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, February 8, 1966, at 9:30 a.m.1/
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Daane
Ellis
Galusha
Maisel
Mitchell
Patterson
Robertson
Scanlon
Shepardson
Messrs. Bopp, Hickman, Clay, and Irons, Alternate
Members of the Federal Open Market Committee
Messrs. Wayne, Francis, and Swan, Presidents of the
Federal Reserve Banks of Richmond, St. Louis,
and San Francisco, respectively
Mr. Young, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Messrs. Baughman, Holland, Koch, Taylor, and
Willis, Associate Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Solomon, Adviser to the Board of Governors
Mr. Molony, Assistant to the Board of Governors
Mr. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
1/ This meeting, originally planned for February 1, 1966, had been
postponed one week because of adverse weather conditions affecting
travel.
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Messrs. Link, Eastburn, Mann, Ratchford, Jones,
Tow, Green, and Craven, Vice Presidents of
the Federal Reserve Banks of New York,
Philadelphia, Cleveland, Richmond, St. Louis,
Kansas City, Dallas, and San Francisco,
respectively
Mr. MacLaury, Assistant Vice President, Federal
Reserve Bank of New York
Mr. Meek, Manager, Securities Department, Federal
Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market
Committee held on January 11, 1966, 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 conditions and on
Open Market Account and Treasury operations in foreign currencies
for the period January 11 through 26, 1966, and a supplemental
report for January 27 through February 4, 1966.
Copies of these
reports have been placed in the files of the Committee.
In comments supplementing the written reports, Mr. MacLaury
said that the Treasury gold stock would remain unchanged this
week.
During January, the Stabilization Fund made gold sales
amounting to $37 million, which were more than offset by a
purchase of $50 million in gold from the Bank of Canada, leaving
a month-end balance of $79 million.
During February, an order
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of at least $34 million from the Bank of France was expected.
On the other hand, a second $50 million of gold had been acquired
from Canada last week so that, on present prospects, there should
not be any decline in the stock this month.
Looking farther ahead, however, Mr. MacLaury continued,
one could not ignore the implications for the United States gold
stock of the situation in the London gold market.
During 1965 a
record volume of private demand for gold absorbed virtually the
entire new supply coming from South African and other mines and
from Russian sources, with the result that the Gold Pool ended
the year with virtually no net accumulation of gold.
As demand
continued to run ahead of supply, the $40 million reserve in the
Gold Pool at the beginning of 1966 had been exhausted and it again
became necessary to reactivate the gold sale consortium.
then the Pool had lost another $19 million net.
Since
There still was
reason to believe that Russia would need to sell another $200
million or so of gold between now and April, which might provide
some further breathing space.
Over the longer pull, though,
unless international political and financial tensions moderated
considerably during the spring and summer months, there could be
fairly heavy pressure upon the Gold Pool arrangements.
On the exchange markets, Mr. MacLaury said, sterling had
continued to show strength.
From September through January, the
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swing in the Bank of England's exchange position had amounted to
more than $2 billion.
Of that amount, $420 million had been
reflected in reserve increases,1/
During January, the Bank of England made
repayments of central bank debt totaling $325 million--$275 to
the Federal Reserve and $50 million to the Bank for International
Settlements-2/
That still left, at month-end, a net
drain of roughly $90 million on British reserves.
Mr. MacLaury reported that there was general agreement
among most of the British and American officials involved that
the British would run a serious risk of damaging the recovery
of confidence in sterling if they were to show a sizable reserve
decline for January.
action were open.
To avert that risk, several courses of
First, the Bank of England might have made a
new drawing on the swap line; but that course was opposed both
by the Bank of England and by the System, on the grounds that
it would represent a leapfrogging procedure of employing a new
drawing to pay off an earlier drawing.
Second, the British
Government might have drawn on its portfolio of United States
1/ Part of one sentence has been deleted at this point for one
of the reasons cited in the preface. The deleted material referred
to ways in which the Bank of England's dollar gains had been employed.
2/ One sentence and part of another have been deleted at this point
for one of the reasons cited in the preface. The deleted material
referred to other operations of the Bank of England in January.
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securities, but that alternative was flatly rejected by Chancellor
Callaghan. Third, the British Government might have drawn on its
$250 million line of credit with the Export-Import Bank, but that
course was opposed for U.S. balance of payments reasons by the
U.S. Treasury.
There remained the fourth alternative of employing
the joint Treasury-Federal Reserve authorization granted last
September of $400 million for exchange operations to support the
recovery of sterling.
As it turned out, the $90 million needed
to prevent a British reserve decline was provided from this
source on a one-day swap over the month-end, divided equally
between the Treasury and the Federal Reserve.
In February, Mr. MacLaury continued, the Bank of England
again started off the month with outpayments of $290 million, of
which $200 million reflected repayment of the remaining debt
under the $750 million swap line with the System and $90 million
repayment of the one-day swap with the Treasury and Federal Reserve.
In addition, a sizable volume of forward contracts would come due
in February.
In the past February generally had been a seasonally
favorable month and the Bank of England might well take in
sufficient funds before the month-end to avoid any net reserve
loss.
In the first few days they already had taken in not quite
$100 million.
If, however, a short-fall should materialize,
arrangements had been made with the Bank of England and the Bank
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of Italy for a triangular operation, having the dual objectives
of strengthening the British reserve position and enabling the
Federal Reserve to liquidate the bulk of its swap drawings on
the Bank of Italy.
As part of the credit package put together
last September, the Bank of Italy committed itself to provide
support for sterling, if needed, up to the amount of $70 million.
If circumstances required, the Bank of England would draw $70
million of lire from the Bank of Italy at the end of February
and sell the lire to the Federal Reserve against dollars,
thereby strengthening the British reserve position by $70 million
and enabling the Federal Reserve to pay off that amount of its
lira debt to the Bank of Italy.
During the four weeks since the last meeting, Mr. MacLaury
observed, the dollar had continued to show strength against nearly
all of the continental currencies.
Although the unwinding of year
end positions undoubtedly had contributed to that strength, the
improvement went beyond such technical factors.
In part, he
thought, the dollar was benefiting from the continued reversal
of short sterling positions.
In addition, he could not help but
believe that the effects were being seen of the improvement in
the U.S. balance of payments situation.
The voluntary foreign
credit restraint program with respect to corporations seemed to
be biting harder, and the movement of rates in both the exchange
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markets and the Euro-dollar market indicated that there was, if
not a growing scarcity of dollars, at least a cessation of
excessive dollar availabilities.
Even in the case of Italy, the
huge dollar inflows of previous months had ended; in fact, there
had been a slight net decline in dollar holdings in the first
three weeks of January.
And, in the case of France, the rate
had been off the ceiling now for more than a month.
Likewise,
with the Belgian franc under some pressure, the System was able
to buy from the Belgian National Bank sufficient francs to pay
off the remaining $35 million equivalent debt under its standby
facility with that bank.
In addition, the Account Management
was in the New York market more or less continuously during the
period, buying marks for Treasury account to build up the balances
that were used on February 1 to repay a $50 million equivalent
mark-denominated bond maturing on that date.
As the Committee would recall, Mr. MacLaury said, at a
recent meeting Mr. Hayes had mentioned that discussions were
taking place among central bankers at the Bank for International
Settlements in an effort to find a way of dealing with the
threat to sterling of possible drains of sterling balances.
package of credits was now shaping up, based on the roughly
$1 billion of credits made available to the Bank of England
last September.
The United States had participated to the
A
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extent of $400 million--$200 million each for System and Treasuryunder an authorization to purchase sterling on a covered or
guaranteed basis.
The other participants in the arrangement set
a time limit of six months on the facilities that they provided.
Present indications were that they would agree to extend their
credit arrangements for a one-year period from March 15, the
current expiration date, channeling any assistance that might
in fact be required through the BIS on the basis of sterling
swaps.
U.S. participation would continue as at present, on a
bilateral basis with the Bank of England.
In response to questions, Mr. MacLaury said that about
$2 billion of gold had come onto the London market in 1965--$1.2
billion from new production, $375 million from Russian sales,
and about $500 million from other sources.
The off-take also was
about $2 billion, absorbing virtually the entire supply.
Of the
latter amount, mainland China had accounted for a relatively small
part of the total--somewhat over $100 million.
Final figures were
not yet available on the change during 1965 in the volume of gold
held in official reserves by non-Communist countries, but he
thought it would show a small increase.
South Africa had
contributed between $200 and $300 million of gold to the market
in the first half of 1965, but in September that country began to
rebuild its own holdings, and thus far had withheld about $125
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million of new production from the market.
With respect to
Canada, there was some possibility of additional sales of gold
by that country to the U.S.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
January 11 through February 7, 1966,
were approved, ratified, and confirmed.
Mr. MacLaury then reported that a System drawing on the
swap arrangement with the Bank of Italy, in the amount of $100
million equivalent, would mature on February 28, and he requested
the Committee's approval to renew the drawing a second time, if
that should prove necessary.
As he had indicated earlier, there
was a possibility that transactions between the British and the
Italians might permit reduction, if not full repayment, of the
drawing in the near future.
Mr. Shepardson remarked that he hoped the System would
repay the drawing as soon as possible, and Mr. MacLaury replied
that that was the intention of the Account Management.
Possible renewal of the $100
million drawing on the Bank of
Italy was noted without objection.
Chairman Martin invited Mr. Daane to comment on devel
opments at the recent meeting of the Deputies of the Group of
Ten.
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Mr. Daane said that the Deputies had met in Paris on
January 31, February 1, and part of February 2.
As he had
indicated to the Committee earlier, the discussions at the
previous meetings--in November and December--had involved rather
frank and exploratory exchanges of views.
At this meeting a
long step had been taken toward the negotiating phase.
The
meeting consisted mainly of a searching question-and-answer
review of four papers that had been put forward, including one
containing a U.S. proposal.
He would outline the U.S. proposal first, Mr. Daane
observed, although it was not in fact the first advanced at the
meeting.
Under Secretary of Treasury Deming had made clear that
the proposal was a serious one, arrived at carefully by the U.S.
Government.
It had been reviewed thoroughly at a series of meet
ings--nine or ten in number--of the so-called Dillon
Advisory
Committee to the Treasury; and it had been given painstaking
consideration by representatives of the Government agencies
concerned, including the Federal Reserve.
Also, it had been
discussed with interested members of Congress and reviewed by
the President.
In essence, Mr. Daane said, the proposal called for a
dual approach, with the first part involving the creation of
special drawing rights for all member countries of the
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International Monetary Fund, both Group of Ten countries and
others.
Those rights would be distinct from all existing
drawing rights in the Fund.
In operation they would resemble
the drawing rights under the present gold tranches; unlike the
latter, however, there would be no input of gold in connection
with them.
The other part of the dual approach would involve the
creation of a new reserve unit, Mr. Daane continued.
The new
unit would constitute a claim on a pool of currencies paid in
by a group of advanced countries.
The U.S. had not taken a
hard and fast position on the question of the exact composition
of that group, but had suggested that a small number of countries
in addition to the members of the Group of Ten might be brought
in.
The new units would be allocated on the basis of IMF quotas,
and would carry a gold-value guarantee.
Among a number of
technical provisions, there would be one establishing limits on
holdings by creditor countries, of perhaps 2 or 3 times the
amount of units allocated to the country.
Another provision
was intended to enable the U.S.--or any country that made its
currency convertible into gold--to avoid excessive accumulation
of the new units by selling them to other countries against its
own currency.
In addition, the U.S. proposal called for a "set
aside" of new units or currencies by the limited group for the
benefit of the rest of the world.
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Some figures had been advanced in connection with the
U.S. proposal for the sake of illustration, Mr. Daane said.
Thus,
it was noted that total world reserves, consisting principally of
gold and reserve currencies, were about $70 billion at present.
If one reasoned that reserves should be increased at a 3 per
cent annual rate, slightly over $2 billion of new reserves would
be needed each year.
Allowing for additions to the monetary
gold stock at the recent average rate of $500-$600 million a
year, it would be necessary to create about $1-1/2 billion in
new reserves each year.
It was suggested that that amount be
divided equally between new drawing rights and new reserve units,
each of which would then amount to $750 million per year.
Similarly, if one started with a 4 per cent rate of reserve
growth, about $1 billion each would be created annually in the
form of drawing rights and new units.
The first paper actually discussed at the meeting,
Mr. Daane continued, was put forth by the Canadians, who made
clear that it was not an official proposal but simply a collection
of views--largely those of the Finance Ministry.
The Canadian
proposal concentrated on the construction of a new unit, some
what similar to the one contemplated in the U.S. proposal but
with a few interesting differences.
Of these, the most important
was the provision for the new unit to carry a rather high rate of
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interest, set one or two percentage points below the U.S.
Treasury bill rate.
The U.S. proposal had not involved an
interest return, although the U.S. delegation had indicated that
its position on that question was neutral.
The Canadians
stressed the desirability of an interest return in order to
make the new unit more acceptable.
As to the make-up of the
group of participating countries, the Canadians, like the U.S.
representatives, were searching for some criteria for qualifi
cation, and were thinking in terms of about 15 or 16 countries.
The third paper, Mr. Daane said, was an official
proposal put forward by the British.
Again, there were a
number of points of similarity with the U.S., as well as the
Canadian, proposals, and some points of difference.
One
distinctive feature was a requirement that any holdings of
the new unit in excess of the holding limit would be converted
directly into gold.
Another interesting variant reflected the
British concern with the problem of conversion of sterling
balances, to which Mr. MacLaury had alluded, and of dollar
balances.
They proposed that the new units be available not
only to increase reserve assets but also to provide an alternative
asset for countries wanting to convert reserve currency holdings.
The fourth proposal, Mr. Daane noted, was advanced by
Mr. Emminger, the Chairman of the Group of Ten Deputies, who
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said that it represented his own views.
It was concurred in by
a number of delegations, however, and could be considered to
represent a synthesis of the views of the continental Europeans
excluding the French--and, it was learned later, the Belgians.
The Emminger proposal called for a new reserve unit whose initial
creation would require a unanimous vote, with subsequent decisions
made by majority vote.
The unit would be used by and allocated
to only a limited group of countries, and it would be used in
transfers in a one-to-one ratio with gold.
The needs of countries
outside the group would be met by providing for set-asides of
the new unit.
Mr. Daane remarked that the French made no new proposals
at the meeting.
They noted that they had had a proposal on the
table for a year and a half, and that there was no change in
their position.
In sum, Mr. Daane said, the meeting pointed up both the
areas of agreement and the areas of division.
As to the former,
all of the proposals provided for reserve units to be created
under the responsibility of a limited group of countries.
All
were reasonably close with respect to the membership of the
group that would receive the units, and all implied a search for
some qualifying criteria that pointed to inclusion of roughly
15 or 16 countries.
There was a fair consensus that the amounts
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of the new reserve asset created should be established in terms
of a growth trend, rather than decided ad hoc each year; and
that the purpose was to provide for global needs rather than
just those of a particular group of countries.
As to the differences, Mr. Daane continued, the major
one was in the attitude taken to the dual approach recommended
by the U.S.
The U.S. proposal was labeled by some as "quadri
lateral" because it provided for drawing rights both for the
group and for other countries, for distribution of the new units
to the group, and for a set-aside of the units for other
countries.
There was much sentiment for a simpler procedure,
perhaps involving a set-aside of the new units to finance
drawings by the countries outside the group, and only units
for the group.
Other major differences, Mr. Daane said, related to the
holding limit that the U.S. had suggested as a means of safe
guarding against abuses, and to the gold link which the
Emminger proposal would involve.
Speaking for the U.S., he
(Mr. Daane) had raised a number of questions regarding the gold
link.
His basic question was whether that link was intended
simply to provide further discipline on the actions of deficit
countries.
The second was whether such a gold link would not
in effect induce much larger holdings of gold--both by the
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countries within the group, particularly those with low gold
ratios at present, and by countries outside the group.
Dr.
Emminger answered those questions quite vigorously and effec
tively.
He argued, in effect, that if the new unit had a gold
link and also carried an interest return, one could expect that
the unit would become more desirable than gold, and that its
creation therefore would be constructive rather than disruptive.
Mr. Daane added that Mr. Polak spoke on behalf of the
Managing Director of the IMF, mainly on two points.
First, he
noted that the Director was anxious that there be recognition
of the reserve needs of countries beyond a limited group, a
view to which the U.S. had been fully sympathetic all along.
Secondly, it was the Director's view that the decision-making
process should be broadened to involve more countries.
Near
the close of the meeting one of the German representatives had
made a provocative and thoughtful statement.
He noted that
the group was faced with the momentous decision to create
money, and raised the question of whether it would not be
better to do so in the traditional way--which Mr. Daane inter
preted to mean within the framework of the IMF.
That position,
Mr. Daane thought, was premised on the fear that the other route
would lead to excessive world liquidity.
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Mr. Daane concluded by noting that there would be another
meeting on March 7 and 8, in which, he presumed, the group would
move a little closer to negotiations.
That would be followed by
a longer meeting in Washington during the third week of April.
He was happy to note that the U.S. delegation now included
Mr. Robert Solomon of the Board's staff, in addition to the
customary participants--Under Secretary of the Treasury Deming,
Messrs. Willis and McGrew of the Treasury, and himself.
In answer to Mr. Ellis' question as to how it was
proposed to execute the provision for an interest return on the
new unit, Mr. Daane said the group had not got down to the
point of working out all of the mechanics on that question.
In general, the debtor would pay the interest on any credit
received--that is, on assets used.
That, of course, could be
done on either a gross or net basis.
Mr. Galusha commented that recent news stories had
suggested that the Deputies had made far greater progress in
their discussions than had been anticipated, and that the
solution to the problem now appeared possible.
He asked whether
that was Mr. Daane's impression.
Mr. Daane replied that he thought such an appraisal
was correct if the progress was measured in terms of the
original charge given to the Deputies, to search out areas of
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agreement.
There had been forward movement at each of three
recent meetings and, as he had indicated, there was clear
progress toward agreement in several important areas.
also, however, were some important disagreements.
There
In the words
of one participant, used in a personal conversation at the end
of the meeting, there had been both progress and retrogression.
Mr. Hayes said he agreed with Mr. Daane's appraisal.
It should be borne in mind, he thought, that some of the
differences between the positions of the U.S. and some other
countries were exceedingly important to the U.S.
In his
personal view, it was far better to make progress slowly toward
the right decision rather than to accelerate the proceedings
for the sake of reaching some agreement.
Mr. Daane indicated that he shared Mr. Hayes' view.
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 January 11 through 26, 1966, and a supplemental report
for January 27 through February 7, 1966.
Copies of both
reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
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The Treasury refunding of outstanding February
maturities, in which owners of April, May, and August
maturities were given a chance to prerefund their holdings,
was the dominant feature of the period since the last
meeting of the Committee. The Treasury's decision to make
this more than a routine operation and to offer a 5 per
cent note was a bold move, designed to ease the problems
of debt management later in the year. And despite some
uneasy moments while the books were open, the decision
turned out to be a wise one. While attrition in the
February and April issues was somewhat greater than
expected, public subscription of $6.5 billion to the
5 per cent notes was substantially greater than the
market anticipated at the time the books closed and has
reduced the May and August refunding operations to routine
proportions.
The Treasury announcement was initially very well
received in the market, but the opening of the books on
Monday, January 31, coincided with the resumption of
bombing in North Vietnam and with accelerated discussion
of the likelihood that monetary policy was apt to play
the leading role in any effort to restrain inflationary
pressures in the months ahead. In this atmosphere prices
of some long-term Government bonds declined by as much as
a full point during the three-day period while the books
were open, and prices of rights and when-issued securities
also declined, with the when-issued 5s closing the period
at par bid compared with a premium of 7/64 immediately
following the Treasury announcement, Dealer support of
the refunding was minimal--with net positions in both
new issues only $300 million--and with short positions
in outstanding intermediate issues rising significantly
during the financing. Dealer pessimism was not shared by
holders of the issues eligible for exchange, however, as
the results indicated. The notes appear to be in firm
hands with little or no speculative activity and, as
noted, there are no large dealer inventories overhanging
the market. Since the books closed prices of the new
issues moved up somewhat until yesterday when the 5s
closed at par bid.
During the period since the Committee last met, the
money market--at least as reflected in the Federal funds
rate and member bank borrowing at the Reserve banks--has
generally been relatively comfortable, as the extreme
pressure on money center banks finally eased. A small net
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borrowed reserve figure has been maintained as System
open market operations were generally directed towards
maintaining an even keel surrounding the Treasury
financing. A sizable proportion of the reserves provided
involved repurchase agreements against rights.
In
contrast to the preceding period, there has been a general
tendency since the last meeting of the Committee--at least
until the past week--for reserve availability to exceed
projections, as float stayed higher than anticipated and
required reserves declined more than seasonally. Despite
the absence of extreme pressures on the banking system,
short-term interest rates moved irregularly higher over
the period, with the three-month bill rate hitting an
all-time high of 4,67 per cent in the auction on January
17, and with rates on three-month acceptances raised by
dealers to 5 per cent bid on February 1. In yesterday's
auction the 3- and 6-month bills were sold at average
rates of about 4.65 and 4.77 per cent, respectively.
Rates on long-term securities, which had been relatively
stable since their initial adjustment to the discount
rate change, rose by about 10-15 basis points.
While the market does not seem to have been at all
impressed, the investor response to the Treasury refunding
may hold some interesting implications about the attrac
tiveness to investors of the historically high yield
levels of intermediate- and long-term Government bonds.
At the same time, at least some of the larger banks, many
of which have been heavily dependent on borrowed funds,
are taking a hard look at their lending policies. To
the extent that this process results in greater reluctance
to meet loan demands, some of the pressure may be removed
from the Federal funds and CD markets. But it is not so
clear what pressures would be shifted to other markets
as corporations and others seek to meet their growing
credit needs elsewhere.
In the meantime, the markets continue to be extremely
sensitive to developments in Viet Nam, to price movements,
and to demand pressures, both financial and real. Amidst
it all, there appears to be a growing feeling that monetary
policy will be forced to play the leading role in any
anti-inflationary campaign. Some further tightening of
monetary policy may well have already been discounted by
the market and an unexpected settlement in Viet Nam could
have a major impact on expectations. But the dominant mood
continues to be one of anticipation of growing pressure on
financial markets as the year progresses. At the moment the
pressure appears to be focusing in the longer end of the market.
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Mr. Swan referred to Mr. Holmes' observations that dealer
participation in the refunding had been minimal and that the new
securities appeared to be in firm hands.
He asked what implications
those facts had for the period over which an even keel policy would
be required.
Mr. Holmes replied that he thought an even keel clearly
should be maintained until the payment date for the refunding,
February 15.
While it was somewhat difficult to understand
yesterday's decline in price of the new securities, dealers had
been seeing a continuing moderate demand for those securities.
On
the whole, he saw no particular problems ahead in connection with
the refunding, and he did not expect the process of distribution
to be lengthy.
Mr. Daane asked what consequences for interest rates Mr.
Holmes would envisage if net borrowed reserve figures were deepened
from their recent levels.
Was the rate impact likely to be minor
since, as Mr. Holmes had reported, the market may already have
discounted some further tightening of monetary policy?
Mr. Holmes remarked that, other things equal, a higher
level of net borrowed reserves probably was already discounted by
the market.
While there was a great deal encompassed by the "other
things equal" qualification, he doubted that somewhat deeper net
borrowed reserves would act to push rates higher, particularly if
some of the other upward pressures on rates diminished.
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Mr. Hickman asked whether the identity of the sellers
accounting for yesterday's decline in the price of the new
securities was known.
Mr. Holmes replied that there were some
indications of sales by investors, but the decline appeared to
be mainly due to professional activity, reflecting the reluctance
of dealers to take a long position in the securities.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions in Government
securities and bankers' acceptances during
the period January 11 through February 7,
1966 were approved, ratified, and confirmed.
Secretary's note: On February 1, 1966, the
following message had been transmitted by
Mr. Young to members of the Committee, by
telegram to those outside of Washington:
The following message has been received from System
Account Manager:
"Referring to current Treasury offering, System Account
holds $2,232,950,000 of notes maturing February 15, 1966,
about 47% of total outstanding. Account management proposes
that Account exchange its entire holdings through subscrip
tion for $1,232,950,000 (about 55%) of the 4-7/8% notes
maturing August 15, 1967 and $1 billion (about 45%) into
the 5% notes maturing November 15, 1970. Principal reasons
for the proposal are avoidance of excessively heavy System
holdings of any single Treasury issue, ample holdings
maturing in one and two years, and the relatively short
maturity of the 5% notes offered by the Treasury.
"1. Assuming the public subscribes to $1,200 million
4-7/8% notes, if the System's entire holdings were exchanged
into the 4-7/8% notes, it would represent 65% of the entire
issue; under the proposed plan it will be 50% of the entire
issue.
2/8/66
-23-
"2. Although it is difficult to assess at this moment
how many fives there will be subscribed by the public
(including prerefunding of May and August maturities) it
appears unlikely that System holdings of the 5% notes would
be excessive relative to public holdings.
"3. After the exchange, 55% of the total System Account
would mature in one year and 84% in two years."
Please wire whether you would approve the Manager's
proposal.
Advices subsequently were received from
all available members of the Committee
indicating that they approved the Manager's
proposal.
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. Holland made the following statement on economic
conditions:
I would like to focus my comments on price pressures
this morning, for it seems likely to me that the next
round of critical choices for stabilization policy,
monetary and otherwise, will turn largely on the current
and prospective performance of prices.
The over-all performance of our economy this past
year has brought us very close to several of our
domestic economic goals. Our level of output is high,
and demand is broadly based and growing rapidly. Rates
of resource utilization are correspondingly high, with
manufacturing output running at better than 91 per cent
of rated capacity and unemployment in January finally
down to the 4 per cent milestone. But, partly for these
very reasons, our price performance this past year has
been less good than earlier. To be explicit, the index
of wholesale prices of industrial commodities has been
2/8/66
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rising at around a 1-1/2 per cent annual rate throughout
this past year and a quarter, after virtually no net
change (+.3 per cent) earlier in this expansion.
From this point forward--absent an unlikely outbreak
of peace in Viet Nam--the outlook seems to me to be for
a further gradual step-up in the rate of price advance.
This, in a nutshell, implies significantly more price
rise this year than last, and more than has been projected
by the Council of Economic Advisers and various other
Administration officials.
Let me tick off briefly the reasons for this con
clusion. The chief cause of this difference from the
Council outlook is not hard to find: we project more
demand than they do. Our latest green book 1/projections
through the first quarter of 1966 unfold along a track
that runs roughly $5 billion higher than the Council's
projection. Besides some variation in the timing of the
build-up of Federal outlays, the biggest differences lie
in our stronger figures for plant and equipment expenditures
and inventory additions. Even these may strike us as too
low, once the full implications of the sharp upward tilt
of November-December inventory statistics are taken into
account.
It may be that businesses are already acting in
recognition of some of the market implications of these
stronger demands. The surprisingly strong fourth-quarter
inventory accumulation probably includes some buying to
guard against longer delivery times, and also some stocking
in anticipation of price advances. By January, the monthly
purchasing agents' survey showed that more than three-fifths
of the reporting firms were paying higher prices than a
month earlier, a sharp rise from the two-fifths figure
reported in December and the highest proportion in seven
years.
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
2/8/66
-25-
Nonetheless, while price increases seem to be having
a more pervasive effect, they are not yet omnipresent and
the bulk of them still are not very large. This explains
why the average price index for industrial commodities
has not shown much acceleration to date. While a strong
upward thrust has appeared in the latest over-all price
indexes, it has stemmed chiefly from the further sharp
rise in agricultural prices. These price increases did
not attach to farm products that serve as industrial raw
materials; rather, they have been confined mainly to food
stuffs, chiefly meat. Such price increases are not much
of a direct addition to business costs outside the food
processing industry. The consequent increases of retail
food prices, however, are obvious to the average wage
earner, and will undoubtedly stiffen demands in this year's
labor negotiations. It is true that relatively few major
labor contracts are up for negotiation until after midyear,
and by then food costs may well be showing some declines.
Nonetheless, in the interim, a great many less noticeable
wage bargains inside and outside the unionized area are
likely to be influenced both by limited manpower supplies
and by the higher cost of living.
Business production costs are also likely to be
enlarged somewhat by nonwage increases in labor cost.
Elasticity of the labor supply surprised many observers
last year, but growth in the labor force was mainly among
inexperienced youths and women. Skilled adult male labor
is scarce. Recent trends suggest employers are hiring
more inexperienced workers and perhaps are beginning some
hoarding of labor. This will help make a dent in the
toughest of the remaining unemployment problems--the
inexperienced youngsters, the disadvantaged, the minority
groups--but there will probably be a price to pay over
the short run in the form of slower productivity gains
and higher training costs. The combination of these
influences, plus the higher Social Security taxes on employers,
can easily push unit labor costs in manufacturing above
the plateau maintained for most of this expansion, and
add a small measure of cost-push to the demand-pull likely
to be at work on prices as the year progresses.
What assurance do we have that the resultant price
action will not develop rapidly into an old-fashioned
inflationary outbreak? It is true that many individuals
and businesses command the financial resources to finance
a sudden price-boosting surge of spending if military or
-26-
2/8/66
other developments were to deliver the necessary shock to
expectations. But this prospect appears less likely to me
than a fairly gradual demand-pull, cost-push, price advance.
The major moderating influences are persisting forces often
cited to this Committee: the rapid rate of expansion of
plant capacity, the trend toward longer-run pricing policies
on the part of business, still strong domestic interproduct
competition, and vigorous competition for certain products
supplied by foreign producers. (This latter is a mixed
blessing, of course, as Mr. Hersey's report on recent import
trends will show.)
Reinforcing these factors will be the
weight of the Administration "guideposts" and the President's
own potent persuasion in headline cases of threatened price
advances.
But, in my judgment, all these influences will not
suffice to prevent the projected growth of public and
private demands from provoking some increase in the rate
of price rise, unless buttressed before long by a somewhat
greater degree of fiscal and monetary restraint than has
been observable up to now. Comments on how much further
financial restraint may already be in train, and considera
tions as to the desirable composition and timing of any
changes in the fiscal-monetary mix, I shall leave to my
colleague, Mr. Koch, to illumine.
Mr. Koch made the following statement concerning financial
developments:
With the most appropriate posture for monetary policy
over the next couple of weeks likely to be of an even keel
nature, at least until the payment date of the current
Treasury refunding, and with recent developments adequately
covered by the staff written materials and by Mr. Holmes'
remarks, I should like to spend my few minutes this morning
talking mainly about some of the more basic, longer-run,
domestic financial developments that are facing us.
There was considerable discussion at our last meeting
as to whether quantities of credit or liquid assets, or
interest rates, should be our main target over the coming
months. I don't think it is a question of "either-or."
We have to keep both types of factors uppermost in our
minds, continually watching their effects on each other,
their effects on spending and investing, and the changing
interactions among the real and financial variables.
2/8/66
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Unfortunately, with our present state of knowledge, we
do not know enough about the strength and the timing of
financial restraint to be sure about either the volume
of credit flows or the level of interest rates that would
be consistent with a sustainable rate of growth of GNP
given our current state of resource use.
Historical evidence does suggest, however, that
under conditions of high resource use and expanding
demands the pace of total credit growth can be large,
and some increases in interest rates can occur, and
still be consistent with sustainable economic growth
without inflation. The job of monetary policy is to
determine the increases in both financial variables
that would be consistent with such a happy state of
affairs.
There is evidence that the monetary restraint
we have been seeking is having some effects. Both
statistics and opinions obtained from the larger banks
suggest that they are firming up their lending and
investing practices. The weekly reporting banks have
reduced their holdings of municipal and agency
securities on balance in recent weeks and have made
quite prompt redistribution of the new Treasury issues
they acquired originally for tax and loan credit.
Credit expansion at the nonweekly reporting banks,
however, seems to have continued strong throughout
January.
Also, in the last two months longer-term interest
rates, even mortgage rates, have risen rather sharply
for such a short period of time. Some feel that this
is the main avenue through which monetary policy affects
the real economy. The impact of this recent rise in
longer-term interest rates on housing starts and other
types of investment may not be visible for some months.
But even if monetary restraint is beginning to
bite, there are reasons for expecting a fairly rapid
total credit expansion to continue in the coming months.
One reason lies in the business area. After economic
expansions have gone on for several years, as this one
has, business investment tends to grow sharply and
available internal funds to level off. As a result,
external financing demands jump. Last year, for
example, business external financing increased 50 per
cent over 1964. With the growth in internal funds
2/8/66
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likely to be slow this year, a further large increase
in external financing will be required to finance a
desired volume of investment.
The Federal Government will also add to, rather
than subtract from, total credit demands in the coming
months despite the apparently rosy look of the 1967
administrative and cash budgets. To assess the indirect
as well as direct impacts of the Federal budget on
financial markets, one has to translate the figures on
spending and receipts in terms of their likely effects
on the volume of the Federal debt held by the public
and then to add such important influences as the projected
speed-up of corporate taxes and the increased sale of
financial assets. When one does this, the over-all demands
on the financial markets stemming from Federal fiscal
developments are likely to be considerably larger this
year than in 1965, although it is very difficult to
pinpoint the exact timing of the asset transactions.
This conclusion is based on the volume of Federal
spending projected in the Budget Document which, unless
developments in Viet Nam improve greatly soon, will no
doubt prove understated. Nondefense spending also may
be underestimated.
Thus, if the projections of GNP that are currently
prevalent prove to be true, in formulating monetary policy
in the months ahead we will have to expect, and I feel
should consider appropriate, further fairly rapid growth
in the rate of over-all credit expansion as well as some
additional increase in interest rates. Credit markets
are in a sensitive state these days and recent events,
such as the resumption of bombing in Viet Nam and the
resultant increased talk of the likelihood of inflation
and the need for a tighter monetary policy, have tended
to make the interest rate outlook even more bearish. One
near-term effect of this has been to keep the 3-month
Treasury bill rate in the 4.60-4.65 per cent range and to put
further upward pressure on bond yields.
I am less sure about likely future monetary expansion
than total credit expansion, since it is not at all clear
how much elasticity we still have in the existing monetary
stock; that is, how much the likely increase in the demand
for balances for transactions purposes will be offset by
the decrease in the demand for money as a result of a
further likely rise in interest rates on substitutes for
money. The rate of expansion in bank credit, as contrasted
2/8/66
-29
to total credit, will likely decline even if money
supply and demand deposit growth continue substantial
for, with rising market rates of interest, banks will
find time and savings funds more difficult and costly
to obtain. The slackened growth in bank time and
savings deposits recently, despite the changes in
Regulation Q in early December, may already be
reflecting this fact.
We are likely to have to support this course of
domestic financial developments by further monetary
restraint, but I would hope that the major share of
any needed further restraint on the economy would come
from fiscal policy.
Interest rates are already historically high. If
they go much higher, it may be difficult to get some of
the sticky ones down when economic conditions call for
lower rates. High interest rates also have significant
differential effects on the various sectors of the
economy, tending to limit growth-inducting investment
more than consumption. In the period ahead, restraint
on consumption may prove to be the more appropriate
policy goal. Of course, if adequate anti-inflationary
fiscal measures are not taken promptly enough, it will
put an added burden on the more flexible monetary
policy instrument to help keep further economic
expansion on a sustainable basis.
Mr. Hickman asked if there was any evidence that the Admin
istration was planning to increase the degree of fiscal restraint
beyond that outlined in the report of the Council of Economic
Advisers.
Mr. Koch replied that, while he had no specific information
on the subject, he assumed that the economists at the Council and
Treasury were thinking about the possible need for further fiscal
restraint.
Mr. Hersey presented the following statement on the balance
of payments:
2/8/66
-30-
One of the most striking pieces of economic intel
ligence to emerge in the past fortnight was the news
that U.S. imports in the last three months of 1965 were
even larger than in the preceding three months, with
only a slight decline in steel imports. Commerce
Department analysts are adjusting the Census figures
down in the fourth quarter and up in the preceding
quarter, to correct for statistical lags. Even so,
they find a rise at a 10 per cent annual rate. In
relation to GNP, fourth-quarter imports were at an
almost unprecedented 3.30 per cent of total GNP
expenditures. If these high and rising imports are
a harbinger of what we have to expect in 1966, and if
we cannot improve much on the fourth-quarter trade
surplus, which was only a little over $5 billion at
an annual rate, the outlook for achieving any
significant reduction in our international payments
deficit will be bleak indeed.
Imports in the fourth quarter were 17 per cent
higher than those of the final quarter of 1964. The
broad features of the upsurge that was occurring last
year can be seen from corrected breakdowns available
for the third quarter. First, imports of manufacturesthat is, of consumer goods and capital equipmenthave been rising at an accelerated pace. The trend
has been steep for many years. In the mid-1950's
these goods made up one-tenth of total imports. By
1964 they were nearly one-fourth of the total, having
risen at a rate of 18 per cent a year, compounded.
But now this rise has accelerated to about 25 per cent
per annum. Second, imports of semimanufactured and
crude materials--which constitute about two-fifths of
the total--had a rising trend from the mid-1950's to
1962 of only 3 per cent a year, with large fluctuations
of a cyclical character around this trend. From 1962
to the present the rise has been steadily accelerating.
Data for October and November, corrected as well as
we can, indicate an annual rise in imports of materials
at least as great as the 18 per cent shown for the
third quarter. Finally, imports of petroleum (under
the quota system since 1959) have been rising very
slowly in value terms, and the same has been true of
our imports of foods.
Against this background, we must ask: is the rise
of total imports going to continue in the 10-to-20 per
cent range this year? Or, can we take reassurance from
2/8/66
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the standard forecasts, which have been projecting a
smaller rise--in the 5-to-10 per cent range? For
example, the National Foreign Trade Council projection
implies a rise to the fourth quarter of 1966 of only
5 per cent, which is less than the 7 per cent average
experienced in the past decade.
In the past, rapid increase in imports has tended
to go with heavy inventory investment and with rapid
increase in the materials and business equipment
components of the industrial production index. The
indications that inventory investment in the fourth
quarter was large are wholly consistent with the recent
import picture. Under current conditions I regard the
NFTC projection as implausibly low. The problem of
slowing the rise in imports now is closely linked with
the problem of holding down the rate of inventory
investment and damping capital outlays.
As I see it, the two big economic challenges that
face the country are twin problems: how to end our
balance of payments deficits soon, and how to make a smooth
transition to stable growth at high employment.
Excessive imports threaten our success on the balance
of payments front; excessive inventory investments,
along with excessively accelerated fixed capital
investments, threaten the smooth passage we hope for
in the economic life of the country.
The growing uneasiness about prices can aggravate
both problems. Fears of price increases may already be
a motive for stocking and ordering ahead, and excessive
bunching of ordering may already be giving a push to the
upward movement of domestic prices and encouraging
greater importing.
Can we accept these conditions as necessary and
inevitable, and hope to ride through them without
fear either of a subsequent letdown in the domestic
economy or of critical developments in the balance of
payments?
I won't try to deal with the domestic side of the
question. For the balance of payments, after we get
beyond the seasonally favorable first quarter the next
several months may be extraordinarily critical ones.
It is not only the import bill that is at stake.
Excessive domestic demand can suck back potential
exports as well as suck in imports. Export prospects
2/8/66
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look reasonably favorable now, but there is no guaranty
that sales will increase as much as we would like. If
the trade balance fails to improve in the next few months,
probably the balance of payments as a whole will worsen,
for the adverse balance of capital movements and Government
payments is likely to be somewhat larger in coming months
than it was in the fourth quarter of 1965. And if the
idea gains ground among investors and businessmen that
the only hope the Government has for handling the balance
of payments is instituting a set of controls more permanent
and less voluntary than those we have now, capital outflows
may well begin to accelerate again. Eventually our problems
with the dollar could begin to resemble Britain's with
sterling.
The Administration has held out great hopes--most
recently in the President's Economic Report--that "we
intend to complete the job (of moving toward payments
balance) this year."
The question is, how is this to
be done?
I would like to quote, in conclusion, what seems to
me a relevant part of a paragraph in the Economic Report,
in which the President states that he will look to the
Federal Reserve System for help in . . . "preventing ex
cessive credit flows that could carry the pace of expansion
beyond prudent speed limits."
Chairman Martin then called for the go-around of comments and
views on economic conditions and monetary policy.
Mr. Hayes, who
began the go-around, made the following statement:
Now that we are one month into the new year, we
have not only statistical evidence of a stronger economy
in December than we believed it to be at our last meeting,
but also clear signs that the rapid pace of the expansion
is continuing. This year we see no sign of the "winter
doldrums" that used to be a normal seasonal phenomenon
early in the calendar year. Moreover, the outlook for
1966 is very strong. In the private sector, besides the
stimulus of vigorous consumer demand and record business
outlays on plant and equipment, accelerated inventory
accumulation may be becoming a significant additional
factor.
2/8/66
-33Of course the Viet Nam war is a major factor affecting
all prospective economic and financial developments.
The
rising scale of military operations has clearly contributed
to the strong business outlook, has generated skepticism
as to the realism of the Federal budget, and has been a
major cause of continuing upward pressure on interest
rates of all maturities. We must have in mind this
dominant uncertainty, with its possibility for bringing
unexpected changes in the economic picture in either
direction.
Notwithstanding the Administration's strenous efforts
to produce a budget that would not add to inflationary
pressures, the general atmosphere remains one of apprehen
sion that excessive demands are building up. Our analysis
suggests that although the budget as presented should be
much less stimulative than the extraordinarily stimulative
1966 budget, it will still make a considerable expansionary
contribution. All indications are that rising expenditures
all along the line will increasingly press against available
resources of labor and plant capacity. These pressures
are likely to be especially noticeable in the area of
manpower; and since the ranks of the unemployed consist,
to a much greater degree than a year ago, of untrained
workers, their absorption into employment could exert a
strong initial drag on productivity. The changes of con
tinuing stability in unit labor costs appear dim. While
the increase in industrial wholesale prices remained
relatively moderate in 1965, with no signs of acceleration
in the over-all index, the price advances were quite
pervasive and indeed increasingly so as the year went by.
The outlook for prices in 1966 is clearly disturbing; and
the performance of the stock market this year, especially
with respect to low-priced issues, has been just one
more sign of growing inflationary psychology.
Fragmentary balance of payments statistics, suggesting
a deficit for the month of January, are not useful as a
measure of the outlook for the year as a whole, because
of the bunching last month of large Canadian issues
originally scheduled for placement in November and December,
besides unusually large tax and royalty payments to
However, recent estimates
Venezuela and the Middle East.
of our prospective international transactions for 1966,
made by a Governmental committee in Washington, are not
encouraging. The benefits of an anticipated $900 million
improvement in our trade surplus, together with a decline
2/8/66
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in direct investment, increased investment income, and
the absence of large sales of British official portfolio
securities, may well be fully offset by increases in
military and aid expenditures, in bank credit to
foreigners, and in travel expenditures. And even the
hoped-for improvement in our trade surplus seems a bit
optimistic in view of the prospect for continued rapid
expansion in the domestic economy and accompanying cost
and price pressures.
In the credit area, preliminary January figures
suggest that the pace of the advance of the credit and
liquidity indicators has moderated since December,
although the gains were still rapid. Bank loan demand
remains extremely active even at the higher interest
rates charged since early December. This latter
impression is verified by New York bankers who foresee
no let-up in loan demand. Such factors as the upward
drift of rates in the corporate bond market and the
prospective speed-up in corporate tax payments are
providing additional stimulus to loan demands, besides
the general influence of the strong business outlook.
Whereas reduced bank liquidity last year was not a
major deterrent to the granting of all reasonable loan
requests, there is now growing evidence of efforts by
the New York banks to curb loan expansion. For one
thing, I am glad to note an apparent increasing reluc
tance to finance transactions they consider more
appropriate for the bond or equity markets, especially
mergers and acquisitions.
Despite some continued uneasiness, I think there
are some signs that the tensions characterizing the
short-term financial markets in December and part of
January are gradually receding. The success of the
Treasury's refunding operation should be a constructive
influence. At the same time, however, the long bond
markets have come under increased pressure, with no
real assurance of stabilization as yet. Earlier yield
adjustments in the long area had been relatively moderate,
but the growing corporate calendar, the prospective large
asset sales by Government agencies, and the already
heavily committed position of insurance companies and
other institutional investors are major factors
currently affecting market sentiment.
Turning to policy, I am impressed by the clear
and present danger of inflation and by the fact that
present fiscal policy plans do not provide any very
2/8/66
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significant restraint. It is impossible to estimate as
yet whether the combination of a very high level of
credit demand and a somewhat more stringent supply will
result in a moderation of the financial expansion without
further restrictive steps. Restraint in the rate of
credit expansion seems highly desirable for purely
domestic reasons, apart from the important contribution
such a move might make to our balance of payments.
The nervous state of the money and capital
markets during the last two months of adjustment to the
higher discount rate and higher Regulation Q ceilings
has made it difficult to keep reserves under sufficient
pressure to encourage a slowing of credit expansion
without excessive rate effects. The recent large
Treasury refunding also required an especially solicitous
attitude toward the state of the money and capital markets.
Now that it is virtually completed, I would hope that net
borrowed reserves could soon be restored to a range
centering around something like $150 million, such as
prevailed for sometime before last December's discount
rate increase; and I would also hope that this would
be consistent with other money market conditions similar
to those prevailing in recent weeks. While I lean toward
moving even a little further in the direction of reduced
reserve availability, perhaps toward a target of $200 million
or more net borrowed reserves, I think this decision might
well be delayed until the next meeting, when we should
have a better idea of the effects on credit expansion of
our moves to date.
With respect to Mr. Robertson's interesting
memorandum,1/ I sympathize with his objective of more
prompt counter-cyclical influence by open market opera
tions, as well as with his goal of wider swings in net
borrowed reserves that would have the effect of diminishing
1/
Entitled "A Free Reserve Proposal," and distributed
to the Committee on January 27, 1966. A copy has
been placed in the Committee's files.
-36-
2/8/66
the present public overemphasis on a given reserve
figure. However, I wonder whether we can rely on
required reserves as a valid short-run measure of the
forces of credit expansion. It seems to me that we
have a hard enough time interpreting credit and
liquidity developments on even a monthly basis, let
alone relying on an automatic reserve interpretation
on a day-to-day basis.
Insofar as a net borrowed
reserve target is involved, I would much prefer, as
a general rule, to wait three weeks or a month until
the next meeting and then make a conscious judgment
that the target should be higher, lower, or unchanged.
The draft directive as proposed by the staff 1/ is
entirely satisfactory.
One possibility which the Board might wish to
consider is an increase in margin requirements, in the
light of the sharp rise in customer credit over the
last five months, and particularly in December.
Mr. Francis reported that economic activity in the Eighth
District had continued to advance during the fall and early winter,
but the growth rate probably had not equaled the rapid national
increase.
Employment in the District had risen since August, though
at less than the national rate.
Unemployment had declined in most
of the area's major labor markets.
In only two of the eight
metropolitan areas of the District was the latest seasonally
adjusted unemployment rate as much as 3 per cent.
One of the areas
was Fort Smith, Arkansas, where the Fort Chaffee military installa
tion was closed.
1/
Appended to these minutes as Attachment A.
2/8/66
-37
McDonnell Aircraft, the region's largest employer, had
received Defense Department contracts to step up production of the
Phantom fighter plane, Mr. Francis said.
In addition, the company
was beginning to build versions of the Phantom for the British.
The company planned to increase its employment between now and
next fall by 4,000, to about 40,000.
Other major companies in
the District which had recently received contracts for military
goods included Wagner Electric, General Steel Industries, Universal
Match Corporation, and Olin Mathieson Chemical Corporation.
Each
of those companies planned to increase its employment in the near
future.
Also, RCA commenced construction in December on a TV
receiver manufacturing plant in the Memphis area; the plant was
expected ultimately to employ about 7,500.
Since August, Mr. Francis continued, manufacturing output
in the District had risen moderately, following a rapid expansion
in late 1964 and early 1965.
Spending, as indicated by the volume
of bank debits, had risen at a 12 per cent annual rate in the same
period.
Personal income, reflecting the higher level of employment
and greater activity, had been about 9 per cent higher in recent
months than it was a year earlier.
Gross farm receipts were up
3 per cent from the fourth quarter 1964 to the fourth quarter 1965.
Returns from livestock jumped considerably, but were partially offset
by reduced crop receipts.
For the year 1965, income per farm was up
about 5 per cent on both a gross and a net basis.
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2/8/66
Total credit at large District'banks had risen moderately
since August, Mr. Francis said.
Increases in total loans,
particularly on real estate and to consumers, more than offset
net sales of securities.
Business loans had risen less than
seasonally since August, following an unusually sharp rise last
spring.
Both demand and time deposits had gone up.
Nevertheless,
banks had been pinched for funds, and borrowings--both from the
Federal Reserve Bank and from others--had been at higher average
levels in the past three months than at any other time in over
five years.
In summary, Mr. Francis observed, economic activity
appeared to be vigorous in the District.
He based that conclusion
on both the statistics and the optimism of those with whom he
From a review of the national data, it appeared that
had talked.
the national scene was as strong or stronger than that of the
District.
Aggregate demand might be excessive, as evidenced by
price rises, labor shortages, and the increased concern about
guideposts.
Mr. Francis said that he preferred not to make detailed
comments on policy at this, his first, Committee meeting.
However, with most measures of the banking system--bank reserves,
loans, bank credit, time deposits, demand deposits, and moneyexpanding rapidly during the past two months, with the current
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2/8/66
stimulative fiscal situation, and with the strong upward momentum
in the economy, it would appear that insofar as the Committee's
responsibility to the Treasury permitted some firming in monetary
policy was indicated.
Mr. Patterson reported that economic developments in the
Sixth District continued to provide a base for strong credit
demands, and the latest banking figures confirmed that conclusion.
Loans at banks at leading cities in the District declined less in
January this year than in 1965.
District bankers were looking
forward to continued loan expansion during 1966 although there
were differences of opinion about its strength.
A new round in the competition for time deposits might
possibly be developing, Mr. Patterson said.
Until recently,
most bankers had adopted a "wait-and-see" attitude with respect
to their rates on time deposits, and any increases in rates that
were made were modest.
Two weeks ago one of the large Atlanta
banks launched an extensive advertising campaign, offering to
pay 4-3/4 per cent on savings certificates for as short a time
as 90 days and for as small amounts as $25.
A newly opened
nonmember bank in New Orleans was offering 5 per cent on savings
certificates held for one year in amounts of $25 and over.
So
far, no reaction had been noted from the other banks or savings
institutions.
Negotiable certificates of deposit declined during
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January at practically all the banks in leading Sixth District
cities, the major exception being a bank that had aggressively
competed on the basis of rates.
For some time, Mr. Patterson observed, the Committee had
been hoping that the dust would settle so that it could identify
the forces that were responsible for the rate and loan behavior
following the discount rate changes.
to be very persistent.
That cloud of dust seemed
Even now, the Committee could not sort
out clearly the technical, expectational, and real factors, and
that seemed also to be the case for persons outside the System.
Nevertheless, more and more of them were commenting on the
apparently inconsistent behavior of rates and reserves.
As was
usual, they had been advising the System that something ought to
be done.
But, contrary to most occasions, they had not told the
System how to go about controlling the expansion of reserves and
the money supply without pushing up rates.
When a dust cloud persisted for as long as this one had,
Mr. Patterson continued, one was tempted to just rush in to do
something, and hope for the best.
On the other hand, if the
Committee waited for the dust to settle completely, it might
find that it had permitted undesirable developments that could
not be changed after visibility had improved.
There was,
however, the possibility of adopting a policy that gently probed
2/8/66
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toward the desired goal with the understanding that that course
of action might have to be altered at any time.
Mr. Patterson commented that during recent weeks the
Committee's operations had been primarily directed toward keeping
the short-term Treasury bill rate within bounds, at the same time
hoping that implementing that policy would not create too large a
volume of reserves.
It seemed appropriate after the Treasury
refunding was completed to reverse the emphasis and to carry out
a probing operation aimed at getting a tighter control of reserves.
He did not think that the Committee should delay that type of
action until after the short-term bill rate fell below the discount
rate.
Possibly some tightening of member bank reserve positions
would result in a further increase in the bill rate, Mr. Patterson
said.
However, he was not sure that that would be the case.
To
the extent that the present bill rate structure resulted from a
maldistribution of reserves and special credit demands, pressures
on the short end of the market might be reduced in the future.
But
even the Treasury bill rate's remaining above the discount rate
would not inevitably call for an immediate further increase in the
discount rate as had sometimes been suggested.
Member banks at
present showed no disposition to take advantage of the differential
between the bill and the discount rates.
Should that develop, of
course, the System's policy would have to be reconsidered.
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The Committee could not begin the probing operation until
after the Treasury refunding program had been completed in mid
February, Mr. Patterson said.
After that, he would like to see
System operations so conducted as to reduce the availability of
reserves, by moving toward a net borrowed reserve figure of around
$200 million, as suggested by Mr. Hayes.
Mr. Bopp remarked that, with the President's budget
message having been made public, it appeared clearer than ever to
him that the economy was poised to move strongly ahead in coming
months and that price pressures were likely to mount and become
more pervasive.
The strength of demand showed up in the trend of
fixed investment, the fast pace of inventory accumulation,
burgeoning new orders and unfilled orders for durable goods, and
an operating rate in the manufacturing sector now within a hair's
breadth of the preferred rate.
Earlier, Mr. Bopp said, when the margin of unutilized
resources was larger, it had seemed reasonable to him to wait
for actual price increases before taking additional restrictive
action.
The margin of unutilized resources was much narrower
now and, although industrial prices had been fairly quiet recently,
the stage was set for major increases in prices.
In that
environment, such increases could lead to speculative inventory
building and other anticipatory actions, creating upward pressures
which fed on themselves.
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Also, in that kind of environment uncertainties over the
Federal budget became more crucial.
As Mr. Bopp saw it, there
were four principal areas of uncertainty, and all of them appeared
to veer in an expansionary direction.
spending:
First, with respect to
Viet Nam needs were unpredictable and spending estimates
were very possibly on the conservative side.
Moreover, it was
uncertain whether and to what extent Congress would be successful
in cutting domestic spending.
Second, on timing:
If, as some
forecasted, the largest expansion in Government spending occurred
in the second half of fiscal 1966 and early in fiscal 1967, such
a "bunching up" of expenditures could prove quite stimulative
even if total spending did not exceed the amount budgeted by the
President.
Third, on revenues:
While a burgeoning economy might
well generate the increased receipts envisaged by the President,
and while his proposed tax changes probably would be passed, the
question still remained of whether and to what extent the tax
measures would restrain private spending during the current
calendar year.
Finally, as to additional fiscal restraint:
Even if the President should move very quickly to recommend added
taxes or reduced spending in the event of further inflationary
pressures, those recommendations would have to be appraised and
acted upon by Congress.
2/8/66
-44In short, with strong pressures from private demand and
the many uncertainties in the fiscal outlook, it seemed to
Mr. Bopp that action should be taken to damp current rates of
flow of money and credit.
However, with the Treasury refunding
in progress, there was a question of whether to wait until the
next meeting of the Committee before imposing additional restraint.
He would be inclined to move initially to tighten reserve
availability as soon after February 15 as the Manager judged was
appropriate in view of the refunding.
The move, however, should be a moderate and gradual one,
Mr. Bopp said.
It might be necessary, among other things, to
relieve some pressures on commercial banks, should they have
strong credit demands at the same time they were experiencing
trouble replacing CDs.
He would rely mainly on the discount
window to relieve any excessive pressure from those and other
sources.
The staff's draft directive appeared appropriate to
him.
Mr. Hickman remarked that the impact of fiscal policy on
the economy this year seemed to be even less predictable than
usual.
The figures for Federal spending in the national income
and "high-employment" budgets, which measured the impact of
budget policy on the economy, probably would be on the low side,
particularly in the area of defense--although the situation was
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subject to change almost on a daily basis.
Despite the general
uncertainty about the budget, it now appeared that fiscal policy
would be stimulative, at a time when aggregate demand was pressing
on the nation's capacity to produce.
Under those circumstances,
higher taxes than were now contemplated seemed indicated.
Until
such plans emerged, he thought the Committee should rely on
reduced credit availability and on tighter money.
Such a course of action was also indicated by current
developments in the economy, Mr. Hickman said.
As the staff had
pointed out in the green book, GNP in the first quarter would
probably increase by at least as much as in the fourth quarter
of last year.
Industrial production through December exceeded
the most optimistic expectations.
All major price indexes
continued to move up, with the resurgence of farm and food
prices at wholesale presaging further increases at retail.
Mr. Hickman thought recent price developments were not
surprising in view of the kinds of pressures now impinging upon
resource utilization.
The Cleveland Reserve Bank's informal
survey in late January of manufacturing firms in the Fourth
District indicated widespread manpower shortages, especially for
firms in the machinery and fabricated metals industries, where
the work week was currently ranging from 50 to 60 hours.
In some
cases, pressures were also developing on plant capacity because
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new facilities were not coming on stream rapidly enough to offset
rising order backlogs.
Moreover, several important industries in
the District emphasized limitations imposed by streched-out delivery
dates for machinery.
Many firms were already operating above
preferred utilization rates and would have difficulty handling any
further increase in orders.
The backlog of defense orders was
already large, and another surge of orders would simply intensify
problems of capacity and priorities.
On the financial front, Mr. Hickman continued, increases
in nonborrowed reserves, money supply, and time deposits apparently
had slowed to a less frenetic pace in recent weeks.
Nevertheless,
over-all rates of increase in those variables since the discount
rate action had been excessive and inconsistent with his view of
appropriate monetary policy.
Because of the massive Treasury refunding, Mr. Hickman said,
there was little that the Committee could do now of a constructive
nature, particularly in view of the unsettled state of the bond
market and the probable churning in the after-market.
Nevertheless,
some moderate corrective action might be possible later this month,
if the bond market settled down.
In the past four weeks, the net
reserve position of banks had averaged slightly above zero, and
bank borrowings had averaged about $400 million, which created
slightly easier conditions than Mr. Hickman thought the Committee
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had intended, even during a period of even keel.
He hoped that it
would soon be possible for the Manager to move net reserve positions
back to levels prevailing before the last discount action.
Once the
Treasury refunding was out of the way, he would prefer a still deeper
level of net borrowed reserves and correspondingly higher bank
borrowings.
For reasons already indicated, Mr. Hickman did not agree with
the second paragraph of the staff's draft directive.
It seemed to
him that it was time for the Committee now to begin to reduce credit
availability, which would mean higher interest rates rather than
stable rates, given the current strength of loan demand.
That approach
would involve less tampering with the economy than would any system
of credit rationing based on vague distinctions as to what are and
are not productive uses of credit.
Mr. Maisel thought that if the Committee examined the Economic
Report it could derive certain assumptions as to where monetary policy
was expected to aid stabilization in the current situation.
Monetary
policy was expected to aid in containing the expansion of fixed
investment and to cut back on inventory investment.
In addition,
it appeared as if a decrease in the net export balance would aid
the fight against inflation.
With respect to the latter point, Mr. Maisel thought the
Committee should give more consideration to the question of whether
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it now had a contradiction in the directive.
Could it expect mon
etary policy to help in restraining inflationary pressures and at
the same time aid in achieving balance in the country's international
payments?
If the Committee was to fight inflation, shouldn't the
net export balance decrease?
Could it expect the current account
to carry as much foreign investment as it had in the past?
Mr. Maisel agreed with the previous statements around the
table that tighter fiscal policy at this time might be proper.
He
would doubt, however, that tighter fiscal policy would be tried
until monetary policy had had its chance to decrease demand.
As
a result he believed that the rate of expansion of total credit
had to be cut back at least to where it was in the Committee's
previous policy period.
The Desk should put more emphasis on the rate of expansion
of nonborrowed reserves, Mr. Maisel said.
That rate of expansion
should be reduced to prior levels, even if that caused somewhat
higher interest rates.
The proposal in Mr. Robertson's memorandum
might be a way of achieving the cut in the expansion of nonborrowed
reserves and, therefore, it should go into effect as soon as possible.
He thought the Committee also should be concerned with the question
of how much of market action and disturbances resulted from rumors
without proper knowledge of what the System was attempting to do.
Specificially, he asked whether the market would operate better if
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it knew that the Federal Reserve was willing to operate at a
much higher level of borrowed reserves without resorting to
another increase in the discount rate.
Mr. Daane said he confessed to being a bit gloomy about
the outlook after listening to, and agreeing with, the people
who had spoken thus far.
He noted particularly Mr. Holland's
expectation of a continued price upcreep; the statement by
Mr. Hersey, whose pessimism regarding the balance of payments
was, he thought, well founded; and the excellent analytical
case Mr. Koch had made for further fiscal restraint, about which
Mr. Daane was not sanguine at this point.
While he shared
Mr. Koch's distaste for higher interest rates he thought that,
were it not for the necessity of maintaining an even keel during
the current large Treasury financing, the Committee should be
trying to restore a somewhat deeper level of net borrowed
reserves.
He would favor such a course as soon as it was
feasible and to the extent that it could be accomplished without
racheting interest rates upward.
Because he felt somewhat
skittish on the latter score, he would go along with a target
of $150 million for net borrowed reserves; otherwise he would
have been inclined to accept a somewhat deeper target.
staff's draft directive appeared appropriate to him.
The
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Mr. Daane was sympathetic with the goals of Mr. Robertson's
memorandum.
However, he recalled the occasion, a number of years
ago, when he had tried to disabuse the Committee of the view that
free reserves were an appropriate guide for policy, and had
received a letter from Woodlief Thomas saying that free reserves
were the only serviceable policy benchmark available to the
Committee.
His own views had come full circle.
He shared
Mr. Robertson's opinion that the free reserve figures should not
be closely pinpointed, and he would like to see the market rely
less on those figures as indicators of policy--as he believed it
was already doing.
He was skeptical, however, that the Committee
could abandon free reserve figures for target purposes; and he
was even more skeptical that it could use required reserves as
a policy guide in the manner Mr. Robertson had suggested.
While
he shared all of Mr. Robertson's reservations about free reserves,
he thought they still were the most useful benchmark to indicate
the nature of the thinking around the table.
Recently, the net
borrowed reserve figures had been showing relatively wide
fluctuations so, in effect, the Committee was accomplishing one
of Mr. Robertson's objectives.
In Mr. Daane's judgment those
wider swings were appropriate; but he hoped that the Committee
would not try to put greater emphasis on aggregate magnitudes
and quantities in its instructions to the Desk.
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Mr. Mitchell remarked that many of those speaking today,
including the staff, seemed to be saying that there was something
wrong with the budget submitted to Congress by the Administration.
He did not think it really needed defense--and yet, perhaps, some
thing should be said in its favor.
In his judgment the budget
represented a plan that encompassed the possibilities of both
peace and war; it straddled that question, and necessarily so.
What was the Committee's role when confronted with that
type of budget?
Mr. Mitchell thought the answer lay in the
Committee's flexibility to fill in during the interim.
The
Committee prided itself on its flexibility but, at the same time,
it could not pinpoint the effects of its actions because it did
not have the necessary selective controls.
If it were able,
the Committee might well be trying to do something about the
inventory situation, which in his judgment was an element not
of strength in the economy but of great weakness.
The Committee did have controls over the banking system,
Mr. Mitchell said, through which it could put some pressure on
bank reserves, although not without some interest rate effects.
Another step could be taken immediately--to advise banks coming
to the discount window to repay their borrowings more quickly
and to adjust their liquidity positions.
The System attempted
to discourage continuous borrowing under the terms of Regulation A,
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but there was no hard and fast rule as'to what "continuous
borrowing" was, and banks were able to maintain an illiquid
position by shifting between the window and the Federal funds
market.
System discount officers could be of some help in
contributing to the Committee's over-all objective of
restraining borrowing.
As to policy, Mr. Mitchell said he agreed that at this
point the Committee should not interfere with the Treasury
financing.
However, he favored moving toward greater firmness
as soon as the Manager judged that the financing was no longer
an important consideration; and increasing the degree of firmness
over time if present circumstances persisted.
As long as there
was a belief that the country faced developments such as were
associated with the Korean war, such a policy would be desirable
to help reduce inflamed expectations.
Mr. Shepardson commented that all of the opinions
expressed thus far today seemed to be consistent with the state
ment in the first paragraph of the staff's draft directive that
the economy was expanding vigorously.
Pressures seemed to be
building in almost every facet of the economy, and developments
since the Budget Message suggested that Federal expenditures
would be higher than estimated in that document, implying still
greater pressures ahead.
It was important that efforts be made
2/8/66
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by any available means to keep the pressures from mounting and,
accordingly, there was merit in the idea of fiscal restraint to
curb demand.
prospect.
But such restraint did not seem to be in immediate
In his opinion the Committee should be exerting more
restraint; it should be supporting the December discount rate
increase by acting to reduce reserve availability.
Recently, Mr. Shepardson said, he had been studying the
possibilities of developing a better target for operations than
free or net borrowed reserve targets.
As everyone knew, there had
been periods when the Committee had maintained negative reserve
targets but had not achieved its objectives for bank credit because
of rising credit demands.
He had discussed the possibility of
using some other measure, such as total reserves, with members
of the staff, but thus far had not found a satisfactory approach.
For lack of a better suggestion at this time, he recommended
working back toward the level of net borrowed reserves that had
prevailed before the discount rate action, and perhaps to higher
level.
He recognized the Treasury financing situation but, if
he correctly interpreted the statements made today on that
subject, the financing had been generally successful and the
problem of digestion of the new issues was a relatively small
one.
Moreover, the need for maintaining an even keel would
become progressively less over the coming period.
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2/8/66
With those circumstances in mind, Mr. Shepardson said,
he would change the second paragraph of the draft directive to
read:
"In light of the successful Treasury financing, System
open market operations until the next meeting of the Committee
shall be conducted with a view to moving toward somewhat firmer
conditions in the money market."
With such an instruction, he
would expect the level of net borrowed reserves to be moved
toward the $200 million level--not immediately, but before the
next meeting of the Committee.
Mr. Mitchell suggested that the Manager indicate how long
he thought even keel conditions should be maintained.
Mr. Holmes replied that in his opinion it certainly would
be desirable to maintain an even keel through the payment date,
February 15.
As to the subsequent period, while he could not be
certain, it appeared that even keel considerations were likely
to be less important than usual at that stage of a refunding.
As he had noted, the underwriters' positions in the new issues
were rather minimal and it was conceivable that they would be
even more minimal a week from now.
He did see one problem with
Mr. Shepardson's proposal for the directive, connected with the
description of the Treasury financing as "successful."
Certainly
it had been successful in achieving the objective of extending
the average maturity of the debt.
From the point of view of
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market developments, however, it had been somewhat less success
ful; it was quite unusual to see the price of a new security
move down to par at this point.
Mr. Shepardson agreed that there might be some problem
with the word "successful," but it was the best word he could
find.
He thought it definitely was desirable to start moving
toward deeper net borrowed reserves; since the distribution of
the new securities already was fairly well accomplished, it
would be unfortunate, in his judgment, to wait three weeks before
doing so.
The objective at first might be to restore the earlier
target level of $150 million net borrowed reserves.
To his
recollection the Committee had not changed that target--the
figures had slipped away in the course of recent developmentsand its restoration could be considered to be consistent with
maintaining an even keel.
As he had indicated, however, he
favored going a little further than that before the next
meeting.
Mr. Daane suggested that Mr. Shepardson's objective might
be accomplished by having the directive call for moving toward
firmer conditions "as soon as the current Treasury financing
permits."
Mr. Young then proposed the following language:
"In
the light of the imminent conclusion of the current Treasury
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financing, System open market operations until the next meeting
of the Committee shall be conducted with a view to maintaining
in the first part of the period about the same conditions in
the money market as have prevailed in recent weeks, and in the
latter part of the period moving toward firmer conditions."
Mr. Daane remarked he could live with that language but
it seemed a little cumbersome.
He would prefer a formulation
along the lines of his own suggestion.
In response to a question by Chairman Martin, Mr. Holmes
said the intent of the members of the Committee who had spoken
thus far was clear; they favored moving to firmer conditions
after the Treasury financing.
The economic go-around then resumed with the following
statement by Mr. Robertson:
The round-up of evidence suggests that a strong
business advance is still under way. With demands
already beginning to press hard upon our narrow
remaining margin of available resources, this
situation possesses all the ingredients for an
outbreak of an inflationary public psychology. The
latest readings on the price indexes are up somewhat,
even though chiefly because of higher agricultural
prices. Other signs of a possible developing ebullient
attitude are exemplified by the apparent inclination
of businesses to commence some hoarding of both
materials and labor, and--in some cases--to borrow
now before interest rates rise further and lendable
funds become harder to locate. There also is the
possibility that Viet Nam developments will do more
to aggravate than to calm these inflationary expecta
tions in the weeks and months ahead.
2/8/66
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This is the kind of situation in which we must be
alert to the signs of an inflationary outbreak and be
prepared to adopt a firm counter-inflationary stand by
a wise combination of fiscal and monetary policy. We
have the new budget figures now, even though it is
generally recognized that the visissitudes of the war
effort render the figures more than ordinarily uncertain.
While the analysts are still arguing over the fine
points of the budget's impact, I am inclined to regard
it as just a shade more stimulative than in the second
half of 1965. The additional money-raising actions of
the Government may be almost but not quite enough to
offset the expansive effect of the step-up in Federal
spending. But no matter how you shade it--either a
little more stimulative or about the same--the Federal
budget will do little, if anything, to help restrain
any upthrust of private demands. This means that
monetary policy must bear the brunt of dampening
excessive demands if they actually develop.
We are now in a period of "even keel" that
probably has to stretch over a good part of the time
between now and the next meeting of the Committee,
although the relatively smaller dealer awards of the
new 5's suggest that we might not have to hold very
much beyond payment date. Nevertheless, I would agree
that any significant further firming in our policy
must wait until at least the March 1 meeting.
In the interim, however, there are two operational
considerations we could have in mind that might make
our next policy change easier to accomplish. One is
to define our current "even keel" with the same
qualifications the Manager attached to the term three
weeks ago, namely, that market responses to basic
military, economic, and budgeting developments should
only be moderated and not completely offset. The
second adaptation I would suggest is to permit a
somewhat greater range of movement in net borrowed
reserves, along the lines of the memorandum I circulated
to the Committee ten days ago. I will not take the
time to reiterate here all the arguments put forth in
that document, but will simply suggest that net
borrowed reserves be centered on $100 million, but
permitted to range between $0 and $200 million as my
memorandum suggests. That would mean dropping toward
$200 million if required reserves are larger than
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expected, and rising toward zero if credit demands are
less than expected. This would not do violence to the
"even keel" principle but would give us a better basis
for maneuver come the first of March.
With this interpretation, I would be willing to
vote in favor of the draft current directive distributed
by the staff.
Mr. Robertson added that he also would concur in a revision
of the directive such as had been suggested, calling for firming
after the payment date.
He was grateful for the sympathetic
comments made with respect to his memorandum, and he would simply
note that he hoped further consideration would eliminate skepticism.
Since the members were aware of the need to get away from fixed
targets he would suggest that the staffs of the Board and the
Reserve Banks be requested to give consideration to the problem;
if his suggestion was not the best, the staff might be able to
offer a better suggestion.
Mr. Hickman commented that the Committee might want to
plan on discussing Mr. Robertson's proposal in depth, perhaps at
a time several months from now.
Chairman Martin agreed that the staff should consider the
subject and that at some time the Committee might hold a discussion
not only of Mr. Robertson's paper but of any others that were
prepared.
It would be desirable, he thought, for other members
who were so inclined to present papers to the Committee.
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Mr. Wayne then reported on Fifth District business
conditions, noting that they continued to follow a strong upward
course.
December increases in nonfarm employment and factory
man-hours were even stronger in the District than in the nation
as a whole.
Manufacturers reported that they felt the pinch of
tight labor markets in the higher costs incurred to find and train
the workers needed to meet existing commitments.
Furniture
producers complained of the limited supply and rising cost of
labor, and some were unable to promise deliveries of popular
lines in less than four months.
The textile industry was beset
by other problems in addition to labor shortages.
Leaders of
the industry said they could meet Defense Department needs only
by reducing production and delaying deliveries to civilian
customers in some product lines.
They felt, however, that the
resulting upward pressure on prices could be controlled by their
determination to hold the line.
Textilemen were also concerned
lest domestic shortages lead to increased imports, a development
that would concern the Committee as well because of its implica
tions for the balance of payments.
On the national scene, Mr. Wayne continued, the long
sustained business expansion showed increasingly disturbing signs
of becoming a classical boom.
Gains in business activity in
December were outstandingly broad and strong and there were no signs
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of slackening in January.
Pervasive upward pressure on prices
continued, with wholesale prices rising by 1 per cent from October
to December and by 3.4 per cent for the year.
Labor markets were
progressively tighter, and optimal rates of capacity utilization
had been passed in a number of industries.
Order backlogs
continued to grow steadily, with an especially large rise in
December.
Unfilled orders for durable goods had risen every
month for two years, but they rose about as much in the last
four months of 1965 as in the first eight months of the year.
Business generally seemed under growing pressure to step up
investment in both plant and inventories.
Business expectations
were increasingly buoyant and credit demands continued unusually
heavy despite sharply higher interest rates.
The budget
presented two weeks ago had apparently made no contribution
toward reducing inflationary sentiments or settling the money
and capital markets.
Against that background of the economy's exuberant
advance, Mr. Wayne said, the growth of reserves, bank credit,
and the money supply in recent weeks had not been consistent
with the rationale of the policy change made in December.
From
December 29 to January 26 weekly reporting banks showed smaller
declines than in comparable periods of the previous two years in
investments, total bank credit, demand deposits, and total
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reserves.
The money supply apparently grew more in January than
was normal for the month.
He was aware that it had been necessary
for the Committee to make a strong effort to provide stability
and order in credit markets and that the recent rapid growth
rates in money and credit had been a by-product of that effort.
But if the Committee was not to negate the December action, it
must now move to slow the growth of reserves, credit, and the
money stock.
The low level of bank borrowing in the past three
weeks suggested that the Committee might have been supplying
reserves somewhat more freely than might be consistent with the
December rate action.
Credit demands had increased greatly in the past two
months, Mr. Wayne observed, and the sharp rate increases over the
period clearly had not exerted any appreciable restraint on
credit and money growth.
In the past ten days those demands had
extended to the long end of the capital market and, along with
military developments and the Treasury refunding, had raised
The
yields on long-term Governments by as much as ten points.
heavier demand appeared to be associated in part with expectational
factors that could pose a progressively more serious problem unless
it was made clear that prompt and effective action would be
taken to contain the boom which seemed to be developing.
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An unequivocal move toward a lower level of reserve
availability seemed to Mr. Wayne to be necessary and also
consistent with recent Administration evaluations of the situation,
especially those of Secretary Fowler last week.
Such a move
manifestly involved risks, as a sudden turnabout in the market's
assessment of the policy posture could produce serious market
disorders.
The increased reliance of bankers on the money
market also could contribute to an over-reaction of money market
rates to diminished reserve availability.
Nonetheless, he was
convinced that those risks would have to be assumed at some early
stage if monetary policy was to make its proper contribution
toward restraint.
He would favor a move toward a lower level of
reserve availability, and adoption of a directive which would
contemplate that before the next meeting of the Committee.
Mr. Clay remarked that once again the Committee was faced
with a Treasury financing that tended to dominate policy considera
tions for the interval between meetings.
It was essential,
nevertheless, to evaluate the economic and financial situation
apart from Treasury financing.
So far as economic activity was
concerned, the statistical measurements continued their upward
revisions both as to what the economy had been doing and what it
was doing now, and indeed as to what it probably would do.
Accordingly, the
relationship between resource availability and
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prices became of more crucial importance month by month.
That
was apparent also in the Tenth District where economic growth
had been much slower than in the nation.
Nevertheless, there was
a growing scarcity of skilled workers in the region, with up
grading and salary adjustments becoming more noticeable.
As a
consequence, many firms were conducting training programs for
production workers, and also were endeavoring to attract workers
from outlying communities and rural areas.
Looking beyond the immediate interval between meetings,
Mr. Clay continued, consideration would need to be given to the
possible application of further monetary restraint.
That view
was underscored by the fact that the Federal budget appeared to
carry expansionary implications for the economy, even if Federal
outlays were confined to the budget projections.
What should be
involved in such a policy change would be difficult to perceive,
however.
A judgment would need to be made as to the rate at
which the economy's accelerating credit demands could be met
without price inflationary developments.
In making provision
for the growth of the credit base, the changing mix of demand and
time deposits would have to be taken into account.
The problem
would be further complicated by the marked movement of interest
rates that had taken place since the monetary policy actions of
early December and the apparent sensitivity of interest rates to
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further increase under current conditions, so that only limited
restrictions on reserve availability might prove to be compatible
with the current discount rate.
As he had already indicated, Mr. Clay said, even keel
considerations would need to prevail in the period ahead because
of the Treasury financing.
The draft economic policy directive
appeared satisfactory to him.
Mr. Scanlon observed that developments in January in the
Seventh District provided further confirmation that the business
upswing was continuing.
Most District labor markets continued to
tighten, backlogs of unfilled orders continued to rise, delivery
schedules were lengthening, orders were being placed earlier, and
reports of higher prices paid for components and raw materials
were heard more frequently.
Retail sales remained strong.
Debits
to demand deposits at District member banks were up 17 per cent
from a year earlier in December, compared to a 12 per cent gain
from 1964 for the year 1965 as a whole.
Mr. Scanlon now saw some evidence that the domestic capital
spending boom might have an adverse effect upon the balance of pay
ments in 1966 while contributing to domestic inflationary pressures.
Machine tool orders placed by domestic users in the fourth quarter
rose sharply from the year-earlier level while foreign orders,
discouraged by lengthening lead times, were down substantially.
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After allowance for seasonal forces, credit demands still
appeared very strong, Mr. Scanlon continued.
Loan liquidation in
January was relatively larger in the District than in the nation
as a whole, but to a large extent that reflected pay-downsespecially by machinery and other hard goods manufacturers--on
the very large borrowings over the December tax and dividend
period.
He had seen no indication of any diminution in the
underlying strength of credit demands.
Despite the seasonal
reduction in loan volume, the major Chicago banks had moved to a
deeper deficit position over the past month as their holdings
of Governments rose and deposits declined.
Like others, Mr. Scanlon said, he was pleased to receive
Mr. Robertson's memorandum of January 27, since he thought it
desirable that the Committee give further consideration to the
form and content of its directive.
He would not take time today
to indicate the points on which he agreed or disagreed, but would
merely state that Mr. Robertson had given the Committee something
to work from, and that the Committee should pursue and not dismiss
the matter.
As to the current situation, Mr. Scanlon remarked, System
policy appeared to be lending support to the rising pace of business
activity.
He believed that the System should undertake to moderate
further the rapid pace of monetary expansion as soon after the
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current Treasury financing as was feasible in the judgment of the
Manager.
He would concur in any directive that so specified.
Mr. Galusha reported that the Ninth District continued to
do exceedingly well economically.
As noted in the green book, it
was benefiting especially from higher farm prices.
District cash
farm income reached an all-time high in the fourth quarter of
1965; the quarterly total was up a full 10 per cent from a year
ago.
And of course the outlook was bright--for farmers, if not
consumers.
Indeed, the recent and prospective behavior of farm
prices might well seriously affect the future course of money
wages, as Mr. Holland had observed.
There appeared to be nothing
in the District's agricultural situation to suggest that prices
to consumers would break at all in the next twelve months.
Mr. Galusha noted that the Reserve Bank's examination
reports for 1965 recently had been analyzed.
Of 123 banks, 19
were eliminated because they consistently had low loan volumes
and seldom had any criticized loans.
The remainder fell into
two groups--the consistent problem banks, numbering ten in all,
and the remaining 94, comprising the great majority.
The latter
group had increased their loan ratios slightly--from 48 per cent
in both 1963 and 1964 to 50 per cent in 1965.
Their classified
loans had dropped from 3.2 per cent in 1963 to 2.5 per cent in
1964 and then to 2.2 per cent in 1965.
The conclusion might be
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drawn that the strong loan demand in the period had enabled the
banks with reasonably good management to upgrade the quality of
their loan portfolios.
slightly.
Conversely, the problem banks had slipped
Classified ratios for them rose to 7.7 per cent in
1965, from 6.8 per cent in 1963 and 4.8 per cent in 1964.
Mr. Galusha said that he would omit the other comments he
had prepared on District developments because they were largely
reiterative of statements already made.
As to open market policy,
an even keel seemed to be indicated, at least for the next week
and possibly beyond.
He would favor holding money market conditions
unchanged for the whole period until the Committee's next meeting;
in his judgment it would be unwise to decide today on a change in
policy that could not be put into effect until very near the time
of the next meeting.
Mr. Galusha added that he was unhappy about phrases like
"holding money market conditions unchanged," or "maintaining about
the same conditions in the money market," because those phrases
connoted a qualitative and quantitative appraisal that had been
and would continue to be illusory.
He hoped the day would soon
come when the Committee could take positive action to curb
the growth of credit and inflation.
sharply
As to the latter, the signs
were showing up in the business community of the Ninth District
with distressing and alarming frequency.
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Mr. Galusha concluded with an expression of gratitude to
Mr. Holland for his letter of January 18, 1966, explaining the
proposal he made at the preceding meeting.1/
In his judgment both
Mr. Holland's proposal and that made by Mr. Robertson warranted the
Committee's fullest consideration; they went to the heart of the
Committee's operating procedure.
Mr. Swan reported that business conditions in the Twelfth
District continued to show considerable strength.
Despite reports
of tight labor markets, the aerospece industries reported a
surprisingly large employment gain in December.
They added almost
9,000 employees in that month, bringing their total increase since
the low of March 1965 to 48,000.
Their employment level in
December was 594,000, still about 40,000 below the peak of
December 1962.
As elsewhere, Mr. Swan said, in the Twelfth District banks
seemed to be facing a strong loan demand.
They had been substantial
buyers of Federal funds throughout January and early February.
At
weekly reporting banks savings deposits declined in January and
negotiable CDs and other time deposits rose considerably less than
a year ago.
Still, at the moment at least, there was much less
1/ Copies of this letter, addressed to Mr. Galusha, were sent to
all members of the Committee and a copy has been placed in the
Committee's files.
2/8/66
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concern than some weeks ago about the possibilities of excessive
rates or destructive competition in seeking deposits of individuals
through the use of savings certificates in various forms.
That
situation seemed to have settled down somewhat.
Mr. Swan agreed with what had been said about the strength
of the business and financial situation generally and about the
desirability of moving toward a more restrictive credit policy.
He favored slowing somewhat the rate at which reserves were being
provided, and setting a somewhat deeper net borrowed reserves
figure as the short-run target of operations after the payment
date for the Treasury refunding.
His only qualification was that
the implications of the refunding for policy might have been
understated somewhat in the discussion thus far.
Despite the small
participation of dealers, there was a question in his mind as to
how firmly some of the new securities were held.
Thus, while he
would favor moving in the direction of a somewhat tighter policy
after the payment date, he hoped the Manager was right in thinking
that the market might already have discounted such a step.
The
move would have to be cautious and probing, given the sensitivity
of the market and the price behavior of the new securities thus
far.
He agreed with those who questioned whether the Committee
could, in fact, make a significant move before its next meeting.
2/8/66
-70For the directive Mr. Swan would accept either the staff's
draft or one referring to the possibility of firming.
If the
Committee favored the latter, he would much rather put it in some
such terms as "when conditions surrounding the Treasury financing
permit" than "after the payment date," or "in the latter part of
the period," because the Committee would have to rely on the
Manager's judgment of the state of the market.
Mr. Irons reported that Eleventh District economic condi
tions were strong in all of the major areas--production, employment,
unemployment, retail trade as reflected by department store
figures, and so forth.
Weather conditions had been good in the
District recently and, generally speaking, the agricultural
picture was quite favorable with respect to both production and
prices.
Much of what Mr. Galusha had said about the farm situation
in the Ninth District applied to the Eleventh District also.
On the financial side, Mr. Irons said, bank loans in all
major categories had declined in the District in the first four
weeks of the year.
Investments rose because of gains in holdings
of Governments; holdings of non-Governments were down.
Demand
deposits showed seasonal declines, and time deposits continued
to grow.
The liquidity position of banks was reflected in part
in their demand for Federal funds, which on a net basis had been
running at about $400 million for the past two weeks.
Borrowing
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from the Reserve Bank was negligible; apparently the large banks
were using non-Federal Reserve facilities and the smaller banks
in need of funds were borrowing from city correspondents.
The
situation with respect to Regulation Q had quieted down reasonably
well.
A number of bankers were negotiating rate increases when
necessary, but they were not advertising higher rates and in
general were trying to hold rates at reasonable levels.
The general expectation in the District, Mr. Irons observed,
was for continued over-all expansion, with capital expenditures
rising further.
There was an underlying concern about inflation;
people found it hard to believe that the Administration could
accomplish everything it planned domestically and in connection
with Viet Nam.
As to policy, Mr. Irons thought the point had been reached
at which the Committee should work toward a deepening of net
borrowed reserves.
It would be desirable, in his judgment, to
move as soon as possible from the average level of under $50
million of the last three weeks up to the $100-$150 million range
prevailing before the discount rate change.
Mr. Irons believed that the second paragraph of the staff's
draft directive was inconsistent with a policy decision calling
for greater firmness during the coming period; it would be
appropriate only if the decision was to maintain about the same
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-72
conditions as in recent weeks.
He had attempted an alternative
formulation, as follows:
"After settlement of the impact of the
current Treasury financing, System open market operations until
the next meeting of the Committee shall be conducted so as to
tighten further the conditions in the money market that have
prevailed in recent weeks."
He held no particular brief for
that specific wording, but he would not want to refer to specific
dates or parts of the period; such a procedure would set an
undesirable precedent.
Mr. Ellis commented that in a period when the economy of
New England was reflecting a general surge of rising activity,
there tended to be a sameness about the glowing reports from
each segment.
That fact lead him to mention just two points-
the deposit record of savings banks and the pressures on member
banks in the First District.
Deposit balances at regularly reporting mutual savings
banks continued to grow, Mr. Ellis said, but at a slower pace.
The December expansion was 0.8 per cent.
Compared with a year
ago, new deposits during December were 9 per cent higher, but
withdrawals were up 15 per cent.
The twelve-month net growth
in deposit balances narrowed to 7 per cent from growth rates
2 points higher a year ago.
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-73
However, Mr. Ellis continued, savings deposits at the
weekly reporting member banks showed a 17 per cent year-to-year
gain, compared with 10 per cent for the U.S., and they continued
to grow in the three weeks ending January 26.
All other time
deposits registered a 27 per cent twelve-month gain, one-tenth
greater than the U.S. pattern.
Those deposit inflows, coupled
with a year-to-year increase in demand deposits of 6.5 per cent,
helped reduce loan-deposit ratios from the regional average of
74 per cent in November and December to 72.3 per cent in January.
The leading money market banks in Boston continued to
lean heavily on borrowed funds in meeting their reserve positions,
Mr. Ellis said.
Through CDs, Federal funds, short-term notes, or
borrowings from the Federal Reserve, they had borrowed an average
of 176 per cent of their required reserves during the past 20
weeks, compared with 186 per cent for the eight New York City
money market banks.
Those Boston banks were still holding to a
posture of meeting all their customers' requests--at least those
of established customers.
Mr. Ellis noted that Mr. Hersey had concluded his remarks
with a quotation from the President's Economic Report on what the
President requested of the System.
He (Mr. Ellis) had planned to
begin his remarks on monetary policy with a fuller version of the
same quotation.
On hearing Mr. Hersey, he was struck by the fact
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that the statement consisted of two parts, the first of which,
"meeting the credit needs of a vigorous and growing economy,"
reflected a point made by Mr. Koch today.
The second part,
relating to the prevention of "excessive credit flows that could
carry the pace of expansion beyond prudent speed limits," had been
cited by Mr. Hersey and reflected a point the latter had emphasized.
Retrospectively, Mr. Ellis continued, while the System's
rate action in December had usefully allowed more realistic rates
in relation to credit demands, the Committee's action in temporarily
de-emphasizing reserve targets had facilitated a sharp expansion of
reserves and credit in magnitudes that certainly strained the
concept of "prudent speed limits."
Looking ahead, Mr. Ellis said, some of the path was marked
by the economic message and the budget.
From the monetary viewpoint,
one of the most important decisions was to forego tax rate increases
in favor of accelerating tax payments.
To the extent that such
acceleration would have any restraining effect on total spending,
it had to influence the taxpayers, both individuals and corporations,
to forego spending they would otherwise have undertaken.
While
individuals might well reduce their takings by amounts roughly
equivalent to the accelerated payments, corporations might well
seek to hold to pre-established plans by borrowing funds to replace
tax-drained cash positions.
That alternative means of financing
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Federal outlays clearly threw additional burdens onto monetary
policy.
It involved an increment of borrowing in an economy
that apparently was already being stimulated by a budget more
stimulative this calendar year than last.
In sum, fiscal
restraint seemed more of a goal than a present likelihood.
Clearly, Mr. Ellis observed, the need to distribute the
new securities issued in the recent Treasury refunding suggested
no immediate shift in monetary policy.
But once the new issues
had been distributed the market would be watching closely to
identify the emerging posture of policy.
As he listened to
Mr. Holmes' report today, he got the impression that the market
was waiting for the other shoe to fall.
It appeared appropriate
to delay no longer than absolutely necessary in recovering to
at least the posture the Committee held before December, as a
basis for future moves.
Mr. Ellis thought that the most critical long-range
policy choice facing the Committee was in deciding how much
emphasis to place on alternative short-term targets of policymoney market conditions, interest rates, or reserve growth.
Experience suggested that the Committee never completely
abandoned any one of the three; but it often elevated one to
greater relative importance, and in the past few months it had
placed relatively greater emphasis on rates.
In the present
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context, he believed interest rates should not be accepted as a
principal object of policy.
Changed and changing price expectations-
from an expectation of a 2 per cent annual rate of increase to one
of perhaps 2.5 or 3 per cent--coupled with foreseeable expansion in
credit demands, suggested that the 1/2 point rise in short-term
rates since November might not represent a completed adjustment
to the new situation and outlook.
However important interest rate
objectives might properly become at some points in time, at present
they did not serve as adequate substitutes for direct attention to
the pace at which reserves were being created in relation to the
economy's need for credit expansion.
In his judgment, the Committee
should move to restore "moderated reserve growth" as a prime
target to guide the Manager's operations.
In that context, Mr. Ellis found helpful the suggestions
in both Mr. Robertson's recent memorandum and Mr. Holland's letter
to Mr. Galusha.
Both proposals started with the objective of
improving the use of the net borrowed reserves concept as a target
of policy.
However much the Committee might challenge its present
technical capacity to determine the "expected demand for required
reserves and deposits" on a weekly basis, it remained true that in
times of rising demands the Account Manager was required to seekwithin other constraints of rate trends and money market conditions--
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to meet in full all demands in excess of such expectations for
reserve expansion, in order to achieve on average a target range
of net borrowed reserves.
As one alternative, Mr. Ellis commented, Mr. Robertson
suggested that initially, at least, the Manager not meet any such
demands for required reserves when they rise at a "faster than
anticipated pace."
Instead, he would allow net borrowed reserves
to rise to the upper limit of a target range--$200 million at present,
for example.
Mr. Holland's approach would be to supply decreasing
proportions of the desired reserves when their growth exceeded
expected rates.
reserves;
Both approaches would (1) rely more on borrowed
(2) allow more fluctuation in net borrowed reserves;
(3) presumably result in somewhat greater fluctuations in bill
rates; and (4) provide quicker responses to underlying shifts of
trend.
His personal preference would be for the Holland alternative,
because it would apply to the whole range of reserve variationsnot just the amount within a preselected range--and it might
facilitate more gradual adjustment of the Committee's target.
It would avoid simply shifting attention from a target figure to
a target range.
Since the Committee obviously was not going to adopt
either of the suggested alternatives today, Mr. Ellis said, he
would urge that the Manager be directed to probe toward a deeper
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2/8/66
level of net borrowed reserves when the market settled down from
the current refunding.
His own choice of target would be net
borrowed reserves of $150 million, with the expectation that
variations around that target would fall within plus or minus
$50 million, as had been true on average during 1965.
The major
objective of moderating the pace of reserve growth was clearly
described in the first paragraph of the directive.
In the second
paragraph he would avoid any effort to specify subperiods, and
he favored language along the lines of that suggested by
Mr. Shepardson.
Mr. Balderston remarked that he was pleased by the
unanimity of views on policy this morning, even though the
circumstances from which it stemmed were not comforting.
The
economy was in a wartime boom and risking uncontrolled escalation
unless restraint, both monetary and fiscal, was applied without
delay.
Many of the Committee members had noted that because
plant and inventories were being built in the expectation of
enlarged demand based upon the pyramiding of war orders and
private buying, prices were tending to push steadily upward.
In short, the economy was pressing hard against its resourceshuman and other--with the over-all unemployment rate about the
same as in the expansion of 1956 and early 1957, and with the
precentage of adult men unemployed at 2.3 per cent and of married
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men at 1.8 per cent.
Farm land values continued to advance; the
national average rose 6.6 per cent in the year ending November 1
last.
There was no substitute for real restraint that bit,
especially at a time when a portion of bank credit was being
used for speculative purposes and for the promotion of such
activities as mergers, take-overs, and similar ventures.
Reflecting current ebullience, Mr. Balderston said,
January trading on the New York Stock Exchange stayed at the high
level of last fall, with common stock prices rising further.
The
volume of daily transactions during the first three weeks of
January was above the historic peak of 8.7 million shares reached
in December.
Since July 1965, net debit balances had risen $660
million; or 13-1/2 per cent, which about offset the decline in
that form of stock market credit between the November 1963 change
in margin requirements and July 1965.
Not only had margin
buying expanded but one could not help but suspect that credit
for the buying of stocks was being obtained through bank loans
and the resetting of mortgages.
There was something reminiscent
of American Founders in the exuberant reception accorded the
Manhattan Fund.
Its focus upon special situations reflected the
mood of the moment.
Mr. Balderston went on to say that two types of increased
efficiency in the use of bank credit and of the underlying
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reserves might tend to offset such braking of bank credit expansion
as the System sought to apply between last spring and the December
change in the discount rate.
Since then, availability had not
been curbed visibly, at least by the central bank.
The two
efficiencies were the increased turnover of demand deposits and
the greater reliance on Federal funds.
The turnover rates in
1965 were 12 per cent higher than in 1964 outside of New York
City and 13.7 per cent higher within it.
The second type of
efficiency that influenced reserve utilization was resort to the
Federal funds market.
In addition, the use of reserves had been
altered since earlier periods of bank credit restraint, such
as those of 1957 and 1959, by changes in the deposit mix.
Although total reserves rose last year at an annual rate of 5.2
per cent, time deposits--against which the reserves required
were only 4 per cent--rose at an annual rate of 16.3 per cent.
The mix of time and demand deposits had altered markedly since
earlier periods when restraint was called for.
That might
explain why bank credit, as reflected by total member bank
deposits, rose last year by 9.1 per cent and the money supply
by 4.8 per cent while the System was intending to apply restraint.
It was clear to Mr. Balderston that the time had come to
deepen the net borrowed reserve figure substantially as soon as
feasible after the current financing.
He would hope that well
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before the next Committee meeting the net borrowed reserve figure
would rise above $150 million, with subsequent targets substantially
larger.
When resources were being used fully, as they were now,
it was appropriate to force banks to get more of their reserves
through borrowing at the Reserve Banks.
He shared the view
expressed so generally at this meeting that there was no time
to lose; in fact, the bus might already have been missed.
Chairman Martin commented that in his judgment the System
had performed quite well over the past few months.
The Committee
should not lose sight of the fact that economic pressures had been
mounting steadily.
Various impediments to the free flow of funds
had had to be removed, and when the System took the rate actions
of December it was clear that a difficult money market operation
would be involved.
All it all, the System had come through that
operation quite well.
Now some people were beginning to say not
that the actions were wrong but that they should have gone
further.
At present, the Chairman continued, the Committee ought
to be reasonably cautious about keeping the flow of funds as
orderly as possible.
The experience with the current Treasury
refunding was typical of the uncertainties of the current period.
For a time--about the middle of last week--it appeared as if the
refunding might be a failure; but it turned out to be substantially,
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although not overwhelmingly, successful, despite the fact that the
subscription books happened to be opened on the day the President
announced the resumption of bombing of North Viet Nam.
Unfortunate
coincidences of that kind were likely to reoccur for some time to
come, and the more orderly the Committee could make any adjustments
the better it would be.
As to the directive, he would have read
the staff's draft as giving the Manager sufficient latitude to
accomplish that objective, but perhaps the language should be
made more specific.
There followed a discussion of possible alternative
wordings of the second paragraph of the directive, in the course
of which Mr. Wayne suggested instructing the Account Management
to move toward somewhat lessened reserve availability, rather than
toward firmer money market conditions.
Although he personally did
not feel strongly about the matter, the former type of instruction
would seem to reflect the sense of today's discussion better.
Mr. Wayne also suggested that the move should be called for in the
coming period "with appropriate regard for the current Treasury
financing."
A number of members concurred in Mr. Wayne's
proposals, and there was a suggestion that the reduction in
reserve availability to be sought should be described as "gradual."
Chairman Martin remarked that the present was a period
in which operations based largely on the "color, tone, and feel"
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of the market would seem appropriate, although as a rule he did
not particularly care for those terms.
Under existing circum
stances it might be difficult to achieve a gradual adjustment,
but it would be desirable to make it as gradual as possible.
He
then asked Mr. Holmes if the Committee's intentions were clear.
Mr. Holmes replied affirmatively.
As he understood it,
when considerations relating to the Treasury financing permitted,
the Committee would like to have net borrowed reserves move back
gradually to about where they were before the December discount
rate action, recognizing that the market atmosphere now was
somewhat different.
While the objective might be difficult to
reach, the desired course was clear.
He added that he would
interpret the references to the conclusion of the Treasury
financing to take into account the aftermarket.
Mr. Hickman asked whether the Manager would propose not
to initiate a change until after any churning in the market had
ended.
Mr. Holmes replied that his course would depend on
whether or not the churning was related to the refunding, as best
as he could interpret it.
If the churning appeared to be related
to other developments he would not postpone firming action.
Thereupon, upon motion duly made
and seconded and by unanimous vote, the
Federal Reserve Bank of New York was
authorized and directed, until otherwise
directed by the Committee, to execute
transactions in the System Account in
accordance with the following current
economic policy directive:
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2/8/66
The economic and financial developments reviewed at
this meeting indicate that the domestic economy is
expanding vigorously, with prices continuing to creep
up and credit demands remaining strong. Our inter
national payments continue in deficit. In this situation,
it is the Federal Open Market Committee's policy to
resist the emergence of inflationary pressures and to
help restore reasonable equilibrium in the country's
balance of payments, by moderating the growth in the
reserve base, bank credit, and the money supply.
To implement this policy, System open market
operations until the next meeting of the Committee, with
appropriate regard for the current Treasury financing,
shall be conducted with a view toward a gradual
reduction in reserve availability.
Mr. Shepardson commented that over the past several months
some members had felt that the Committee should be moving toward
reducing the rapid rate of credit expansion.
Others had felt
that no attempt to slow the expansion should be made until certain
developments had occurred.
Those developments had come to pass;
and it seemed to him that the hesitancy to move earlier meant
that now, when everyone recognized the existence of real pressures,
the Committee might have to move less gradually than otherwise
might have been possible.
His own hope would be that since those
pressures now were definitely apparent, the Committee would not
act in too gradual a manner in meeting them.
He recognized that
the current Treasury financing had to be considered, but it would
not constitute a constraint for long.
2/8/66
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Mr. Mitchell agreed, except that he noted that conditions
in the money market had been disorganized during the recent period
and that the market even yet had not settled down.
Chairman Martin commented that it was desirable to get
as smooth a flow of funds in the money markets as possible so
that when an adjustment was made it would not prove disruptive.
He hoped that in carrying out today's policy decision for a
gradual move the Desk would maintain as much stability as it
could.
By the time of the next meeting the Committee would have
more information on the basis of which it could decide whether
a further policy change was indicated.
It was agreed that the next meeting of the Committee
would be held on Tuesday, March 1, 1966, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
February 7, 1966
Draft Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on February 8, 1966
The economic and financial developments reviewed at this
meeting indicate that the domestic economy is expanding vigorously,
with prices continuing to creep up and credit demands remaining
strong. Our international payments continue in deficit. In this
situation, it is the Federal Open Market Committee's policy to
resist the emergence of inflationary pressures and to help restore
reasonable equilibrium in the country's balance of payments, by
moderating the growth in the reserve base, bank credit, and the
money supply.
In light of the current Treasury financing, System
open market operations until the next meeting of the Committee
shall be conducted with a view to maintaining about the same
conditions in the money market as have prevailed in recent weeks.
Cite this document
Federal Reserve (1966, February 7). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19660208
@misc{wtfs_fomc_minutes_19660208,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1966},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19660208},
note = {Retrieved via When the Fed Speaks corpus}
}