance of any given level
of net borrowed reserves implied accommodation of whatever demand
for bank credit emerged--whether that demand was strong or weak.
In view of that fact, he preferred in his own thinking not to
characterize an increase in net borrowed reserves of, say, $20
million as a shift in policy.
In operational terms, however, he
would still say that he would accept some increase in net borrowed
reserves if the demand for bank credit continued strong.
He would
not recommend any specific figure as a target for the Desk's
operations,
but he would not favor action to prevent a higher
level of net borrowed reserves from developing if
from strong credit demands.
it resulted
7/13/65
-75
Mr. Maisel said it appeared to him that, in contrast to
this morning's presentation, the green book gave a story that was
mixed, both more optimistic and more pessimistic than the staff
interpretation.
He disagreed particularly with the interpretation
given to the price story of the green book, seeing in
that excellent
study more of what Messrs. Galusha and Clay did.
The study of industrial prices seemed optimistic to
Mr. Maisel.
While prices had risen,
normal for a period of active demand.
the types of rise appeared
There was no indication
that they were moving up as a result of any structural shift; rather,
the opposite w.s the case.
The economy appeared to be in a period
of fluctuating prices around a very stable base, and the long-run
price level gave no sign of an upward movement.
From the point of view of the balance of payments, Mr. Maisel
continued, the rise in prices appeared even better.
Most of the
increase in recent periods had been in industrial materials.
Given
the structure of U.S. foreign trade, those increases which were
international in nature almost certainly had improved the competitive
situation of the United States.
Thus, the wholesale price situation
seemed particularly favorable, and in his judgment it offered no
constraint on any type of desired monetary action.
Also optimistic, Mr. Maisel continued, was the fact that
the country had been able to increase its output at approximately
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the rate of growth of supply while decreasing its relative liquidity
in
terms of banks'
position and of the money supply.
He agreed
that it was important to note that a considerable part of the recent
increase in
bank credit had resulted from a slower rate of growth
in other liquid assets.
Less optimistic and more serious were the warnings of
potential danger, Mr. Maisel said.
Inventories, the Committee
was told, might have been increasing at a rate which in
the past
had proved not to be viable--a rate which usually had been followed
by serious contractions.
If that was so, it meant that even though
the U.S. was still considerably below full utilization of its capacity,
the expansion in demand--in contrast to output--had failed to equal
the growth in
productive capacity.
That failure of demand to expand as fast as potential
production was serious in
importantly,
if
Mr. Maisel remarked.
too large a share of current
into inventories,
In
and of itself,
a recognition of that
More
production had gone
fact might well be seen.
the past such changes had been rapid and had led to needs for
sudden and drastic shifts in monetary policy.
Mr. Maisel felt that small increments were preferable to
sharp ones and that, therefore, the Committee should start to
move towards greater ease.
If the present directive was one of
an average of $150 million in net borrowed reserves, he would
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prefer to stay with it.
He would hope that during the period until
the next meeting the shortfalls necessary to attainment of that
average would cccur.
At the same time, the Committee could look
forward at the next meeting to a new directive calling for less
restraint.
Mr.
mixed bag,
Hickman remarked that business news in June was a
but on the whole was better than he had expected earlier.
A number of series had moved upward,
auto sales and employment.
including steel production,
Nevertheless, he continued to expect a
slower rate of expansion in GNP in the second half, and a leveling
in the index of industrial production, including some individual
months of actual
decline.
Such a pattern would reflect the
liquidation of large steel inventories and associated factors,
only partly offset by the stimulus of Federal fiscal measures.
The recent adjustment in
although it
stock prices had probably been healthy;
might contribute to some slowing in consumer spending
and capital expansion,
he did not believe its influence would be
serious enough to alter the general path of business.
That general view of the business outlook had received
strong support at a meeting of Fourth District business economists
held recently at the Cleveland Reserve Bank, Mr. Hickman noted.
Not a single one of the 24 economists attending expected that
industrial production in the third quarter would average higher
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7/13/65
than in
the second quarter.
For industrial production in
the
second half as a whole, most of the economists foresaw a slight
weakening.
Mr.
Hickman commented that unit labor costs in manufacturing
were likely to increase in
the months ahead.
May figures, which were the latest available,
inching up of costs between the first
clear change in
trend was evident.
While the April and
did indicaLe an
and second quarters,
no
Thus far this year, the adverse
implications for profit margins had been offset by a slight rise
in
the ratio of prices to unit labor costs in manufacturing.
The
latest readings, however, suggested that price pressures were abating;
that,
coupled with a leveling of production,
could mean lower profit
margins.
With reference to the staff's
question on world trade,
Mr. Hickman thought the outlook would probably be influenced by
two major adverse factors.
The first
was a leveling in business
activity that was apparently developing in
countries
a number of major
The second was the resurgence of mercantilistic
measures in many countries in an effort to encourage domestic
production and to decrease imports.
The United States' own effort
to discourage capital outflows would not stimulate, and perhaps
might temporarily retard, expansion of world trade.
For a variety
of reasons, the U.S. trade balance was likely to be lower this
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year than last.
U.S. exports in 1965 were unlikely to exceed last
year's record volume, and imports might rise, perhaps by as much
as 10 per cent.
Thus the trade surplus could be reduced by as
much as $2 billion.
The record of Federal debt management in the first half
of 1965 was erratic and therefore difficult to extrapolate into
the second half, Mr. Hickman said.
ownership of
There was a massive shift in
the public debt to the Federal Reserve and to State
and local governments, as well as a sharp reduction in the amount
of short-term securities outstanding.
In coming months, further
demands for short-term issues might be expected from public funds,
corporations withholding funds from overseas, banks experiencing
slackening loan demands, and from the Federal Reserve in its
seasonal program to supply reserves.
It would be helpful if
Treasury would satisfy its second-half borrowing needs in
short-term market insofar as possible and ii
the
the
the Federal Reserve
would participate by lowering reserve requirements rather than by
absorbing part of the outstanding supply of bills.
Such a joint
effort would have desirable interest rate effects.
Short-term
rates would be likely to rise moderately, and long-term rates
would show little change or perhaps even decline slightly.
The
balance of payments program would thus be reinforced and private
capital
formation would be encouraged.
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7/13/65
With reference to the question on bank credit and money
supply, Mr. Hickman said, the resurgence of bank credit in June,
coupled with a reduction in U.S. Government cash balances, was
reflected in a sharp rise in the money stock, reversing the
combination that had contributed to an equally sharp decline in
the money supply in May.
Reduction in Government balances during
the second half of the year, coupled with further growth in both
bank credit and time deposits, should contribute to continued,
but less erratic, gains in
the money supply.
Mr. Hickman added that a recent study at the Federal
Reserve Bank of Cleveland showed that the ratio of total debt
to GNP had virtually a level trend recently, as had the ratio of
total liquid assets to GNP.
Those results indicated to him that
bank credit growth had not been excessive recently, although he
did think it
had been excessive at times last year.
In view of uncertainties in the business outlook, Mr.
Hickman favored a modest retreat f-om the current levels of net
borrowed reserves and member bank borrowings.
He would prefer to
see net borrowed reserves in a range of $50 to $100 million and
borrowings around $400 million, as he had suggested at the last
meeting.
Recent events indicated that rates on U.S. Treasury bills
were more responsive to supply and demand factors than to changes
in reserve factors alone, at least under present money market
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7/13/65
conditions.
The bill rate should be maintained or increased
slightly by appropriate actions by the Treasury and Federal
Reserve.
Alternative A was clearly preferable to alternative
B for the directive, although he would prefer a third alternative
calling for a roll-back to conditions prevailing in late March
and early April.
If the Committee adopted alternative A, he would
suggest deleting the word "somewhat"
from the first sentence.
In his opinion that would be preferabl, to substituting the word
"considerably."
as Mr. Mitchell had suggested.
Mr. Bopp reported that credit extended by Third District
member banks in June mirrored the sharp increase experienced in
the nation as a whole.
At all member banks in the District, total
credit outstanding rose by 2.8 per cent, compared to an average
monthly increase of only 0.4 per cent for the first half of the
year and of 0.7 per cent for June of last year.
Business loans
at weekly reporting member banks rose by a little over 4.5 per
cent, compared to a rate of only 0.6 per cent on average during
the period January through May.
The increase in business loans
was spread throughout a wide range of industrial categories.
A discussion with District reserve city bankers, Mr. Bopp
remarked, revealed that the June tax date had been responsible for
a sizable part of the credit increase and that seasonal expansion
in several District industries was also important.
In the opinion
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7/13/65
of those bankers, prospects were for a more moderate rate of
growth in credit in the near-term future.
Mr.
Bopp went on to say that discussions during the past
few days with several large manufacturing concerns
in
the District
produced some interesting side-lights on recent and prospective
trends in prices, profits, productivity, and costs.
and petroleum, nothing like a profit squeeze, was in
according to those discussions,
In chemicals
prospect,
although industry officials expected
some slowing from the exceptionally good profit rates turned in
during the first half of 1965.
emphasis; one
Two steel economists disagreed in
thought no squeeze was in the offing for the industry,
and the other put more emphasis on the probability of a wage settle
ment such that wage increases would outrun productivity increases.
No one saw in his industry such pressures on capacity that increasing
costs would be a problem because of production passing the optimum
point for efficiency.
In steel, one economist pointed out that some
companies had gone outside for financing,
if
and that could be a problem
expected rates of utilization of new facilities
were not achieved.
The only people who saw any problem at all with wage costs outrunning
productivity were those in steel.
As for prices, Mr. Bopp said, chemicals and petroleum
companies were getting increased prices in some staple lines--heavy
chemicals and gasoline--that "would not have held a year or two ago."
7/13/65
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There had been spotty increases in a few input commodities used by
chemicals manufacturers.
The general impression from the interviews
was that input prices were not a worry, and that prices of final
products were firm, in chemicals and petroleum.
With regard to policy, Mr. Bopp continued to feel that the
degree of restraint prevailing at present was appropriate to the
near-term business outlook.
With the adjustment in steel in
ventories still to come and with a decline in automobile output a
likely prospect, the increases in economic activity would probably
slacken relative to the fast rate of the first quarter.
Superimposed
upon such a slackening expansion in demand, prospective increases in
supplies of goods and in capacity to produce might serve to contain
the selective upcreep in industrial prices which had occurred in
recent months.
On the other hand, an increase in prices in the steel
industry might occur if the wage settlement was overly generous.
an
Such
increase was by no means certain, however, and even if it came,
competitive pressures might moderate it both in amount and with respect
to the range of products affected.
Bearing those factors in mind and considering also the con
tinued success of the voluntary restraint program, Mr. Bopp would
make no change at present in the general posture of monetary policy.
He favored alternative A for the directive, with the deletion of
the word "somewhat" from the first sentence.
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7/13/65
Mr. Bryan reported that economic activity had continued
to expand in the Sixth District, judging by such data as those on
employment, unemployment, consumer income, and consumer spending.
The insured unemployment rate continued to decline.
Spending plans
for new and expended manufacturing facilities announced in the
second quarter of this year totaled $600 million, an all-time high
for the District.
So far as the outlook for business expansion was concerned,
Mr. Bryan said that he and his staff had discovered nothing signif
icantly new in the period since the previous meeting of the Committee,
and he had no basis for developing a conclusive answer to the question
of the business outlook.
He did have a rather intuitive feeling,
however, that stresses should be developing when the economy came as
close to full utilization of capacity as the U.S. had at present.
But he could not prove the existence of strains.
Available evidence
seemed to suggest continued expansion in business activity over the
rest of the year, although at a somewhat slower pace than in the
first quarter.
However, six months was relatively long in present
times of rapid change, and he was prepared to be surprised.
Mr. Bryan went on to say that one reason he was dubious
about the view that further expansion would be orderly was his
belief that it would be difficult to avoid further pressure on
prices and profits if expansion proceeded at the expected rate.
7/13/65
-85
As the economy approached full employment some decline in output
per manhour seemed inevitable.
He was told that current rises in
prices were attributable to temporary factors, including supply
conditions for meat; nevertheless, the rise in consumer prices
would have some permanent effects because many labor contracts
took account of the consumer price index, often automatically.
Admittedly, it was hard to find any major forces pushing up
prices, but enough minor forces could have, and in his judgment
were having, the same effect as single large ones.
Generally, Mr. Bryan remarked, it was assumed that the
margin of unutilized capacity set the limit to economic activity.
But there were many factors that could limit activity.
At present,
he thought, a limiting factor existed in the skills of those who
currently were unemployed, unless the new plant and equipment
coming on stream was of a type that required a lower level of
skills.
Despite all the talk of automation, it seemed to Mr. Bryan
that the requirements increasingly were for higher levels of skill;
and in his opinion the combination of that factor and the policy
of increasing the minimum wage level would limit the gains in
activity, regardless of the amount of fixed investment.
Mr. Bryan observed that Mr. Mitchell's analysis had not
wholly reassured him about recent banking developments.
In June,
he noted, the seasonal increases in total, required and nonborrowed
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7/13/65
reserves were estimated at $64 million,
$42 million,
and $63 million,
respectively.
The System certainly had accommodated those seasonal
needs; indeed,
the actual increases in
the three measures of reserves
had exceeded the seasonal rises by $161 million, $164 million, and
$139 million, respectively.
Since March, total reserves had in
creased at a 6.1 annual rate, nonborrowed reserves at a 4.9 per cent
rate, and required reserves at a 6.5 per cent rate.
be mistaken,
While he might
he did not believe such rates were sustainable without
developing an inflationary potential.
Mr.
Bryan said that he wished the Committee's policy choice
was not formulated in terms of the alternatives of "no
"firmer".
What he favored might be called,
change" and
for want of a better
term, a "tight rein" policy.
His difficulty with the concept of
"no change" was that under it
the Committee's policy had been
simply one of supplying all the reserves demanded.
judgment,
was tantamount to having no policy at all.
That,
in his
At the same
time, he certainy did not favor an overt tightening action.
seemed to him that,
contrary to Mr.
Irons'
view,
It
it was necessary
to put the banks into a somewhat heavier borrcwing position--to
have them obtain a larger proportion of their reserves through the
discount window.
Accordingly, if a free reserve target were to
be used--and, as he had often noted, he did not like such a targethe thought the level of net borrowed reserves to be sought should
be raised a little.
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7/13/65
In sum, Mr. Bryan said, he advocated neither "no change" nor
"greater firmness," but a "tight rein" policy.
He did not favor a
change in the discount rate at the present time because of the risk
that it would have large undesirable reprecussions on the economy.
Mr. Shuford reported that growth in economic activity in
the Eighth District during the first half of 1965 had been similar
to that of the nation.
There had been a strong rate of expansion,
but with some evidence of moderation from the unusually high rate
during last fall and early winter.
Payroll employment had increased
at a 2 per cent annual rate since December, compared with a 3.3 per
cent rate from August to December.
Manufacturing output had expanded
at a 7 per cent annual rate since December, compared with an 18 per
cent rate in the last four months of 1964.
In line with the national trend, Mr. Shuford said, loans
and investments at District banks had expanded at a substantially
faster rate since December than in late 1964.
Business loans in the
District had beer especially strong, increasing at about a 20 per
cent annual rate since last fall.
Since the beginning of May, daily average borrowings by
member banks from the St. Louis Reserve Bank had been double the
average for the first four months of the year, Mr. Shuford continued.
Some of that borrowing had been secured by customer notes, and
inquiries had been received from two others of the larger banks
7/13/65
in
-88
the District regarding use of such notes for collateral.
Those
developments pointed up the fact, already noted in connection with
another District, that bank liquidity was being reduced as the heavy
demand for bank loans was being met.
Farm prospects in the District had improved in recent months,
Mr. Shufor
observed.
Higher prices for livestock, primarily beef
cattle and hogs, had been the chief factors.
Crop prospects also
were quite good, as timely showers had fallen over most of the area
during the past month.
The moderation in national business activity since the first
quarter of the year indicated to Mr. Shuford that the growth rate
of the economy was returning to the trend which had prevailed during
most of the current expansion.
A continuation of that movement of
activity back to the rate which had prevailed since early 1961 would
seem desirable, for he thought there had been some indication of
excessive total demand.
Mr. Shuford believed that the continued upward movement in
prices was significant.
Prices in recent months had been rising
faster than their longer-run trend, and their movement could not be
attributed entirely to seasonal forces or to supply conditions in
the agricultural sector.
The consumer price index rose at a 1.9 per
cent annual rate from January to May, whereas the average rate of
increase during the corresponding months of the past four years
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7/13/65
was 1.1 per cent.
Wholesale prices rose at a 3.8 per cent annual
rate from January to June, compared with an average rate of decrease
of 2.1 per cent for the same period of the previous four years.
The
industrial price component of the wholesale price index rose at about
a 1 per cent annual rate over the past five months, in contrast to an
average decline at an 0.8 per cent rate during those months of the
previous four years.
The implications of such comparisons depended,
of course, on the starting date used, but averages for the four prior
years of the present expansion seemed to provide a fair basis for
comparison with the changes this year.
Bank credit had continued to expand at a very rapid rate,
Mr. Shuford said, although there had been some moderation since
April.
Money had risen at a 3 per cent annual rate since last
November, compared with a 4.2 per cent rate in the previous 26 months.
An upward movement in money could be expected during the balance of
the summer as the Government reduced its deposits to normal levels.
As the economy moved into the second quarter of 1965,
Mr. Shuford said, it would be necessary to continue to give recognition
to the contribution of the Federal budget, which would add considerably
to aggregate demand.
Mr. Shuford thought his position on policy was relatively close
to Mr. Bryan's, and also, perhaps, to Mr. Daane's.
In view of the
recent turn toward moderation in the rate of economic expansion, he
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7/13/65
would not make an overt move toward additioral firmness today.
On
the other hand, he would like to see further moderation and would
favor resisting any excessive demand that might develop.
Reserves
should not be supplied to support unduly large increases in total
bank credit, and while some increase in the money supply was
desirable it should be at a rate less than the 4 per cent rate of
the period from September 1962 to November 1964.
This year, he noted,
through June the money supply had been expanding at a 2-1/2 per cent
rate.
Mr. Shuford commented that like some others he was reluctant
to speak in quantitative terms; he shared the reservations that had
been expressed about setting specific net borrowed reserve figures
as guides for the Desk.
But if references to specific figures
were to be made, he would say that he would not be disturbed if the
Treasury bill
rate rose to 4 per cent or even a little
higher,
and
if net borrowed reserves rose to above $200 million, as a result of
the attainment of the goal he had indicated of resisting any excessive
demand that might develop.
He did not favor a change in the discount
rate.
Mr. Shuford thought his position was not too far from one
favoring no change in policy, and the first paragraph of alternative
A of the draft directives was satisfactory to him.
But, to emphasize
the need to resist excessive demand, he would prefer to have the
second paragraph of the directive revised to call for operations
7/13/65
-91
"with a view to maintaining at least as firm conditions in the
money market as have prevailed in recent weeks, and to permit some
tightening if demands for credit strengthen."
Mr. Balderston remarked that in the period of nearly twelve
years that he had been a member of the Board he had observed that
each time the steel industry had entered into wage negotiations,
whether or not a strike ensued, the statistics for the industry had
undergone large changes.
This year was no exception.
He found much
of the economic data available to the Committee to be quite unreliable
in many respects.
Throughout the summer months the Committee was
likely to suffer from some lack of visibility because of distortions
in inventory and other figures.
Mr. Balderston said he noted a tendency to explain away what
trends were in evidence as "temporary,"
or "self-correcting."
He was
concerned by the seeming rationalization of developments that might
otherwise disturb the Committee.
He was disturbed by a number of
particul .r phenomena, and his concern was deep-seated because, not
knowing what the future held, it was especially difficult to decide
what the right policy decision was at present.
His first source of concern, Mr. Balderston said, was the
possibility that recent inventory increases had been greater than
the published figures indicated, as had been suggested by Mr. Gehman
of the Board's staff.
Secondly, the long-continued improvement in
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7/13/65
labor productivity, which certainly was unique, had now flattened
out, with the result that unit labor costs were no longer declining.
The impact of that development on prices, particularly of export
goods, merited attention.
Third, Mr. Balderston continued, the balance of payments
outlook for the year--and he would accept Mr.
Hersey's guess that
the adverse payments balance might approximate $1.5 billion--was
a continuing threat that certainly could not be ignored by those
responsible for either fiscal or monetary policy.
Therefore,
he
disliked the form of the reference to the second-quarter surplus
in the payments balance that appeared in both alternative A and
alternative B of the draft directives.
Finally, Mr. Balderston said, the recent striking increase
in bank loans could not go unnoticed.
However,
as he studied that
development he found his conclusions supported some of Mr. Mitchell's.
He recognized that the costs of borrowing from banks had been low
relative to costs in the capital market and that the capital market
had been congested at times.
Also, trade concerns and metals
manufacturers had accounted for about 40 per cent of the total
increase in business loans at weekly reporting banks in the first
half of 1965.
That fact helped explain why commercial bank loans
(other than to financial businesses) had risen by an average of $2.1
billion per month (seasonally adjusted) from November 1964 through
7/13/65
-93
June 1965, as compared with an average rise of about $1.4 billion
per month during the previous eight months.
That increase of 50 per
cent was large, but when allowance was made for the heavy borrowing
by trade and metals companies the change was not as startling as it
appeared at first glance.
Nevertheless, Mr. Balderston continued, like Mr. Bryan he
felt that a commercial bank loan expansion of the type that had
been witnessed over the past seven months was something that the
Committee had to worry about and to watch continually.
The essential
point was to discover, if possible, whether bank lending was for
purposes that were constructive in the long run or for speculative
purposes.
That was difficult to do.
From all that he observed, he
suspected that the ebullience of the first few months of the year
had been carried over to some degree, and that some bank borrowing
was being misusec.
In a related area, consumer credit continued
high, not only fcr instalment buying of automobiles but for other
purposes also.
Mr. Balderston agreed with Mr. Bryan that the Committee's
policy should be one that would press banks to obtain the additional
reserves they needed by borrowing from the Reserve Banks.
therefore,
He would,
favor a slightly firmer policy, and accordingly preferred
alternative B for the directive.
But he would revise the wording of
the second sentence to read, "Despite a surplus in our international
7/13/65
-94
payments in the second quarter, reflecting the large initial impact
of the Administration's balance of payments program, the prospect is
for a substantial deficit for the year as a whole, with gold outflows
continuing."
Chairman Martin commented that the only important economic
change since the previous meeting of the Committee, in his judgment,
had been in psychology; he thought there had been a lessening of
optimism about the economy.
The kind of policy change that had been suggested today, the
Chairman continued, was so minor that he found himself questioning
whether it would have any real effect.
After turning over the
alternatives for policy in his mind before this meeting, he had
reached the conclusion that Mr. Irons had expressed today--that the
Committee should either make an overt move, including a change in
the discount rate, or should hold to the status quo.
He also had
concluded that an overt move was not desirable at the present time,
and nothing that he had heard in the discussion this morning had
altered that view.
Although he agreed with Mr. Ellis that the
Committee's earlier probing steps had been appropriate, he doubted
that a further probing operation now would be effective, and he was
not prepared to see the discount rate changed at this time.
On the
other hand, he did not favor a move toward greater ease.
There were many cross-currents at work in the economy at the
moment, the Chairman remarked, as was suggested by the fact that good
7/13/65
-95
cases had been made in the discussion today for both of the suggested
alternatives for :he directive.
One might say that the water in the
economic radiator had been boiling earlier in the year, but was not
boiling now.
question.
Whether it would be again later was, of course, another
The Committee might have a better picture of the situation
at its next meeting.
In his judgment, the Chairman said, monetary policy recently
had been performing about as well as possible under the prevailing
circumstances.
While he recognized that the Committee might have
to move in one direction or the other later, he favored the suggested
alternative A for the directive today.
He noted that deletion of the
word "somewhat" from the first sentence of the draft had been suggested,
and while the matter did not appear to be of great importance he was
agreeable to that change.
He then proposed that the Committee vote
on a directive consisting of alternative A with the word "somewhat"
deleted.
Mr. Shepardson commented that Mr. Balderston's proposed
revision of the balance of payments reference in the draft directive
seemed worthy of consideration even if the majority favored no change in
policy.
In the ensuing discussion it was pointed out that the proposed
language implied a forecast of developments to come of a type not
customarily included in the Committee's directives.
After further
consideration it was decided to revise the statement relating to the
7/13/65
-96-
balance of payments from that in the staff drafts, without employing
language that implied a forecast.
Thereupon, upon motion duly made
and seconded, and with Mr. Ellis dissenting,
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 ecoromic and financial developments reviewed at
this meeting indicate continuing expansion of the domestic
economy, although at a slower pace than in the first quarter.
Reflecting the large initial impact of the Administration's
balance of payments program, there was a surplus in our
international payments in the second quarter. In this situation,
and with gold outflows continuing, 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, and taking into account the
forthcoming Treasury financing, 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.
Shepardson indicated that he had cast his favorable vote wi'h
some reservations.
Chairman Martin then read a telegram he had received from Senator
Eugene J. McCarthy on June 25, 1965, in which the Senator had urged the
Federal Reserve Board to reexamine money and credit policy "with the
view of providing greater liquidity and relieve the tight credit sit
uation."
The Senator had expressed the judgment that, with continuation
7/13/65
-97
of present conditions, "to place critical pressure on the British
pound would eventually result in economic slowdown in the United
States."
It was agreed that the next meeting of the Committee would
be held on Tuesday, August 10, 1965, at 9:30 a.m.
Thereupon the meeting adjourned.
Assistant Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
July 13, 1965
Drafts of Current Economic Policy Directive
for Consideration by the Federal Open Market Committee
at its Meeting on July 13, 1965
Alternative A
(no change in policy)
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. They
also indicate a surplus in our international payments in the second
quarter, reflecting the large initial impact of the Administration's
balance of payments program.
In this situation, and with gold outflows
continuing, 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, and taking into account the forth
coming Treasury financing, 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.
Alternative B
(firming)
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, with
some upward pressure on prices and rapid growth in bank credit.
They also indicate a surplus in our international payments in the
second quarter, reflecting the large initial impact of the
Administration's balance of payments program. In this situation,
and with gold outflows continuing, 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, while taking into
account the forthcoming Treasury financing.
Cite this document
Federal Reserve (1965, July 12). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19650713
@misc{wtfs_fomc_minutes_19650713,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1965},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19650713},
note = {Retrieved via When the Fed Speaks corpus}
}