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.,
PRESENT:
on Tuesday, March 1, 1966, at 9:30 a.m.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Bopp
Clay
Daane
Hickman
Irons
Maisel
Mitchell
Robertson
Mr. Shepardson
Messrs. Wayne, Scanlon, Francis, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis, Patterson, and Galusha, Presidents
of the Federal Reserve Banks of Boston, Atlanta,
and Minneapolis, respectively
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Molony, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Eastburn, Garvy, Green, Koch, Mann,
Partee, Solomon, Tow, and Young, Associate
Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Fauver, Assistant to the Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
Messrs. Axilrod and Gramley, Associate Advisers,
Division of Research and Statistics, Board
of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
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Mr. Strothman, First Vice President, Federal
Reserve Bank of Minneapolis
Messrs. Willis, Ratchford, Brandt, Baughman, and
Jones, Vice Presidents of the Federal Reserve
Banks of Boston, Richmond, Atlanta, Chicago,
and St. Louis, respectively
Messrs. Nelson and Lynn, Directors of Research
at the Federal Reserve Banks of Minneapolis
and San Francisco, respectively
Mr. Meek, Manager, Securities Department, Federal
Reserve Bank of New York
In the agenda for this meeting, the Secretary reported that
advices had been received of the election by the Federal Reserve
Banks of members and alternate members of the Federal Open Market
Committee for the term of one year beginning March 1, 1966, and it
appeared that such persons would be legally qualified to serve
after they had executed their oaths of office.
The elected members and alternates were as follows:
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York, as alternate;
Karl R. Bopp, President of the Federal Reserve Bank of
Philadelphia, with Edward A. Wayne, President of the
Federal Reserve Bank of Richmond, as alternate;
W. Braddock Hickman, President of the Federal Reserve
Bank of Cleveland, with Charles J. Scanlon, President
of the Federal Reserve Bank of Chicago, as alternate;
George H. Clay, President of the Federal Reserve Bank
of Kansas City, with Eliot J. Swan, President of the
Federal Reserve Bank of San Francisco, as alternate;
Watrous H. Irons, President of the Federal Reserve Bank
of Dallas, with Darryl R. Francis, President of the
Federal Reserve Bank of St. Louis, as alternate.
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Upon motion duly made and
seconded, and by unanimous vote,
the following officers of the
Federal Open Market Committee were
elected to serve until the election
of their successors at the first
meeting of the Committee after
February 28, 1967, with the under
standing that in the event of the
discontinuance of their official
connection with the Board of
Governors or with a Federal Reserve
Bank, as the case might be, they
would cease to have any official
connection with the Federal Open
Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Robert C. Holland
Merritt Sherman
Kenneth A. Kenyon
Arthur L. Broida
Charles Molony
Howard H. Hackley
David B. Hexter
Daniel H. Brill
David P. Eastburn, George Garvy, Ralph T.
Green, Albert R. Koch, Maurice Mann,
J. Charles Partee, Robert Solomon,
Clarence W. Tow, and Ralph A. Young
Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and
seconded, and by unanimous vote,
the Federal Reserve Bank of New
York was selected to execute
transactions for the System Open
Market Account until the adjourn
ment of the first meeting of the
Federal Open Market Committee
after February 28, 1967.
Upon motion duly made and
seconded, and by unanimous vote,
Alan R. Holmes and Charles A.
Coombs were selected to serve at
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the pleasure of the Federal Open
Market Committee as Manager of the
System Open Market Account and as
Special Manager for foreign currency
operations for such Account, respec
tively, it being understood that
their selection was subject to their
being satisfactory to the Board of
Directors of the Federal Reserve
Bank of New York.
Secretary's note:
Advice subsequently
was received that Messrs. Holmes and
Coombs were satisfactory to the Board
of Directors of the Federal Reserve
Bank of New York for service in the
respective capacities indicated.
Upon motion duly made
and by unanimous vote, the
the meeting of the Federal
Committee held on February
were approved.
and seconded,
minutes of
Open Market
8, 1966,
Consideration then was given to the continuing authoriza
tions of the Committee, according to the customary practice of
reviewing such matters at the first meeting in March of every year,
and the actions set forth hereinafter were taken.
With respect to the continuing authority directive relating
to transactions in U.S. Government securities and bankers'
acceptances, Chairman Martin noted that in a memorandum to the
Committee dated February 24, 1966, the Manager had recommended a
reduction from $2 billion to $1.5 billion in the dollar limit
established in paragraph 1(a) on the aggregate amount by which
System Account holdings of Government securities might be increased
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or decreased between meetings of the Committee.
As indicated in
the memorandum, a copy of which has been placed in the Committee's
files, the higher limit had been established on December 6, 1965,
because of certain circumstances which seemed to have passed.
Thereupon, upon motion duly
made and seconded, and by unan
imous vote, the Federal Reserve
Bank of New York was authorized
and directed, until otherwise
directed by the Committee, to
execute transactions in the System
Open Market Account in accordance
with the following continuing
authority directive relating to
transactions in U.S. Government
securities and bankers' acceptances:
1. The Federal Open Market Committee authorizes and directs
the Federal Reserve Bank of New York, to the extent necessary to
carry out the most recent current economic policy directive adopted
at a meeting of the Committee:
(a) To buy or sell U.S. Government securities in
the open market, from or to Government securities
dealers and foreign and international accounts maintained
at the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the System Open
Market Account at market prices and, for such Account,
to exchange maturing U.S. Government securities with the
Treasury or allow them to mature without replacement;
provided that the aggregate amount of such securities
held in such Account at the close of business on the day
of a meeting of the Committee at which action is taken
with respect to a current economic policy directive shall
not be increased or decreased by more than $1.5 billion
during the period commencing with the opening of business
on the day following such meeting and ending with the
close of business on the day of the next such meeting;
(b) To buy or sell prime bankers' acceptances of
the kinds designated in the Regulation of the Federal
Open Market Committee in the open market, from or to
acceptance dealers and foreign accounts maintained at
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the Federal Reserve Bank of New York, on a cash, regular,
or deferred delivery basis, for the account of the Federal
Reserve Bank of New York at market discount rates;
provided that the aggregate amount of bankers' acceptances
held at any one time shall not exceed $125 million or 10
per cent of the total of bankers' acceptances outstanding
as shown in the most recent acceptance survey conducted
by the Federal Reserve Bank of New York;
(c) To buy U.S. Government securities with matu
rities as indicated below, and prime bankers' acceptances
with maturities of 6 months or less at the time of
purchase, from nonbank dealers for the account of the
Federal Reserve Bank of New York under agreements for
repurchase of such securities or acceptances in 15
calendar days or less, at rates not less than (1) the
discount rate of the Federal Reserve Bank of New York at
the time such agreement is entered into, or (2) the
average issuing rate on the most recent issue of 3-month
Treasury bills, whichever is the lower; provided that in
the event Government securities covered by any such
agreement are not repurchased by the dealer pursuant to
the agreement or a renewal thereof, they shall be sold
in the market or transferred to the System Open Market
Account; and provided further that in the event bankers'
acceptances covered by any such agreement are not
repurchased by the seller, they shall continue to be
held by the Federal Reserve Bank or shall be sold in the
open market. U.S. Government securities bought under
the provisions of this section shall have maturities of
24 months or less at the time of purchase, except that,
during any period beginning with the day after the
Treasury has announced a refunding operation and ending
on the day designated as the settlement date for the
exchange, the U.S. Government securities bought may be
of any maturity.
2. The Federal Open Market Committee authorizes and directs
the Federal Reserve Bank of New York to purchase directly from the
Treasury for the account of the Federal Reserve Bank of New York
(with discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such amounts
of special short-term certificates of indebtedness as may be
necessary from time to time for the temporary accommodation of the
Treasury; provided that the rate charged on such certificates shall
be a rate 1/4 of 1 per cent below the discount rate of the Federal
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Reserve Bank of New York at the time of such purchases, and
provided further that the total amount of such certificates held
at any one time by the Federal Reserve Banks shall not exceed
$500 million.
Chairman Martin then noted that on February 21, 1966
Mr. Young had distributed to the Committee certain materials
prepared by the Secretariat relating to a proposed reorganization
of the Committee's instruments governing System foreign currency
operations.
(Copies of Mr. Young's memorandum and attachments
have been placed in the Committee's files.)
The Chairman invited
Mr. Young to comment on the materials.
Mr. Young said that the members would recall that at the
meeting of November 23, 1965 the Committee had asked the staff to
review System operations in foreign currencies and to submit a
report.
Work on the report had progressed to an advanced stage
but had not been completed.
At the same time, the staff had made
a study of the Committee's existing foreign currency instrumentsthe authorization, guidelines, and continuing authority
directive--and had concluded that their essential content could be
recast into simpler and clearer form in two new instruments--an
authorization and a directive.
Among the materials distributed
were drafts of the proposed new instruments, an explanatory
memorandum, and copies of the existing instruments with marginal
notes indicating the disposition made of all passages in
developing the proposed new instruments.
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Mr. Young noted that the subject was a complex one and that
the members had had relatively little time to study the documents
distributed.
For those reasons, and also because the staff report
on foreign currency operations was not yet available, he thought
the Committee might want to defer action regarding the recommendation
that the three existing instruments be replaced by two new ones.
Chairman Martin suggested that the Committee reaffirm its
existing foreign currency instruments today and plan on considering
the proposed replacements at its next meeting, when all members
would have had an opportunity to review them carefully.
There was
general agreement with this suggestion.
Thereupon, upon motion duly
made and seconded, and by unan
imous vote, the Authorization
Regarding Open Market Transactions
in Foreign Currencies, as reaffirmed
on March 2, 1965, was reaffirmed:
Pursuant to Section 12A of the Federal Reserve Act
and in accordance with Section 214.5 of Regulation N
(as amended) of the Board of Governors of the Federal
Reserve System, the Federal Open Market Committee takes
the following action governing open market operations
incident to the opening and maintenance by the Federal
Reserve Bank of New York (hereafter sometimes referred
to as the New York Bank) of accounts with foreign
central banks.
I.
Role of Federal Reserve Bank of New York
The New York Bank shall execute all transactions
pursuant to this authorization (hereafter sometimes
referred to as transactions in foreign currencies)
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for the System Open Market Account, as defined in the
Regulation of the Federal Open Market Committee.
II.
Basic Purposes of Operations
The basic purposes of System operations in and
holdings of foreign currencies are:
(1)
To help safeguard the value of the dollar in
international exchange markets;
(2) To aid in making the existing system of
international payments more efficient and in
avoiding disorderly conditions in exchange
markets;
(3) To further monetary cooperation with central
banks of other countries maintaining
convertible currencies, with the International
Monetary Fund, and with other international
payments institutions;
(4) Together with these banks and institutions,
to help moderate temporary imbalances in
international payments that may adversely
affect monetary reserve positions; and
(5) In the long run, to make possible growth in
the liquid assets available to international
money markets in accordance with the needs of
an expanding world economy.
III.
Specific Aims of Operations
Within the basic purposes set forth in Section II,
the transactions shall be conducted with a view to the
following specific aims:
(1)
(2)
To offset or compensate, when appropriate, the
effects on U.S. gold reserves or dollar
liabilities of disequilibrating fluctuations
in the international flow of payments to or
from the United States, and especially those
that are deemed to reflect temporary forces
or transitional market unsettlement;
To temper and smooth out abrupt changes in
spot exchange rates and moderate forward
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(3)
(4)
IV.
premiums and discounts judged to be
disequilibrating;
To supplement international exchange arrange
ments such as those made through the
International Monetary Fund; and
In the long run, to provide a means whereby
reciprocal holdings of foreing currencies may
contribute to meeting needs for international
liquidity as required in terms of an expanding
world economy.
Arrangements with Foreign Central Banks
In making operating arrangements with foreign central
banks on System holdings of foreign currencies, the New
York Bank shall not commit itself to maintain any specific
balance, unless authorized by the Federal Open Market
Committee.
The Bank shall instruct foreign central banks regard
ing the investment of such holdings in excess of minimum
working balances in accordance with Section 14(e) of the
Federal Reserve Act.
The Bank shall consult with foreign central banks
on coordination of exchange operations.
Any agreements or understandings concerning the
administration of the accounts maintained by the New York
Bank with the central banks designated by the Board of
Governors under Section 214.5 of Regulation N (as amended)
are to be referred for review and approval to the Committee,
subject to the provision of Section VIII, paragraph 1,
below.
V.
Authorized Currencies
The New York Bank is authorized to conduct trans
actions for System Account in such currencies and within
the limits that the Federal Open Market Committee may
from time to time specify.
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-11VI.
Methods of Acquiring and Selling Foreign Currencies
The New York Bank is authorized to purchase and
sell foreign currencies in the form of cable transfers
through spot or forward transactions on the open market
at home and abroad, including transactions with the
Stabilization Fund of the Secretary of the Treasury
established by Section 10 of the Gold Reserve Act of
1934 and with foreign monetary authorities.
Unless the Bank is otherwise authorized, all trans
actions shall be at prevailing market rates.
VII.
Participation of Federal Reserve Banks
All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in
accordance with paragraph 3 G (1) of the Board of
Governors' Statement of Procedure with Respect to
Foreign Relationships of Federal Reserve Banks dated
January 1, 1944.
VIII.
Administrative Procedures
The Federal Open Market Committee authorizes a
Subcommittee consisting of the Chairman and the Vice
Chairman of the Committee and the Vice Chairman of the
Board of Governors (or in the absence of the Chairman
or of the Vice Chairman of the Board of Governors the
members of the Board designated by the Chairman as
alternates, and in the absence of the Vice Chairman of
the Committee his alternate) to give instructions to
the Special Manager, within the guidelines issued by
the Committee, in cases in which it is necessary to
reach a decision on operations before the Committee
can be consulted.
All actions authorized under the preceding
paragraph shall be promptly reported to the Committee.
The Committee authorizes the Chairman, and in his
absence the Vice Chairman of the Committee, and in the
absence of both, the Vice Chairman of the Board of
Governors:
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(1) With the approval of the Committee, to enter
into any needed agreement or understanding
with the Secretary of the Treasury about the
division of responsibility for foreign
currency operations between the System and
the Secretary;
(2) To keep the Secretary of the Treasury fully
advised concerning System foreign currency
operations, and to consult with the Secretary
on such policy matters as may relate to the
Secretary's responsibilities;
(3) From time to time, to transmit appropriate
reports and information to the National
Advisory Council on International Monetary
and Financial Problems.
IX.
Special Manager of the System Open Market Account
A Special Manager of the Open Market Account for
foreign currency operations shall be selected in
accordance with the established procedures of the Federal
Open Market Committee for the selection of the Manager
of the System Open Market Account.
The Special Manager shall direct that all transactions
in foreign currencies and the amounts of all holdings in
each authorized foreign currency be reported daily to
designated staff officials of the Committee, and shall
regularly consult with the designated staff officials of
the Committee on current tendencies in the flow of interna
tional payments and on current developments in foreign
exchange markets.
The Special Manager and the designated staff offi
cials of the Committee shall arrange for the prompt
transmittal to the Committee of all statistical and other
information relating to the transactions in and the
amounts of holdings of foreign currencies for review by
the Committee as to conformity with its instructions.
The Special Manager shall include in his reports to
the Committee a statement of bank balances and investments
payable in foreign currencies, a statement of net profit
or loss on transactions to date, and a summary of
outstanding unmatured contracts in foreign currencies.
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X.
Transmittal of Information to Treasury Department
The staff officials of the Federal Open Market
Committee shall transmit all pertinent information on
System foreign currency transactions to designated
officials of the Treasury Department.
XI.
Amendment of Authorization
The Federal Open Market Committee may at any time
amend or rescind this authorization.
Upon motion duly made and
seconded, and by unanimous vote,
the Guidelines for System Foreign
Currency Operations as amended on
November 23, 1965, were reaffirmed:
1.
Holdings of Foreign Currencies
Until otherwise authorized, the System will limit
its holdings of foreign currencies to that amount
necessary to enable its operations to exert a market
influence. Holdings of larger amounts will be
authorized only when the U.S. balance of international
payments attains a sufficient surplus to permit the
ready accumulation of holdings of major convertible
currencies.
Foreign currency holdings shall be invested as far
as practicable in conformity with Section 14(e) of the
Federal Reserve Act.
2.
Exchange Transactions
System exchange transactions shall be geared to
pressures of payments flows so as to cushion or moderate
disequilibrating movements of funds and their
destabilizing effects on U.S. and foreign official
reserves and on exchange markets.
In general, these transactions shall be geared to
pressures connected with movements that are expected to
be reversed in the foreseeable future; when expressly
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authorized by the Federal Open Market Committee, they
may also be geared on a short-term basis to pressures
connected with other movements.
Subject to express authorization of the Committee,
the Federal Reserve Bank of New York may enter into
reciprocal arrangements with foreign central banks on
exchange transactions ("swap" arrangements), which
arrangements may be wholly or in part on a standby
basis.
Drawings made by either party under a reciprocal
arrangement shall be fully liquidated within 12 months
after any amount outstanding at that time was first
drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
The New
purchase and
market rates
appear to be
York Bank shall, as a usual practice,
sell authorized currencies at prevailing
without trying to establish rates that
out of line with underlying market forces.
If market offers to sell or buy intensify as
System holdings increase or decline, this shall be
regarded as a clear signal for a review of the System's
evaluation of international payments flows.
It shall be the practice to arrange with foreign
central banks for the coordination of foreign currency
transactions in order that System transactions do not
conflict with those being undertaken by foreign monetary
authorities.
3.
Transactions in Spot Exchange
The guiding principle for transactions in spot
exchange shall be that, in general, market movements in
exchange rates, within the limits established in the
International Monetary Fund Agreement or by central bank
practices, index affirmatively the interaction of
underlying economic forces and thus serve as efficient
guides to current financial decisions, private and
public.
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Temporary or transitional fluctuations in payments
flows may be cushioned or moderated whenever they
occasion market anxieties, or undesirable speculative
activity in foreign exchange transactions, or excessive
leads and lags in international payments.
Special factors making for exchange market
instabilities include (i) responses to short-run
increases in international political tension, (ii) dif
ferences in phasing of international economic activity
that give rise to unusually large interest rate
differentials between major markets, or (iii) market
rumors of a character likely to stimulate speculative
transactions.
Whenever exchange market instability threatens to
produce disorderly conditions, System transactions are
appropriate if the Special Manager, in consultation with
the Federal Open Market Committee, or in an emergency
with the members of the Committee designated for that
purpose, reaches a judgment that they may help to re
establish supply and demand balance at a level more
consistent with the prevailing flow of underlying
payments. Whenever supply or demand persists in
influencing exchange rates in one direction, System
transactions should be modified, curtailed, or
eventually discontinued pending a reassessment by the
Committee of supply and demand forces.
Insofar as is practicable, the New York Bank shall
purchase a currency through spot transactions at or
below its par value, and sell a currency through spot
transactions at rates at or above its par value.
Spot transactions at rates other than those set
forth in the preceding paragraph shall be specially
authorized by the Committee or by the members of the
Committee designated in Section VIII of the Authorization
for Open Market Transactions in Foreign Currencies,
except that purchases of exchange to meet System
commitments may be executed without special authorization
at rates above par when necessary.
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-164.
Transactions in Forward Exchange
Transactions in forward exchange, either outright
or in conjunction with spot transactions, may be
undertaken:
(1) When forward premiums or discounts are incon
sistent with interest rate differentials and
are giving rise to disequilibrating movements
of short-term funds;
(2) When it is deemed appropriate to supplement
existing market supplies of forward cover,
directly or indirectly, as a means of
encouraging the retention or accumulation of
dollar holdings by private foreign holders;
(3)
To allow greater flexibility in covering System
commitments, including those under swap
arrangements;
(4)
To facilitate the use of holdings of one
currency for the settlement of commitments
denominated in other currencies.
Forward sales of authorized currencies to the U.S.
Stabilization Fund out of existing System holdings or in
conjunction with spot purchases of such currencies also
may be undertaken in order to allow greater flexibility
in covering commitments of the U.S. Treasury.
In all other cases, proposals of the Special Manager
to initiate forward operations shall be submitted to the
Committee for advance approval.
Upon motion duly made and
seconded, and by unanimous vote,
the following continuing authority
directive to the Federal Reserve
Bank of New York with respect to
foreign currency operations was
approved:
The Federal Reserve Bank of New York is authorized
and directed to purchase and sell through spot transactions
any or all of the following currencies in accordance with
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the Guidelines for System Foreign Currency Operations
as reaffirmed March 1, 1966; provided that the aggregate
amount of foreign currencies held under reciprocal
currency arrangements shall not exceed $2.8 billion
equivalent at any one time, and provided further that
the aggregate amount of foreign currencies held as a
result of outright purchases shall not exceed $150
million equivalent at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also
authorized and directed to operate in any or all of the
foregoing currencies in accordance with the Guidelines
and up to a combined total of $275 million equivalent,
by means of:
(a)
purchases through forward transactions,
for the purpose of allowing greater
flexibility in covering commitments under
reciprocal currency agreements;
(b)
purchases and sales through forward as well
as spot transactions, for the purpose of
utilizing its holdings of one currency for
the settlement of commitments denominated
in other currencies;
(c)
purchases through spot transactions and
concurrent sales through forward trans
actions, for the purpose of restraining
short-term outflows of funds induced by
arbitrage considerations; and
(d)
sales through forward transactions for the
purpose of influencing interest arbitrage
flows of funds and of minimizing speculative
disturbances.
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The Federal Reserve Bank of New York is also
authorized and directed to make purchases through spot
transactions, including purchases from the U.S. Sta
bilization Fund, and concurrent sales through forward
transactions to the U.S. Stabilization Fund, of any of
the foregoing currencies in which the U.S. Treasury has
outstanding indebtedness, in accordance with the
Guidelines and up to a total of $100 million equivalent.
Purchases may be at rates above par, and both purchases
and sales are to be made at the same rates.
The Federal Reserve Bank of New York is also
authorized and directed to make purchases of sterling
on a covered or guaranteed basis in terms of the dollar
up to a total of $200 million equivalent.
The Federal Reserve Bank of New York is also
authorized and directed to assume commitments for
forward sales of lire up to $500 million equivalent as
a means of facilitating the retention of dollar holdings
by private foreign holders.
Upon motion duly made and
seconded, and by unanimous vote,
the following procedures with
respect to allocations of the
System Open Market Account were
approved without change:
1. Securities in the System Open Market Account
shall be reallocated on the last business day of each
month by means of adjustments proportionate to the
adjustments that would have been required to equalize
approximately the average reserve ratios of the 12
Federal Reserve Banks based on the most recent available
five business days' reserve ratio figures.
2. The Board's staff shall calculate, in the
morning of each business day, the reserve ratios of each
Bank after allowing for the indicated effects of the
settlement of the Interdistrict Settlement Fund for the
preceding day. If these calculations should disclose a
deficiency in the reserve ratio of any Bank, the Board's
staff shall inform the Manager of the System Open Market
Account, who shall make a special adjustment as of the
previous day to restore the reserve ratio of that Bank
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to the average of all the Banks. However, such adjust
ments shall not be made beyond the point where a
deficiency would be created at any other Bank.
Such
adjustments shall be offset against the participation
of the Bank or Banks best able to absorb the additional
amount or, at the discretion of the Manager, against the
participation of the Federal Reserve Bank of New York.
The Board's staff and the Bank or Banks concerned shall
then be notified of the amounts involved and the
Interdistrict Settlement Fund shall be closed after
giving effect to the adjustments as of the preceding
business day.
3. Until the next reallocation the Account shall
be apportioned on the basis of the ratios determined in
paragraph 1, after allowing for any adjustments as
provided for in paragraph 2.
4. Profits and losses on the sale of securities
from the Account shall be allocated on the day of
delivery of the securities sold on the basis of each
Bank's current holdings at the opening of business on
that day.
A proposed list for distribution of periodic reports
prepared by the Federal Reserve Bank of New York for the Federal
Open Market Committee was presented for consideration and approval.
Thereupon, upon motion duly
made and seconded, and by unanimous
vote, authorization was given for
the following distribution:
1.
2.
3.
*4.
*5.
The Members of the Board of Governors.
The Presidents of the twelve Federal Reserve Banks.
Officers of the Federal Open Market Committee.
The Secretary of the Treasury.
The Under Secretary of the Treasury for Monetary Affairs
and the Deputy Under Secretary for Monetary Affairs.
*Weekly reports of open market operations only.
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*6.
*7.
8.
9.
10.
11.
-20The Assistant to the Secretary of the Treasury working on
debt management problems.
The Fiscal Assistant Secretary of the Treasury.
The Director of the Division of Bank Operations of the
Board of Governors.
The officer in charge of research at each of the Federal
Reserve Banks not represented by its President on
the Federal Open Market Committee.
The alternate member of the Federal Open Market Committee
from the Federal Reserve Bank of New York; the
Assistant Vice Presidents of the Federal Reserve Bank
of New York working under the Manager of the System
Account; the Managers of the Securities Department
of the New York Bank; the Vice President of the
Foreign Function having supervisory responsibility
for operations; the Senior Foreign Exchange Officer
of the Foreign Function; the Managers of the Foreign
Department; the officer in charge, the Assistant Vice
President, and the Adviser of the Research Department
of the New York Bank; and the confidential files of
the New York Bank as the Bank selected to execute
transactions for the Federal Open Market Committee.
With the approval of a member of the Federal Open Market
Committee or any other President of a Federal Reserve
Bank, with notice to the Secretary, any other employee
of the Board of Governors or a Federal Reserve Bank.
The Committee reaffirmed by
unanimous vote the authorization,
first given on March 1, 1951, for
the Chairman to appoint a Federal
Reserve Bank to operate the System
Open Market Account temporarily in
case the Federal Reserve Bank of
New York is unable to function.
The following resolution to
provide for the continued opera
tion of the Federal Open Market
Committee during an emergency was
reaffirmed by unanimous vote:
*Weekly reports of open market operations only.
3/1/66
-21-
In the event of war or defense emergency, if the
Secretary or Assistant Secretary of the Federal Open
Market Committee (or in the event of the unavailability
of both of them, the Secretary or Acting Secretary of
the Board of Governors of the Federal Reserve System)
certifies that as a result of the emergency the avail
able number of regular members and regular alternates
of the Federal Open Market Committee is less than seven,
all powers and functions of the said Committee shall be
performed and exercised by, and authority to exercise
such powers and functions is hereby delegated to, an
Interim Committee, subject to the following terms and
conditions:
Such Interim Committee shall consist of seven
members, comprising each regular member and regular
alternate of the Federal Open Market Committee then
available, together with an additional number, suffi
cient to make a total of seven, which shall be made up
in the following order of priority from those available:
(1) each alternate at large (as defined below);
(2) each President of a Federal Reserve Bank not then
either a regular member or an alternate; (3) each First
Vice President of a Federal Reserve Bank; provided that
(a) within each of the groups referred to in clauses
(1), (2), and (3) priority of selection shall be in
numerical order according to the numbers of Federal
Reserve Districts, (b) the President and the First Vice
President of the same Federal Reserve Bank shall not
serve at the same time as members of the Interim
Committee, and (c) whenever a regular member or regular
alternate of the Federal Open Market Committee or a
person having a higher priority as indicated in clauses
(1), (2), and (3) becomes available he shall become a
member of the Interim Committee in the place of the
person then on the Interim Committee having the lowest
priority. The Interim Committee is hereby authorized
to take action by majority vote of those present
whenever one or more members thereof are present,
provided that an affirmative vote for the action taken
is cast by at least one regular member, regular alternate,
or President of a Federal Reserve Bank. The delegation
of authority and other procedures set forth above shall
be effective only during such period or periods as there
are available less than a total of seven regular members
and regular alternates of the Federal Open Market
Committee.
3/1/66
-22-
As used herein the term "regular member" refers to
a member of the Federal Open Market Committee duly
appointed or elected in accordance with existing law;
the term "regular alternate" refers to an alternate of
the Committee duly elected in accordance with existing
law and serving in the absence of the regular member for
whom he was elected; and the term "alternate at large"
refers to any other duly elected alternate of the
Committee at a time when the member in whose absence he
was elected to serve is available.
The following resolution
authorizing certain actions by the
Federal Reserve Banks during an
emergency was reaffirmed by unan
imous vote:
The Federal Open Market Committee hereby authorizes
each Federal Reserve Bank to take any or all of the actions
set forth below during war or defense emergency when such
Federal Reserve Bank finds itself unable after reasonable
efforts to be in communication with the Federal Open
Market Committee (or with the Interim Committee acting
in lieu of the Federal Open Market Committee) or when
the Federal Open Market Committee (or such Interim Commit
tee) is unable to function.
(1) Whenever it deems it necessary in the light of
economic conditions and the general credit situation
then prevailing (after taking into account the possibility
of providing necessary credit through advances secured
by direct obligations of the United States under the last
paragraph of section 13 of the Federal Reserve Act), such
Federal Reserve Bank may purchase and sell obligations
of the United States for its own account, either outright
or under repurchase agreement, from and to banks, dealers,
or other holders of such obligations.
(2) In case any prospective seller of obligations
of the United States to a Federal Reserve Bank is unable
to tender the actual securities representing such
obligations because of conditions resulting from the
emergency, such Federal Reserve Bank may, in its
discretion and subject to such safeguards as it deems
necessary, accept from such seller, in lieu of the
3/1/66
-23-
actual securities, a "due bill" executed by the seller
in form acceptable to such Federal Reserve Bank stating
in substantial effect that the seller is the owner of
the obligations which are the subject of the purchase,
that ownership of such obligations is thereby transferred
to the Federal Reserve Bank, and that the obligations
themselves will be delivered to the Federal Reserve Bank
as soon as possible.
(3) Such Federal Reserve Bank may in its discretion
purchase special certificates of indebtedness directly
from the United States in such amounts as may be needed
to cover overdrafts in the general account of the Treasurer
of the United States on the books of such Bank or for
the temporary accommodation of the Treasury, but such
Bank shall take all steps practicable at the time to
insure as far as possible that the amount of obligations
acquired directly from the United States and held by it,
together with the amount of such obligations so acquired
and held by all other Federal Reserve Banks, does not
exceed $5 billion at any one time.
Authority to take the actions above set forth shall
be effective only until such time as the Federal Reserve
Bank is able again to establish communications with the
Federal Open Market Committee (or the Interim Committee),
and such Committee is then functioning.
By unanimous vote the Commit
tee reaffirmed the authorization,
first given at the meeting on
December 16, 1958, providing for
System personnel assigned to the
Office of Emergency Planning,
Special Facilities Branch, on a
rotating basis to have access to
the resolutions (1) providing for
continued operation of the
Committee during an emergency and
(2) authorizing certain actions
by the Federal Reserve Banks
during an emergency.
There was unanimous agreement
that no action should be taken to
3/1/66
-24
change the existing procedure, as
called for by resolution adopted
June 21, 1939, requesting the Board
of Governors to cause its examining
force to furnish the Secretary of
the Federal Open Market Committee a
report of each examination of the
System Open Market Account.
Reference was made to the procedure authorized at the
meeting of the Committee on March 2, 1955, and most recently
reaffirmed on March 2, 1965, whereby, in addition to members and
officers of the Committee and Reserve Bank Presidents not currently
members of the Committee, minutes and other records could be made
available to any other employee of the Board of Governors or of a
Federal Reserve Bank with the approval of a member of the Committee
or another Reserve Bank President, with notice to the Secretary.
It was stated that lists of currently authorized persons
at the Board and at each Federal Reserve Bank (excluding secretar
ies and records and duplicating personnel) had recently been
confirmed by the Secretary of the Committee.
The current lists
were reported to be in the custody of the Secretary, and it was
noted that revisions could be sent to the Secretary at any time.
It was agreed unanimously that
no action should be taken at this
time to amend the procedure authorized
on March 2, 1955.
3/1/66
-25
This concluded the consideration of the continuing authoriza
tions of the Open Market Committee, and the Committee turned to a
review of operations during the period since the meeting of the
Committee held on February 8, 1966.
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 February 8 through February 23, 1966, and a supplemen
tal report for February 24 through 28, 1966.
Copies of these reports
have been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs stated that
the Treasury gold stock would remain unchanged again this week.
The Stabilization Fund opened the month with a gold balance of
roughly $80 million, with prospective sales during the month of at
least $34 million to the French, $19 million to settle the U.S.
share of the Gold Pool deficit for February, and about $18 million
for other scattered transactions.
Those sales would just about
clean out the Stabilization Fund's holdings.
It was still hoped
that the Russians would be compelled to sell as much as $200 million
of gold to finance Canadian wheat imports during March and April,
and that might enable the U.S. to fend off further reductions in
the Treasury gold stock until April.
If the Russian sales did not
-26
3/1/66
come through, the Treasury presumably would have to transfer $75
to $100 million from its stock to the Stabilization Fund before
the end of this month.
Mr. Coombs reported that strong buying pressure had
continued on the London gold market, and that the Pool had been
forced to put in a total of $78 million worth of gold since the
beginning of the year.
It was hoped that sizable Russian gold
sales would relieve the pressure on the Pool's resources during
the next two months or so, but thereafter the Russians probably
would stay out of the market.
As he had mentioned on previous
occasions, he did not think the outlook in the gold market was
favorable.
He was apprehensive that serious trouble might be
encountered in that area before the year was over, with possible
repercussions on other markets.
On the exchange markets, Mr. Coombs said, sterling had run
into new troubles during the past two weeks.
The Bank of England
had had to give support to the rate each day last week, probably
to a total of $50 million or so, and it was in the market again
yesterday.
However, yesterday the British authorities had let the
rate slip below par.
That involved some risk; whenever the rate
moved below par there was the risk that selling pressures would
cumulate.
In his judgment, however, their decision to back away
rather than to try to hold the rate was a wise one because market
participants felt that with a British election in prospect a new
-27
3/1/66
element of uncertainty had been injected into the market.
A number
of factors seemed to be involved in the difficulties for sterling.
The U.K. trade figures for January were disappointing, although
that perhaps was fortuitous; more seriously, the trend of wages
and prices remained inflationary; and the expectations of an
election, now scheduled for March 31, had further unsettled the
market.
Also unsettling was the discussion of a suggestion by a
group of European and American economists that the margins for
exchange rate fluctuations might be widened.
That suggestion was
disturbing because of fears that sterling might move to the lower
limit of the wider range, and that such a development might be a
prelude to devaluation.
Mr. Coombs went on to say that the Bank of England began
the month of February with net outpayments of close to $400 million,
of which $290 million represented debt payments to the System and
to the U.S. Treasury.
1/
Despite the fact that
the Bank of England's reserves benefited during the month to the
extent of $100 million by operations undertaken by the Federal
Reserve Bank of New York and by the Bank of Italy, they approached
1/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence referred to certain other operations
of the Bank of England.
3/1/66
-28
the month end with a prospective deficit of somewhat more than
$250 million.
Today Chancellor Callaghan was expected to announce
that the British Government had taken into the reserves nearly
$900 million of the British Government's portfolio of U.S. secu
rities which had been progressively liquefied during the past year
or so.
That would serve not only to cover the February deficit,
but would also add about $630 million to British official reserves.
At the same time, the British Government would announce that the
$750 million swap line with the Federal Reserve had been completely
repaid.
Mr. Coombs said that he would like to bring the Committee
up to date on the progress being made at the Bank for International
Settlements meetings in negotiating a new international credit
package designed to deal with the sterling balance problem.
As
Mr. Hayes, Mr. MacLaury, and he had mentioned at previous Committee
meetings, the general objective was to put together an over-all
package of roughly $1 billion, of which the U.S. share would be
$315 million, to supersede the credit package provided last
September to the Bank of England.
The credit lines that had been
granted by most of the continental central banks were due to reach
the end of their six months' terms about the middle of March.
At
the last BIS meeting, further progress was made in shaping up a
draft which would probably be technically acceptable to most of
3/1/66
-29
the European central banks concerned.
Two of the European central
banks, however, insisted that they could not participate in any
new package until the British Government negotiated a backstop
arrangement of medium-term credit from the International Monetary
Fund or other sources, which would provide refinancing of central
bank credits if the Bank of England should be unable to repay them
at their final maturity.
Meanwhile, Mr. Coombs continued, it was informally agreed
that on March 15 the European parties to the September credit
package would extend their credit lines for another three months,
but for the limited purpose of offsetting reserve drains occasioned
by liquidation of the sterling balances.
In his opinion it was
unfortunate that the new credit authorizations would be subjected
to a more restrictive use than those of September.
However, there
might not be too much difference in substance because any future
speculative attack on sterling would, in all probability, be
accompanied by a substantial running down of the sterling balances.
He was inclined to think, therefore, that no serious damage would
be done if the Federal Reserve and the U.S. Treasury were to pursue
a roughly parallel course by informally restricting part of their
combined credit lines to the Bank of England to use in financing
liquidation of sterling balances.
At the present moment, the
unused portion of those lines amounted to $1,070 million, comprised
3/1/66
-30
of the Federal Reserve swap line of $750 million, a Treasury
authorization of $200 million established last September, and the
$120 million remaining under a Federal Reserve authorization for
$200 million, also provided last September.
He suggested that
$400 million of the $1,070 million temporarily be earmarked for
the specific purpose of offsetting drains on British reserves
arising out of liquidation of the sterling balances.
If and when
the BIS proposal for a new credit package should become effective,
the U.S. share of such credit assistance directed to the sterling
balance problem would decline from $400 million to $315 million.
Mr. Coombs said he suggested that the Committee proceed
informally in the matter because the negotiations on the new credit
package were still in process.
It was not as yet clear whether
the Basle decision to restrict use of the temporary new credit
lines could be maintained.
With British elections ahead, and with
the possibility existing of a new run on sterling, the continental
Europeans might find it necessary to take a less restrictive
attitude.
By acting informally, the System could accommodate
itself to the present fluid situation without endangering its own
position or that of the Bank of England.
Mr. Daane commented that his personal inclination would be
to keep the U.S. credit arrangements with the British as flexible
as possible and not to take the more restrictive attitude.
3/1/66
-31
However, he supposed that if the U.S. joined with other countries
in a package that involved restrictions it would have to go along
with them.
Mr. Coombs remarked that if more restrictive terms were
adopted and if the British wanted to draw on the credit lines, the
Europeans probably would insist that their credits not be drawn
on unless there was a pro rata drawing on the U.S. for the same
purpose.
Thus the initiative could be left with the British; even
if the Committee were to place no restrictions on the use of
System credits, the Bank of England would be compelled to restrict
its use of them in order to draw on the European central banks.1/
Chairman Martin commented that the matter Mr. Coombs had
raised was an extremely important one, and that it would be
desirable for all members of the Committee to follow developments
with respect to sterling closely over the coming weeks.
Mr. Daane remarked that it was desirable, in his judgment,
for the Committee to allow the Special Manager the maximum possible
degree of flexibility to deal with the situation.
1/ A sentence has been deleted at this point for one of the
reasons cited in the preface. The sentence reported a further comment
by Mr. Coombs on the subject under discussion.
3/1/66
-32
In reply to questions by Mr. Mitchell, Mr. Coombs said
that the Bank of England's total use of its swap line with the
System probably had amounted to about $2 billion.
The Bank had
twice drawn the full amount available and it had made a number of
additional drawings of a few days each around month-ends.
Of the
$200 million authorized in September for System covered purchases
of sterling, $80 million had been used.
Last fall $30 million had
been employed in direct support of the sterling rate.
The remainder
had been used last week, when the System bought $50 million of
sterling from the Bank of England against dollars.
Since the
System had swapped the sterling with the BIS for lire, and had used
the lire as part of the repayment of its swap drawing on the Bank
of Italy, last week's transaction served the interests of both the
System and the Bank of England.
There was no risk exposure to the
System in using the authorization in question, because the sterling
acquired under it was fully guaranteed by the Bank of England.
The
authorization for covered sterling purchases did not specify any
time limit but it was, of course, subject to review and modifica
tion by the Committee.
The System held somewhat less than $25
million of uncovered sterling in its working balances, but he
planned to reduce that amount to about $20 million in the next
week or so.
In response to other questions, Mr. Coombs noted that the
September credit package had totaled roughly $930 million.
The
3/1/66
-33
U.S. share, divided equally between the System and the Treasury,
was $400 million, or somewhat over 40 per cent; other central banks,
not including the Bank of France, participated to the extent of
about $530 million.
The new package under discussion totaled
slightly more than $1 billion, of which the U.S. share of $315
million would be a little over 30 per cent; and the Bank of France
might possibly participate.
The terms being considered allowed
for 3-month credits renewable for periods of up to nine or twelve
months.
Thus, they would be consistent with the Committee's one
year outside limit on swap drawings, although they might call for
a somewhat more generous interpretation of renewal possibilities
If the arrangements were completed, the System
within that limit.
and the Treasury might reduce their authorizations for covered
sterling purchases from the present combined level of $400 million
to $315 million.
Alternatively, the authorizations might be
continued at $400 million, with $315 million earmarked for the more
restrictive purpose.
The matter remained to be negotiated with the
Treasury.
Mr. Daane said he thought the latter course--continuing the
$400 million authorization--would be preferable.
Mr. Coombs agreed.1/
1/ Two sentences have been deleted at this point for one of the
reasons cited in the preface. The deleted material reported further
comments by Mr. Coombs on the subject under discussion.
3/1/66
-34-
Mr. Swan asked whether the informal earmarking Mr. Coombs
had suggested earlier would be for British drawings under the swap
line or for U.S. covered purchases of sterling under the September
authorizations.
Mr. Coombs replied that to retain the greatest
flexibility it might be best to relate the earmarking to the over
all total of available U.S. credit lines to Britain--including the
System's $750 million swap arrangement with the Bank of England,
which was now wholly on a standby basis; the Treasury's $200 million
authorization for covered sterling purchases, which was not now in
use; and the $120 million remaining under the Committee's $200
million authorization for covered sterling purchases.
From the
technical point of view, however, he was anxious to keep available
for market intervention for general purposes the authorization for
covered purchases of sterling, since that could be done at the
System's initiative.
Under certain circumstances the Bank of
England might be hesitant about drawing on the swap line, and in
any case such drawings gave the general impression of defensive
operations.
Operations by the New York Bank in the market were
likely to be far more effective; they could be an extremely
powerful tool.
3/1/66
-35
Mr. Mitchell asked whether an increase in the size of the
swap arrangement with the Bank of England might be desirable.
Mr. Coombs replied that he would prefer to see the size of some of
the other swap lines increased first, because the line with the
British was on the high side relative to others.
In general, he
thought the System's network, taken as a whole, was too small,
considering the continuing growth of international trade and
payments.
It would be desirable to increase it by $1 billion or
so.
In reply to questions by Mr. Wayne, Mr. Coombs said he was
not sure that an increase in the swap line with the Bank of England
would have an adverse effect on the willingness of other central
banks to extend credit to the British.
It was true that some
European central bankers thought the U.S. had been overly lenient
in its dealings with the British and that it should have taken a
firmer line.
His own feeling was that a much more serious situation
would have resulted had the U.S. followed such advice.
He did not
think the attitude of particular countries, such as France or the
Netherlands, would seriously damage the chances of negotiating
increases in the System's swap lines because the United States had
a great deal of bargaining power.
One general difficulty at the
moment was that the whole international financial system was being
subjected to formal review; many approaches
were being considered,
3/1/66
-36
of which swap arrangements were only one, and there was some
tendency for action to be frozen pending the outcome of those
discussions.
Also, at present the U.S. was mainly focusing its
bargaining power on the negotiations for increasing international
liquidity through a collective reserve unit and expanded IMF
facilities.
Mr. Hayes commented that he thought it reasonable to draw
a distinction between the size of the standby facilities the
System extended to the Bank of England, which was a matter of
public record, and the maximum amount of assistance the U.S. might
be prepared to extend to the British under emergency conditions.
He could conceive of circumstances in which the U.S. would be
willing to provide additional credits on an ad hoc basis but not
through an enlarged swap arrangement.
Mr. Hickman asked whether there was any evidence that
market participants were beginning to take short positions in
sterling and, if so, whether it would be desirable for the System
to intervene in the market to buy pounds.
Mr. Coombs replied that there was some indication that
people who had maturing forward contracts were using existing
holdings of sterling to settle them rather than buying spot
sterling for that purpose.
He recently had indicated to the Bank
of England that the System was prepared to buy sterling on a
3/1/66
-37
covered basis, but the Bank had felt such action was not desirable
at present.
In his judgment their position was correct; the market
was convinced that a sterling rate above par would not be realistic
now, although no one could be sure what the equilibrium rate was.
If the sterling rate began to slide, however, the System could step
in.
Chairman Martin noted that any further liquefication of the
British portfolio of U.S. securities would involve an additional
drain on the U.S. balance of payments.
Mr. Wayne then asked
whether the step Mr. Coombs had noted the British would announce
today--taking about $900 million of their U.S. holdings into their
reserves--would have much impact on the U.S.
balance of payments.
Mr. Coombs replied that about 85 per cent of the impact had already
been felt on the U.S. payments balance; $500 million had shown up
in the second and third quarters of 1965 alone.
Thereupon, upon motion duly
made and seconded, and by unan
imous vote, the System open market
transactions in foreign currencies
during the period February 8 through
28, 1966, were approved, ratified,
and confirmed.
Mr. Coombs then noted that the System's $100 million
standby swap arrangement with the Netherlands Bank would mature on
March 15, 1966, and he requested the Committee's approval of its
renewal for another three months.
No drawings were outstanding on
3/1/66
-38-
this arrangement; indeed, for the first time in a long time no
drawings by either party were outstanding on any of the System's
swap lines.
Renewal of the standby swap
arrangement with the Netherlands
Bank for a further period of three
months was approved.
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
February 8 through 23, 1966, and a supplemental report for
February 24 through 28, 1966.
Copies of these reports have been
placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
A further sharp rise in long-term interest rates
was the main feature of the period since the last
meeting of the Committee and market participants
appear convinced that more of the same lies ahead.
Against the background of vigorous economic expansion
and growing inflationary fears, a heavy calendar of
corporate, municipal, and Government agency issues
met generally with a cautious investor response.
Anticipation of higher yields and lesser availability
of funds later on in the year has tended to bring
borrowers into the market ahead of need, while making
investors--who seem periodically on the verge of
succumbing to the temptations of the historically
high yields now prevailing in many sectors of the
market--inclined to wait and see.
Government agency issues encountered some
difficulties during the period. The poor response to
the Export-Import participation certificates, and an
3/1/66
-39-
announcement of a $410 million FNMA issue scheduled
for mid-March, reminded the market of the substantial
extent to which the 1967 budget relies on agency asset
sales. The poor response to the Export-Import Bank
financing--$360 million placed out of a $700 million
offering, despite a 5-1/2 per cent coupon--was not a
true reflection of the state of the agency market.
The Export-Import Bank participation certificate had
few attractive features in present market conditions.
The 18-month call feature made it unattractive for
long-term investors, and the lack of marketability
made it unattractive to corporations and others with
liquid funds to invest. Given their tight money
positions, commercial banks were understandably
anxious to reserve lendable funds to serve customer
relationships, rather than purchase a beneficial
interest in loans made by the Export-Import Bank.
System action to make the certificates eligible at the
discount window was apparently not rated an important
inducement.
The FNMA participation certificates, on the other
hand, will provide a more meaningful test for the
market. There already appears to be a substantial
interest in the longer maturities to be offeredprovided the price is right--but pricing of the
intermediate maturities may be a problem. Other
recent routine agency issues--a $340 million 9-month
FICB issue, and a $506 million 8-month FHLB issue--met
with only a lukewarm response despite a 5.15 per cent
coupon. And a $250 million 14-month FNMA issue--priced
to yield 5.38 per cent--was a real success only because
of large--and unexpected--demand from an international
institution at the last minute. The contrast of this
most recent experience with the earlier ease of placing
agency issues is a warning that serious rethinking of
the general approach to agency financing may be
required in the months ahead.
In the Government securities market, yields in the
5-10 year area rose by 1/4 per cent or more in the past
three weeks, extending the "hump" in the yield curve and
bringing yields to over 5 per cent on issues for
maturities out to 1974. With Governments in the 20-year
maturity area yielding around 4-3/4 per cent, yields in
the long end of the Government list are well above 1960
peaks, while new corporate issues are now close to their
3/1/66
-40-
previous postwar highs.
Dealers have been extremely
cautious, keeping their net positions in coupon issues
close to zero or short and seeking to find a price
level that will bring in buyers. There has been some
bank selling, and some investors have made modest
purchases as prices declined. While the market has
been under pressure at times, most of it appears to
have been professionally generated, and it has not
been accompanied by panicky or urgent investor selling
in any size. Thus, while rates have moved rapidly at
times, the market has not been disorderly. While most
market participants feel that the adjustment has
further to go, the technical position of the market is
strong. Favorable developments in the shape of a
determined move in the fiscal policy area, or good
news from Viet Nam, could still have a pronounced
steadying effect on the Government bond market.
The short-term area of the market has been some
what steadier, although CD rates have inched higher,
the three-month Treasury bill has touched 4.70 on
several occasions, and the one-year bill auctioned
six days ago went at an average of 4.95 per cent--1/4
per cent higher than a month ago and equivalent to
5.21 per cent on a bond yield basis. Despite a strong
demand for short-dated Treasury bills from public
funds and from the temporary investment of money either
raised in the capital markets or awaiting investment
there, dealers have been very cautious and have been
working with minimal trading positions in bills. As
a result, dealer financing needs have been reduced,
and this has tended to reduce the strain on the money
market banks and on other short-term markets generally.
At the same time, however, Federal funds rates have
been consistently at a premium, with the likelihood
that continued pressure on bank reserve positions may
result in an effective rate of 4-3/4 per cent on funds
from time to time in the near future.
Dealers appear to be in a relatively good position
to go into the March tax and dividend period, but heavy
runoffs of CD maturities at banks will intensify the
seasonal pressures and some strain on short-term rates
is a likely prospect in the next few weeks.
Even keel considerations posed no handicap to
open market operations over the past three weeks.
Dealers had managed to dispose of the bulk of the
3/1/66
-41-
modest amounts of the new issues they had acquired in
the February refunding by the payment date on
February 15, although some buying of the new 5's by
Treasury trust accounts was necessary to slow the
decline of prices below par. During the last two
weeks, both the new 4-7/8 per cent 18-month notes and
the longer 5 per cent notes have performed well, with
the latter up 2/32 over the period, in sharp contrast
to the performance of the rest of the market.
While the settlement of the February refunding
posed no problems, operations were handicapped by a
persistent tendency for reserve availability to exceed
projections as float ran unusually high and required
reserves fell short of seasonal expectations. Con
sequently, in the weeks ending February 16 and
February 23 action taken to supply reserves before the
weekend had to be reversed later on. On one occasion
reserve objectives had to be temporarily sidetracked
to take account of the unsettled state of the market.
During the period, the System purchased short-dated
Treasury coupon issues for the first time since last
September. Purchases of such issues had not been made
since that time because of a succession of cir
cumstances--including a desire to avoid action at a
time where strong market feelings of developing upward
rate pressures were being confounded by various
official statements about interest rate objectives.
Recently we have been seeking an opportunity to provide
some portion of reserve needs by undramatic purchases
of available coupon issues. Such an opportunity arose
on February 17 when we had a substantial amount of
reserves to supply at a time when there was a scarcity
of Treasury bills available in the market. Our
purchases, confined to 1966 and 1967 maturities, made
some dealers think twice about their short positions
and induced some temporary short-covering, but
otherwise had no effect on the bond market. In the
future we plan to purchase additional modest amounts
of coupon issues from time to time when supplying
reserves, while trying to avoid an impression that
special significance attaches to our purchases.
In conclusion, a few words may be in order about
the Treasury's cash position in the weeks ahead.
Given the heavy cash drains anticipated before
mid-March and again before mid-April, there is a
possibility that the Treasury may want to take
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advantage of its temporary borrowing facilities at the
Reserve Banks. At the moment, there is some uncertainty
about the outlook, which is partly dependent on how
much various agency asset sales may raise in the coming
months. All in all, it appears that the Treasury's cash
position is developing at least as satisfactorily as had
been anticipated earlier. Given the pre-refunding of
part of May maturities, direct Treasury financing
problems do not at this moment appear troublesome over
the balance of the fiscal year.
Mr. Scanlon asked whether the Manager thought he had accom
plished the firming action the Committee had decided on at its
previous meeting.
Mr. Holmes replied that a good start had been
made, but he would consider the action to be still in process.
Mr. Maisel noted that in his statement the Manager had
referred several times to problems associated with Federal agency
issues.
Developments with respect to agency issues might dominate
the Government securities market over coming months, since the
Treasury was depending on them to build up its cash balance.
Accordingly, there might be advantages if the System traded in
agency issues.
Perhaps the continuing authority directive ought
to be reviewed to consider whether it should be revised to authorize
such transactions.
He did not know enough about the subject to
hold a firm opinion at the moment, but felt that consideration
should be given to that possibility.
More generally, he thought
it would be useful for the staff to examine the question of the
appropriate relationship between the System and the market for
agency issues, and for the Committee to plan on discussing the
subject at a future meeting.
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Mr. Hayes agreed that the subject of agency issues was
important, and noted that the Treasury was studying it now.
However, while the System might be able to offer the Treasury some
advice on debt management aspects, he could see nothing to indicate
that it would be desirable for the System to trade in those
securities.
Mr. Daane felt that exploration of the fundamentals of the
subject would be worthwhile.
But he agreed with Mr. Hayes that
the System should not enter the agency issue market, particularly
in view of the budgetary implications.
Chairman Martin observed that the question Mr. Maisel had
raised might well be considered in the study of the Government
securities market that the System and the Treasury jointly were
about to launch.
There was general agreement with that suggestion.
Thereupon, upon motion duly
made and seconded, and by unanimous
vote, the open market transactions
in Government securities and bankers'
acceptances during the period
February 8 through 28, 1966, were
approved, ratified, and confirmed.
The staff economic and financial report at this meeting
was in the form of a visual-auditory presentation.
(Copies of the
charts have been placed in the files of the Committee.)
The introductory portion of the review, presented by
Mr. Brill, was as follows:
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The time of year has come again for the staff to
present to the Committee an annual exercise in which
we dissect the economic model underlying the Budget
and explore the financial implications of the
projected spending and income flows. The purpose of
these exercises is to gauge the pressures in financial
markets one might expect to encounter in pitting a
particular monetary policy against the pattern and
level of demands for goods and services projected by
the Administration.
Today, however, our presentation must take a
somewhat different tack. The economic world has been
moving swiftly since early January, when the final
touches were being put on the Council's model.
Moreover, data now available for late 1965 reveal a
surge in activity barely evident in the economic
information available at that time. It would hardly
profit to ignore these new data and new developments
in setting forth to explore the financial outlook.
We have, therefore, modified the CEA model, revisingin most cases upward--the projected spending and income
estimates. It is this revised model that serves as
the basis for our analysis of the financial outlook.
First, however, we will review briefly the
salient elements of the CEA model.
Mr. Koch commented as follows:
The Administration GNP projection for 1966 is
centered on $722 billion, give or take $5 billion. In
current dollars, the increase for the year is $46
billion, about the same as in 1965. With the GNP price
deflator projected to rise about 1.8 per cent, the
increase in constant dollars amounts to 5.0 per cent,
compared with 5.5 per cent in 1965. Projected growth
is fairly uniform throughout the year, with the
fourth quarter projected at $739 billion.
In the CEA model, the main expansionary forces are
Federal spending for defense and business spending for
fixed capital. Federal purchases of goods and services
rise $7 billion between 1965 and 1966, mostly for
defense. But with GNP rising rapidly, the proportion
of GNP devoted to defense increases little.
Transfer payments are expected to advance almost
$5 billion, with Medicare coming in at a $2 billion
annual rate at midyear and rising rapidly thereafter.
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Grants-in-aid to State and local governments, included
in transfers and other payments, also show a considerably
larger rise than during 1965.
Thus, in addition to the direct contribution to GNP
from rising purchases of goods and services, scheduled
increases in other Federal payments would support rising
private demands.
This expansion of Federal expenditures is just
about matched by the growth of tax receipts. The first
quarter bulge in receipts reflects increased social
security taxes. Thereafter growth in receipts stems
mainly from increased personal and corporate income.
Consequently, the Federal deficit, as measured in
the national income accounts, is estimated to remain
not far from the level of late 1965 throughout most of
1966.
The other major expansionary force in the Council
model, business fixed investment, is projected to rise
10 per cent for the year, compared with 15 per cent in
1965. Increases in spending after midyear are quite
moderate. At year end, fixed capital investment
accounts for 10.6 per cent of GNP, little different
from the share in late 1965.
Over all, developments projected for 1966 in the
CEA model are not far from a replica of those in 1965.
The increase in defense spending is larger than last
year, but this is about offset by a smaller rise in
business fixed investment. The steady growth in State
and local spending continues. Disposable income rises
about as much as in 1965, and with the consumer spending
rate remaining unchanged, consumption increases about
the same amount as last year.
With substantial growth in total demands, further
pressure is exerted on available resources, particularly
manpower. But the projected rise in the GNP deflator
is about the same as in 1965, with declining food prices
helping to offset a somewhat faster rise in industrial
prices. The unemployment rate is calculated to decline
to an average of 3-3/4 per cent for the year, compared
with 4.6 per cent in 1965.
As Mr. Brill noted earlier, the CEA projection was
constructed in late 1965; new data and new developments
since then suggest the need for a new perspective on
the outlook. The revised GNP data for the fourth
quarter alone suggest greater strength in demands than
was evident earlier.
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The staff's reassessment raises expenditures
moderately in several key categories, and the over-all
effect of this implies significant differences in the
degree of resource utilization. Basically, we look for
more business investment spending and larger State and
local purchases. The effects of this on income also
raise consumer outlays.
We have not, however, departed from the CEA
projection of defense expenditures. Like everyone else,
we are aware of the uncertainty attaching to the
ultimate magnitude and time pattern of the defense
effort, but military clairvoyance is not our forte.
The staff's projection of State and local purchases
is significantly larger than the Council's. Pressures
are strong for expansion of spending on a host of
community services--from education to waste disposal.
A sizable volume of these increased services will be
financed through the scheduled increase in Federal
grants-in-aid. Federal purchases are also shown as
increasing strongly, in line with the Budget message.
Available evidence suggests a marked increase in
business fixed investment this year. In about a week,
we shall have a new reading on business spending plans;
pending this we have assumed continuation throughout
the year of the expansion rate indicated in the earlier
survey for the first half. Indeed, on the basis of a
recently released private survey, our own estimate may
prove too low. Projecting a slowdown after midyear, as
in the CEA model, hardly does justice to the very
expansive psychology now pervading the economy, nor to
the underlying determinants of this type of spending.
Sales are rising rapidly, and profits are projected to
rise faster than GNP, although not as much as last year.
Manufacturing capacity is currently harder pressed than
at any time since late 1955, and new orders for machinery
and equipment are still mounting, as are unfilled orders.
Thus, we expect that by the fourth quarter, nearly 11
per cent of GNP will be accounted for by business spending
on fixed capital.
Inventory investment rose sharply late in 1965,
despite rapid liquidation of steel stocks. Continued
strong demands for inventory are likely, in a setting
of rapid expansion in final sales and growing prospects
of supply shortages, delivery delays, and price increases.
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In absolute terms, projected inventory accumulation may
appear high. Nevertheless, the stock-sales ratio is
expected to remain at the 1965 level.
Unlike other types of economic activity, prospects
for housing starts are for some further decline. For
the single-family component of private starts,
underlying demographic factors will continue relatively
neutral, and upgrading may be limited by further
increases in building costs. The already higher level
of borrowing costs will also be a factor whose effect
may be felt increasingly as the year progresses. In
the case of multi-family starts, which accounted for
all of the year-to-year drop in 1965, a further
downward adjustment is indicated.
U.S. exports of goods and services are expected to
increase rapidly this year, with demand conditions
abroad generally buoyant. However, U.S. imports will
also be rising rapidly, and net exports may thus be
only moderately larger. An improvement of $800
million is projected, but the margin of uncertainty is
large. Imports of goods and services include military
expenditures abroad; these are expected to increase
about $1/2 billion this year.
Merchandise imports are not expected to rise as
fast this year as last, mainly because steel imports
should not increase further from the high 1965 level.
Nevertheless, total merchandise imports are projected
to rise as fast as GNP, and hence, as in 1965, to
remain higher in relation to GNP than in any other
year since the Korean War.
Increases projected for government spending and
investment outlays would generate a large rise in
consumers' after-tax income. Disposable personal income
is expected to rise rapidly, and the projected increase
for the year is more than in 1965. Gains in employment
and wage and salary disbursements are projected at the
rapid rate of late 1965, and government transfer payments
will rise sharply.
With this growth of income, total consumer spending
is projected to show a larger dollar rise than last year,
but about the same percentage increase.
The consumer spending rate advanced last year from
the reduced 1964 level. But in 1966 a slight decline
appears likely, in part because a much smaller rise is
anticipated this year in expenditures for autos and
hence in total consumer spending on durable goods.
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3/1/66
After 4 years of sharp increases, sustained high auto
demand, rather than a large further increase, seems
the more likely prospect. This assumption is
consistent with the findings of the latest Census
survey of intentions to buy. Spending on nondurable
goods and services, on the other hand, is expected to
increase in step with disposable income, and the
decline in the over-all spending rate for 1966 would
therefore be small.
Summarizing the expenditure changes, the staff
projection for the year is a GNP in current dollars of
about $731 billion, 8 per cent above 1965, with a
fourth quarter GNP close to $750 billion. Allowing
for an increase of 2.2 per cent in the deflator, the
increase in real GNP would be 5.9 per cent, almost a
full point more than the CEA projection, and the
largest increase of recent years.
Mr. Partee continued the discussion, focusing on the
implications for resource use and prices, as follows:
With GNP growing rapidly, manpower demands will
intensify this year. The supply of trained workers
is already diminished, and substantial additions of
younger workers and women to the labor force will be
required.
Bringing into employment many inexperienced workers
will tend to offset the gains in output per manhour
arising from the enlarging volume of new plant
capacity. Thus, we would expect productivity growth
to slow somewhat further from last year's reduced pace.
The length of the workweek in the private economy,
which is already high, should show little change.
On these assumptions, civilian employment would
have to increase by 2.2 million from fourth quarter
to fourth quarter, in order to produce the projected
GNP.
And the build-up of the armed forces is scheduled
to absorb an additional 300,000 men.
To meet these very strong demands for manpower,
the total labor force may expand by 1.9 million, about
600,000 more than the long-term trend would suggest.
Unemployment would fall throughout the year, with the
unemployment rate dropping to 3.3 per cent for the
fourth quarter, nearly a full percentage point below
the fourth quarter 1965 rate.
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In recent months, wage rate increases have
accelerated in many industries, as available supplies
of labor have been reduced. Consequently, increases
in average hourly earnings during 1965 were larger
than from 1960 to 1964 and were generally above the
guidepost. The largest gains occurred in such
industries as retail trade and services, where
average wage rates are low and excess labor supplies
until recently had acted to limit wage advances.
Increases in minimum wage rates were also a factor in
raising wages in some of these industries in 1965.
In manufacturing, wage gains generally have
continued to be moderate and close to the guidepost.
Here too, however, there has been some tendency for
average wage increases to accelerate, reflecting
higher overtime costs, selective upgrading of jobs
and pay scales to reduce the incidence of voluntary
quits, and more rapidly rising wages in the non-union
sectors of manufacturing.
The prolonged stability in unit labor costs in
manufacturing since 1959 thus seems likely to give way,
as direct and indirect wage costs come under pressure
from intensive utilization of manpower resources and
slower productivity growth. In the immediate months
ahead, the degree of acceleration in the advance of
wage rates should be moderate, because few major
contracts can be reopened this year. Nevertheless,
any increase in the advance of wage rates would tend
to steepen the rise in industrial commodity prices
already underway.
Manufacturing capacity also is likely to be under
sustained pressure. In January, the capacity
utilization rate was about 92 per cent. This year,
capacity is estimated to grow by 7.0 to 7.5 per centmuch more than last year. But manufacturing output is
projected to rise almost as much, so that the capacity
utilization rate would remain around 92 per cent. In
the 1955-57 boom, a 92 per cent rate was reached in
only one quarter--in late 1955.
The projected environment of further rapid
expansion in demands and strong pressures on labor,
capacity, and materials should be conducive to somewhat
larger and more widespread price increases this year.
But unless increases in costs are larger and more
pervasive than now seems likely, or unless Vietnam
developments inspire buying sprees, the acceleration in
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the rise of industrial prices should be moderate. As
a rough estimate, we would expect industrial prices to
rise on average about 2.5 per cent this year, compared
with the 1.5 per cent increase of the past 12 months.
In contrast, prices of foodstuffs--up 10 per cent
over the past year--are likely to turn down before
year end, barring very unfavorable weather. The high
hog prices of the past six months are stimulating
recovery in production, and prices of hogs and pork
could begin to fall as early as this spring. These
prospective developments should limit the rise in the
total wholesale price index, perhaps to about one-half
the 4 per cent increase of the past 12 months.
In terms of consumer prices, foods should reverse
direction this spring or summer. Any decline in prices
of foodstuffs, however, will be more than offset by
further and larger increases this year in the nonfood
categories.
Prices of nondurable goods and services are
expected to rise more in this year's stronger markets.
And consumer durables prices are likely to rise
somewhat, in contrast with last year's declines, which
reflected mainly reductions in excise taxes.
Turning now to financial implications, it seems
clear that the increased spending contemplated in the
staff's GNP model--a gain of 8 per cent in current
dollars--could not occur without a significant increase
in credit demands. Our financial projection seeks to
assess the potential dimensions of the resulting credit
flows, in order to gain some insight into the pressures
that might develop in financial markets.
The financial projection is to be interpreted in
the light of two principal assumptions that underlie it.
First, it is assumed that the expansion in GNP shown
here can be realized despite mounting pressures in
markets for credit portrayed in the projection. To the
extent that spending plans would be revised in response
to the financial developments portrayed, the financial
flows and market pressures would themselves be affected.
Second, with respect to monetary policy, we
postulate a somewhat more restrictive posture than in
1965--in terms of growth in reserves and bank
deposits--because the GNP model suggests heightened
price pressures. Without prejudging how restrictive
policy should be, we have assumed that growth of total
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reserves would be about 4 per cent--compared with a bit
over 5 per cent last year.
Consistent with that reserve expansion, and given
other aspects of the projection, we would expect a
reduction in growth of the money stock to about a 3
per cent annual rate, the lowest since 1962, as the
influence of rising interest rates partly offsets the
public's growing demand for transactions balances.
Growth in time deposits also is assumed to decline,
with a less rapid expansion in negotiable CD's held by
corporations the principal factor. Bank credit expansion,
consequently, would slow to about 8 per cent for the
year, compared with 10 per cent in 1965.
Mr. Gramley continued the discussion, focusing on the
implications of the policy assumption, together with the GNP model,
for developments in markets for credit, as follows:
With these assumptions in mind, we turn now to the
credit flows consistent with the GNP model. Total funds
raised are seen as rising nearly 13 per cent, to $81
billion in 1966, with most of the increase coming from
Federal borrowing. Total Federal borrowing may be more
than $9 billion this year, when planned sales of loan
participation certificates and Federal agency issues
are added to Treasury financing. Private borrowingalready large last year--is expected to rise, but only
moderately further.
In fact, the ratio of private borrowing to private
spending would decline slightly in 1966. This is
attributable partly to a slight decline projected for
State and local borrowing, reflecting a larger increase
in receipts than in expenditures. Also, consumer credit
is expected to rise at about last year's rate--despite
a sharp increase in total consumer spending--since auto
purchases are projected to increase less rapidly than
last year.
The projected expansion of total funds raised is,
by the way, only moderately larger than what the
Administration's GNP model would have implied. In that
model, a less rapid growth of private spending would
have resulted in a smaller expansion of private credit,
but Federal borrowing would have been somewhat
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higher--because of lower tax receipts.
On balance,
total funds raised might have risen about 10 per cent,
as opposed to 13 per cent in our projection.
Corporate demands for credit are projected to
rise substantially further this year, even though
total private credit flows increase only moderately.
The increase projected for corporate fixed investment
and inventories is sharp, almost twice the expected
increase in gross retained earnings. Consequently,
external borrowing rises further from last year's
already high level.
This increase in corporate borrowing may take the
form principally of an expansion in bond issues. Given
the difficulties likely to be faced by banks in
supplying funds to meet all loan demands, growth in
corporate bank loans could scarcely be accommodated at
a pace much faster than last year's. Consequently, we
are projecting corporate bank loan expansion at no
more than the high 1965 pace, with nearly all of the
1966 increase in borrowing hitting the security markets.
The corporate bond market, as a result, is expected to
be a major focal point of pressures in credit markets
as the year progresses.
The securities markets during 1966 must also
absorb sharply increased marketings of Federal
securities, including participation certificates. As
a result, the projected growth in total funds raised
is concentrated largely in security issues rather than
in loans. The projection calls for a slight decline in
mortgage borrowing, and for little change in other loans
from the exceptionally high 1965 pace.
The banking system, nonetheless, will face
heightened pressures on available resources this year.
As noted earlier, growth in total bank credit is
projected to slow down. But expansion in bank loans
other than mortgages is expected to be as much, or a
bit more, than last year, leaving little room for
expansion in other earning assets.
Consequently, we expect banks to cut back sharply
on their acquisitions of municipal securities, and to
liquidate Federal securities in somewhat larger volume
than last year. They might also acquire mortgages at
a somewhat slower pace.
This projection of changes in bank earning assets
implies a significant further increase in the ratio of
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bank loans to deposits, and banks would thus be likely
to tighten their lending policies substantially further
over the course of the year.
The bank share of total funds supplied is projected
to decline significantly in 1966, reflecting both the
reduced growth rate of bank credit and the expansion in
total credit flows. The share falls below that of the
past 5 years, but banks would be supplying a much larger
portion of total funds than during earlier postwar
expansions, when inflows of time deposits to banks were
small.
The share of funds supplied by nonbank interme
diaries, meanwhile, also is projected to decline in
1966. Inflows of savings to mutual savings banks and
savings and loan associations may decline slightly
further, under the pressure of competition from
commercial banks and rising market rates of interest.
To fill the gap, there would have to be a jump in
the portion of funds supplied directly to credit markets
by the nonfinancial public--that is, by businesses,
State and local governments, and especially households.
In the past, it has taken a substantial boost in
interest rates to bring these investors into security
markets in volume.
Evidence from past periods of monetary restraint
provides clues as to the orders of magnitude that
might be involved in such an adjustment of interest
rates. Given the credit flows indicated and the policy
assumed in the projection, it seems plausible that late
in 1966 rates on 3-month Treasury bills may be 50 basis
points or so above current levels. At these rates,
banks would once again encounter difficulties in
attracting CD's under present Regulation Q ceilings.
Yields on 3-5 year Governments might rise a little
faster than those on bills, especially if the Treasury
seeks to prevent too much debt shortening by offering
intermediate-term issues, and continues to be inhibited
from issuing long-term securities by the 4-1/4 per cent
ceiling.
Long-term rates of interest would likely be under
continuing upward pressure. Mortgage rates probably
would adjust upward gradually, given the heavy commitment
of institutional lenders to the mortgage market, although
other mortgage terms would undoubtedly become significantly
more restrictive. Municipal yields, however, could move
up substantially in response to reduced bank demand.
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3/1/66
Yields on corporates would also rise sharply in
response to a swelling volume of flotations, and
sometime during the year we might see 6 per cent rates
even for top quality issues. At these rates, corpora
tions would be forced to reconsider the desirability of
financing investment through capital market issues--as
opposed to other sources of finance--and also to
reconsider investment programs.
Outflows of private capital should be held down
this year by tighter domestic credit conditions,
working hand-in-hand with voluntary restraints. But
the net outflow of U.S. private capital was cut back
very sharply last year, partly as the result of a
repatriation of liquid funds that is unlikely to be
repeated. Consequently, no further cut back in net
outflows is projected--instead, some increase seems
likely.
Direct investment outflows this year are likely
to be held below last year's level by the Commerce
Department's voluntary program, but they will be at a
higher rate than in the second half of 1965. A
year-to-year reduction of about $300 million is
projected; this would be consistent with a $700 million
cut in terms of the Commerce program, which employs a
somewhat different measure of direct investment abroad.
Other outflows of U.S. capital--including bank
lending, transactions in foreign securities, and
movements of liquid funds--are projected at about the
same rate as in the second half of 1965, somewhat
above the average for all of last year.
The concluding part of the staff presentation was given by
Mr. Brill, as follows:
Before turning to the policy implications of the
foregoing analysis, let me stress again the
uncertainties involved in projections, particularly at
a time when the economy is moving as rapidly as ours
has been in the past few months. The growth projected
in GNP is substantial, but we could be underestimating
the expansion ahead by a margin that is significant for
policy purposes.
Given the pressure on available resources suggested
by the projection, we could also be underestimating the
strength of factors pushing on prices. Certainly, our
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projection suggests stronger upward pressure on prices
this year. But barring a wave of scare buying by
consumers and businesses, or further escalation in
Vietnam, the potential price rise doesn't appear to be
of 1955-56 proportions.
What appears more likely is some moderate
acceleration of the rise in the industrial commodities
index, perhaps to a rate of about 2-1/2 per cent, as
against 1-1/2 per cent over the past 12 months. The
index for all commodities would increase less, because
of the expected drop in food prices. The equivalent,
in terms of the GNP deflator, would be a rise of
somewhat less than 2-1/2 per cent.
But for international reasons particularly, any
increased pressures on industrial prices would be
unfortunate. Merchandise imports already are very high,
and military spending abroad is increasing. Outflows
of capital for direct investment, though projected to
decline in 1966, will remain large. Altogether, our
balance of payments position seems likely to remain
troublesome.
Would the degree of restraint postulated in our
financial projection be sufficient to check the advance
of spending and prices? Given the present state of
knowledge, we must still rely heavily on intuitive
judgments as to the strength and timing of responses to
monetary policy. My own judgment is that a constraint
on reserve growth this year to 4 per cent would raise
interest rates high enough to begin cutting deeply into
private demands. In fact, if additional fiscal policy
actions were taken to slow the expansion in private
spending, the projected degree of monetary restraint
might even prove over time to be excessive.
How rapidly should this degree of restraint be
achieved? There are advocates of a rapid and dramatic
monetary action, one that might bite quickly into
spending plans and might, at the same time, unblock
fund-flows by assuring investors that interest rates
had attained peak levels. Recognizing merits to this
argument, I still find myself favoring gradual
intensification of restraint.
First, the pace at which long-term interest rates
have been rising in recent weeks borders on the
precipitous. Financial markets are taut--indeed,
unsettled. It might be well to pause a bit and see how
the economy adjusts to so sharp and extensive a change
3/1/66
in borrowing costs and asset values. Second, investor
attitudes are now strongly shaped by Vietnam
uncertainties, and these attitudes would not necessarily
be modified by a dramatic monetary action, whatever
explanation accompanied it. These factors, plus our
inability to pinpoint the desirable degree of restraint,
argue to me for a series of cautious moves, rather than
for a large, rapid or dramatic action.
Translating this general policy stance to specific
operating targets, we may note first that total reserve
growth thus far in 1966 has been somewhat above the 4
per cent figure for the year assumed in the projectionprincipally because of an increase in reserves to support
growth in Treasury balances. The money stock in January
and February together grew only a little faster than the
projected 3 per cent rate, although some increase in the
expansion rate of money may occur in the weeks ahead,
since Treasury deposits are projected to decline. Thus
far, time deposit growth has been much slower than the
projection given here.
To stay on the course of reserve growth assumed in
the projection would seem to indicate the need to move
somewhat further in the direction of lessened reserve
availability, perhaps to a range around $200 million for
net borrowed reserves. Over the next few weeks, pressures
on bill rates resulting from that course of action might
arise, but probably would not be severe, because dealer
inventory positions are relatively low and investors still
seem to be disposed to keep their portfolio maturities
short. The 3-month bill might thus move in a range
between 4.70 and 4.80 per cent.
But interest rates in bond markets are already
moving up sharply, and tighter bank reserve positions
would accentuate that movement, particularly in light of
the burgeoning calendar of new corporate and municipal
offerings.
Given the present unsettled condition of the bond
markets, postponing a significant deepening of the net
borrowed reserve target for three weeks or more may be
more appropriate. Even with net borrowed reserves
averaging near $150 million, continued upward pressure
on long-term rates can be expected, but Treasury bill
rates probably would show only a moderate further
adjustment.
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Mr. Ellis asked if Mr. Brill would explain the background
for the staff's projection of inventory developments.
Mr. Brill said that the staff estimated that the first
quarter rise in inventories was likely to be at a rate close to
that of the fourth quarter.
The large fourth-quarter increase had
been a surprise to everyone, particularly since steel stocks were
being liquidated rapidly then.
Moreover, the increase now shown
in the published figures for the fourth quarter was likely to be
revised upward again by a significant margin.
In this context
the increase projected for the first quarter might be considered
moderate, given the turnaround in steel, the general ebullience
in the economy, and the probable increase in the price component
of the figures.
Some of the efforts to build stocks might fail,
but the short-fall was not likely to be great.
Mr. Daane asked whether the staff thought an Administration
announcement of further fiscal action would have a substantial
effect in quieting present expectations.
Mr. Brill remarked that the effect would depend on the
type of fiscal action announced.
A modification of the investment
tax credit, for example, might have a bigger impact on the forces
that were providing the main upward thrust to the economy than
would a general tax increase.
Mr. Holmes agreed.
He added that in his judgment any
steps toward a firmer fiscal policy would have a large impact on
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expectations in financial markets.
Fiscal policy was an area of
great concern to market participants, who were focusing on the
projected demands on capital markets.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Hayes, who made the following statement:
The business situation and outlook remain very
strong, with the Vietnam buildup a major contributing
factor. The most disturbing feature of the economy at
present is the growing evidence of inflationary
pressures. As recognition of these pressures and worry
over inflation are becoming more widespread, additional
pressures are being generated. The high rate of
inventory accumulation in the fourth quarter of 1965
was a danger sign, and this accumulation is probably
continuing. We can hardly view with equanimity the
3.6 per cent rise in the wholesale price index over
the past year, or the 5.8 per cent annual rate of
increase in the three months through the end of January.
While the rate of increase in industrial wholesale
prices has been less, it does show signs of acceleration.
The entire price picture is disturbing.
Balance of payments statitstics during most recent
weeks have made better reading than for some time past.
Nevertheless, the outlook for the year as a whole is
decidedly cloudy. On the one hand export prospects
appear to be reasonably good, as long as supply
bottlenecks and price pressures do not undermine our
competitive position. But much higher imports,
military outlays, and tourist expenditures are also in
the offing. In the capital area, new foreign security
issues have been running at a high level; fortunately,
banks have kept well below their lending limits under
the voluntary restraint program, at least in part
because of heavy domestic credit demands. The rise in
U.S. interest rate levels has decreased the spread
between domestic and foreign rates, with beneficial
effects on private holdings of dollars. Balances held
by overseas branches of U.S. banks in their head offices
reached a record total of $1,776 million on February 19,
up $450 million since the year end.
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As for credit developments, the growth in bank
credit and in a number of related liquidity indicators
appears to be moderating in February, after an
exceptionally rapid advance in January. While loan
demand continues very strong, it is possible that the
banks are now coming under sufficient liquidity pressure
to have tightened loan policies to the point at which
the actual rate of bank credit growth is responding.
Loan-deposit ratios since late 1965 have not been
advancing as fast as before, and bankers may now feel
that they are close to some limit which it would be
unsafe to exceed. Also, many bankers report that their
holdings of U.S. Government securities are about as
low as they would like to see them go, given their
liquidity requirements and their needs for collateral
on public deposits. Liquidation of municipals is
inhibited by reluctance to incur significant capital
losses. Finally, the banks are finding it very hard
indeed to attract additional CD money, in spite of an
advance in CD rates that has moved much faster than in
the periods following earlier changes in Regulation Q.
Apparently this difficulty in attracting time deposits
may be attributed to the rapid growth of the economy,
with the implied need for transactions balances, plus
the rise in capital outlays relative to corporate cash
flows and liquidity.
In any event, a special survey (made at the Board's
request) of lending policies and bank resources at
selected Second District banks showed virtually all
banks embarked upon some sort of program to restrain
loans in the face of above average-to-unusually strong
demand; and this restraint has been stepped up in some
banks in the last few weeks. Yet we cannot be sure
that the current degree of monetary policy restraint will
produce an adequate slowdown in bank credit growth.
Several large New York banks have indicated that they
believe the prime rate should be raised to assist in
their rationing process; but for the time being they
are restrained by fears of political reactions.
It seems to me that, with inflation a real and
present danger, a coordinated Government program is
needed to preserve the integrity of the dollar for
domestic as well as international reasons. This would
involve holding the line on the wages and cost front
and a close coordination of fiscal and monetary policy.
Unfortunately there seems to be much uncertainty as to
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whether, and how soon, fiscal policy will play a
significantly restraining role; but since it is clearly
undesirable to place too much of the burden on monetary
restraint alone, we are probably justified in moving
rather cautiously in the hope that the Administration
will decide on more restrictive tax and spending
policies. Certainly the important role assigned to the
sale of assets in the 1966 and 1967 fiscal-year Federal
budgets is placing a much greater strain on interest
rates than the size of the deficits alone would suggest.
A second reason for our moving slowly is to give a little
more time to evaluate the effect of previous policy moves
on the rate of bank credit expansion and to try to sort
out exaggerated expectations from the prospective balance
of demand and supply factors. Under these conditions,
it would seem to me unwise to contemplate a further rise
in the discount rate or in Regulation Q ceilings at
this juncture, and by the same token we should avoid for
the time being such a sharp increase in open market
pressures as to make a higher discount rate virtually
inevitable.
The time may perhaps be approaching when
strong overt moves will be needed in the areas of both
fiscal policy and general monetary policy. We should
not rule out the possibility--particularly if fiscal
policy moves are not forthcoming--that a supplemental
voluntary domestic credit restraint program may be
required. However, there are many undesirable features
in the last-named type of approach, and it should not,
I believe, be adopted until other more normal measures
have been fully utilized.
For the near term, I should think the Manager
should be instructed to continue the policy agreed upon
at our last meeting, i.e., to seek a gradual reduction
in reserve availability. To me this might point to net
borrowed reserves centering in the $150 to $200 million
range, if this can be accomplished without too rapid
additional rate adjustments. Actually, it seems likely
that the market has already discounted such a move,
and thus it would not in itself necessarily lead to
significant upward pressures on the Treasury bill ratealthough there will be seasonal pressures on short rates
in the weeks ahead. The proposed policy on reserves
could push the Federal funds rate up more frequently
to 4-3/4 per cent, but this would not be a cause for
concern.
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Since I am really advocating continuation of the
gradual reduction in reserve availability which was
sought at the last meeting but not completely achieved
to date, only a modest change in the wording of the
directive is required, and the staff's proposed
alternative B seems quite appropriate.1/
Mr. Ellis observed that one of the embarrassments of
prosperity was the danger of having to forego the benefits and
privileges of special programs designed to assist distressed areas.
New England was just about to be designated as eligible for a
Regional Action Planning Commission, under the terms of the
Economic Development Act.
Such designation had been threatened,
however, by the disturbing prevalence of prosperity.
New England
unemployment (seasonally adjusted) fell to 3.6 per cent in January
compared to the 4 per cent national average.
Declines occured in
all six States, reaching a low of 2.1 per cent in New Hampshire.
Apparently the designation was based more on long-term data,
however, so New England was to have the advantage of being
classified along with Appalachia, the Ozarks, and upper Michigan
in qualifying for the program.
Extensive Federal funds were to
be available to support economic development research and planning
at the community, area, and regional levels.
The leading indicators covering New England business
prospects suggested continued expansion, Mr. Ellis reported.
1/ Alternative draft directives suggested by the staff are appended
to these minutes as Attachment A.
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Initial returns from the Boston Reserve Bank's capital expen
ditures survey were very bullish.
Construction contract awards
during the most recent three months averaged 4 per cent ahead of
last year.
Purchasing agents continued to report a two-to-one
preponderance of upward trends in new orders to manufacturers.
District banks reported a continued high level of loan
demand, in excess of normal seasonal patterns, Mr. Ellis
continued.
For the first time some of the banks reported that
they were rejecting acquisition loans and many reported that
they were taking a posture of being less-eager lenders.
Their
attitude toward continued active participation in the home
mortgage market was viewed as an important factor in determining
whether mortgage rates would rise further in New England.
A
sharp inflow of time and savings deposits in the past year and
currently had encouraged the weekly reporting member banks to
increase their real estate lending in the month by 17 per cent.
At reporting Boston mutual savings banks withdrawals exceeded
new deposits during January, but interest credited resulted in
a new deposit increase.
Withdrawals in January exceeded last
year's experience by one-third.
As a consequence, virtually
no money was flowing out of State from the large mutuals.
Only
five of the ten largest Boston mutuals had raised their rates
since December 6, and only two of those five paid as much as
4-1/2 per cent on special savings.
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Mr. Ellis thought that both the green book 1 / and chart
presentation documented the prevalent consensus that the major
threat to a sustained prosperous economy was the strengthening
of inflationary pressures.
To the expanding demands from
government, business, and consumers, must now be added the
incremental effects of inventory demands.
It was necessary to
anticipate that decisions by all of those consuming groups would
be increasingly affected by changed price expectations.
To the
extent that the wage guidelines were exceeded, those demand
pressures would be supplemented in their inflationary impact by
wage-cost pressures.
Despite the widespread recognition of strengthening
inflationary pressures, Mr. Ellis said, there did not seem to be
a matching determination to reverse the thrust of fiscal policy.
Present programs seemed to call mainly for a lessened expan
sionary posture.
At the same time, there was a general consensus
that monetary policy must and would do its part in fighting
inflation.
But, while some people feared the System would act
too abruptly and bring the economy to a halt and downturn, others
feared it would be too timid.
Quite obviously the search had to
be for a "middle course."
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
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In Mr. Ellis' judgment, the Committee had launched a
middle course at its previous meeting by deciding to moderate
growth in the reserve base, bank credit, and the money supply by
seeking a gradual reduction in reserve availability.
The
results had appeared tentatively in slightly higher money rates,
member bank borrowings, and net borrowed reserves but, as the
Manager had reported, the move was still in process.
With
the Committee having embarked on that policy course, the
critical question became one of how to define and execute a
gradual movement.
One way was to consider a longer time
interval and time the increments of action accordingly.
For
example, the Committee might take, as a June 1 target, a net
borrowed reserve position averaging $300 million, plus or minus
$50 million, to be achieved by lifting the target $50 million
per month for three months.
Depending on conditions and
expectations, that action could be expected to yield a higher
level of borrowings and interest rates.
Such a development
might then be confirmed by a discount rate increase of 1/4 per
cent, thereby reaffirming an intention to rely on gradual and
incremental moves at this sensitive stage in the economy's
evolution.
Taking such a course of action as his objective, Mr. Ellis
found the present directive quite appropriate, with exclusion of
the reference to Treasury financing; operations should continue
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to be conducted "with a view toward a gradual reduction in
reserve availability."
He would classify alternative B of the
staff drafts as calling for no change in a policy which was in
process of firming.
Mr. Irons reported that conditions in the Eleventh
District reflected the same sort of expansion and inflationary
pressures in almost all areas that were seen in the national
economy.
Employment continued to rise and labor shortages were
becoming increasingly apparent; the problem was immediate, and
not in the future.
The unemployment rate was about at the
minimum, ranging between 3 and 3.5 per cent.
District
industrial production continued to expand, with nondurable
manufactures up and durables showing relatively little change,
and with a rise in minerals output reflecting increased
production of petroleum.
Sales of new automobiles were strong,
as were department store sales, which were up 9 per cent from a
year ago.
Agricultural conditions were particularly favorable
at this time.
Mr. Irons found that District financial figures continued
to reflect the strength of credit demands and the relatively
illiquid position of banks.
District banks had been very large
users of Federal funds during the past four weeks, with net
purchases running up to almost $1 billion in one recent week.
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Bankers were trying to be restrictive in their loan policies,
especially on loans that did not relate to the production of
goods.
But they still found loan demand extremely strong.
Mr. Irons commented that the national economic situation
had been covered adequately in the chart presentation and there
was no need to review it in detail again.
Briefly, it was
evident that aggregate demands had become excessive; increases
in defense spending, business fixed investment, inventories,
State and local government spending, and consumer outlays were
all putting pressure on markets for goods and on financial
markets.
The most desirable means of cutting back aggregate demands
at present, in Mr. Irons' judgment, would be a positive, strong
fiscal policy move in the form of a tax increase of some type.
He was not sure that monetary and credit action could bring about
the desired results without the assistance of fiscal policy.
Nevertheless, in the absence of fiscal action it was up to the
Committee to do what it could.
Mr. Irons agreed with the comments made earlier that the
Desk was still moving toward the objective decided upon at the
previous meeting, and he favored continuing the policy adopted
then.
In the coming period net borrowed reserves might be
deepened gradually to the $150-$200 million range, with an
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attempt made to avoid any operations that might stimulate sharp,
appreciable further increases in interest rates.
He would very
much hope that short-term rates would not increase so much
relative to the discount rate that the System would be almost
compelled to raise the discount rate again.
With a gradual
movement of net borrowed reserves to that range the bill rate
might go to 4.70 per cent or a few points higher, and the rate
on Federal funds might frequently be at 4-3/4 per cent.
hoped rates would not move beyond those levels.
He
He also hoped
that fiscal policy actions that would have a more direct effect
on the demand situation would be taken. He did not consider the
present to be a time for dramatic monetary policy action; there
were too many uncertainties in the picture.
Nor would he want
to make a monetary policy recommendation that involved projections
for several months into the future.
The existing uncertainties
suggested that judgments on appropriate monetary policy should
be made on a short-run basis for the time being.
Mr. Swan reported that except for residential construction
the various sectors of the Twelfth District economy continued to
reflect strength.
January employment trends were, if anything,
somewhat stronger in the Pacific Coast States than in the
country as a whole, with the unemployment rate declining three
tenths of a percentage point to 5.1 per cent.
There was another
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substantial addition to aerospace employment in the month, although
it was a little less than the December gain.
Estimates of future
labor requirements by major firms in the District indicated
further significant employment increases ahead if the firms were
able to find the workers.
The District banking picture was much the same as elsewhere
in the country, Mr. Swan said.
In the three weeks ending
February 16, the increase in loans at weekly reporting banks was
more than offset by reductions in securities holdings.
Commercial
and industrial loans expanded, but by less than in the comparable
period of last year.
Savings deposits continue to decline, as
they had fairly consistently thus far in 1966.
time deposits increased further.
However, other
District banks continued to be
net buyers of Federal funds on a rather substantial scale.
With respect to policy for the next three weeks, Mr. Swan
said he was in complete agreement with Messrs. Hayes and Irons as
to the desirability of a very gradual further implementation of
the decision made at the previous meeting, and he favored a net
borrowed reserve target somewhere in the $150-$200 million area.
As Mr. Brill had pointed out, to maintain some reasonable rates
of increase in total and nonborrowed reserves, it probably would
be necessary to move slowly to a somewhat lesser degree of reserve
availability.
He was encouraged by the reduction in the growth
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rates of aggregate reserves in February, even though so far it was
only a one-month development and he did not know the nature of the
lags involved.
Finally, he agreed that this was not the time for
an overt or major action, either in terms of reserve availability
or a change in the discount rate.
Mr. Galusha commented that recent economic statistics for
the Ninth District paralled those of the nation.
It was important
to note that every indication was for the continuation of
livestock prices at present high levels.
Numbers of cattle had
remained relatively constant, which would assure continued price
pressures.
The present national economic outlook appeared to require
some slight tightening of monetary conditions, Mr. Galusha
continued.
Possibly, further increases in interest rates and further
firming of credit terms could be achieved without a change in the
level of net borrowed reserves.
If so, fine; but, if not, then
some modest change should be effected.
the word "modest."
He would, however, stress
Now did not seem to be the time for a
dramatic, well-publicized change in monetary policy.
Mr. Galusha had several reasons for that belief.
First,
the current flow of economic intelligence was not monotonously
and overwhelmingly bullish.
Quite obviously, too much should not
be made of the latest retail and auto sales figures, nor of the
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latest survey of consumer buying intentions.
But perhaps those
bits of information should give the Committee slight pause,
modestly corroborated as they were by the reappearance for the
first time in months of precautionary statements, however
discreetly expressed, by a few business leaders.
Secondly, there
had been a good deal of concern expressed about the condition of
financial markets.
Although he did not fully understand
the
bases of that concern he was willing to defer to those with
greater experience in the ways of financial markets and to regard
the concern as another reason for the wisdom of making haste
slowly.
To a comparative newcomer, the market appeared to be
still beset by a number of disruptive forces which seemed
unpredictable both in timing and scope.
The present would appear
to be one of those times when the Committee had to be reactive
rather than active.
Mr. Galusha's final reason for wanting to avoid a
dramatic change in policy at the present time was also, in his
opinion, the most important.
It was simply that such a change
could sharply reduce chances for a tax increase later this year.
Yet it was very much in the interest of world economy, the U.S.,
and, indeed, the Federal Reserve itself, that aggregate demand be
curbed to the extent necessary not by further monetary restraint
but by an increase in tax rates.
It was not reasonable to assume
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that whatever the near-term future brought there would be no new
Administration tax bill, or that a tax increase could not be got
through Congress.
The Committee could, he thought, be more
confident than was possible a few weeks ago that a tax bill, if
needed, would be forthcoming.
Mr. Galusha felt he could not be as specific as Mr. Ellis
had been regarding the appropriate course of action over the next
few months.
Perhaps the Committee should be giving some thought
as to how it should act if, a few weeks hence, the future
promised a GNP level for 1966 of, say, $735 billion and contained
insufficient hint of a tax increase.
It might be useful to
speculate whether, with such an outlook, a gradual tightening of
monetary conditions--the use of open market operations to push
interest rates up gradually--would be best.
It might be better
at that time to run certain obvious political risks and follow a
more dramatic course, possibly increasing discount rates again
ahead of the market or increasing reserve requirements.
Actually,
the near future might present an excellent opportunity both to
alter the structure of reserve requirements, which cried for
attention in his District, and to tighten monetary conditions in
a dramatic way.
Perhaps fortunately, however, the issue of whether to move
gradually or dramatically was for the future, Mr. Galusha said.
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At the moment, it would seem, prudence dictated a decidedly gradual
tightening of monetary conditions.
Accordingly, he favored
alternative B of the staff's draft directives.
Mr. Scanlon observed that businessmen and bankers in the
Seventh District were convinced that manpower and productive
facilities were being utilized at practical capacity.
Demand for
most types of goods, especially durables, was strengthening
further.
rise.
Demand for steel from all user categories continued to
Auto inventories were the highest relative to current sales
since early 1961, and there had been more than seasonal weakness
in used car prices; nevertheless, confidence was high among
industry leaders that output and sales of both cars and trucks
would equal or exceed last year's records.
Recent evidence
suggested that loan demand had continued to be basically very
strong in most parts of the District and was expected to remain
so.
As to policy, Mr. Scanlon would like to see the Manager
continue the policy adopted at the Committee's last meeting but
not yet completed.
directives.
He would favor alternative B of the draft
However, he would change the word "emergence" to
"strengthening" in the first-paragraph reference to inflationary
pressures, thus making the phrase read, "to resist the
strengthening of inflationary pressures."
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Mr. Clay commented that the basic question before the
Committee was the ability of the national economy to meet the
demands being made upon it without creating a serious price
inflation problem.
While the price record of this business
upswing generally had been very good, particularly when weighed
against the economic growth achieved, the present situation was
a much more precarious one.
With military expenditures imposed
upon civilian spending, the pace of expansion was very rapid at
a time when the room for growth had become more limited.
In
addition, expectational factors appeared to have become of
considerable importance in accelerating demands for goods, such
as in business inventory accumulation.
increased somewhat more than earlier.
Upward price movement had
In the tighter situation
now prevailing in the economy, further price pressures appeared
highly probable.
Under those circumstances, Mr. Clay said, monetary policy
should make me its contribution toward restraining the growth in
aggregate demand to the output of goods and services that was
attainable without creating a price inflation problem.
On the
other hand, that also meant that monetary policy should provide
reserves in sufficient volume to finance the national economy's
growth.
Just what program of action would lead to that result
was not so readily determinable.
Accepting the need for further
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restraint, the proper course at this time would appear to be a
reduction in the degree of reserve availability, approached
cautiously so as not to create avoidable disturbances in the money
and capital markets.
Although tightening of reserve availability would put
upward pressure on interest rates, Mr. Clay felt this should not
be the aim of further monetary restraint.
Particularly, it would
seem desirable to avoid such upward pressure on interest rates as
would call for another increase in the Federal Reserve discount
rate at this time--granting that the pursuit of that policy might
justifiably lead to a discount rate change later.
Carrying out
the program in that way would provide further opportunity for
evaluating the economy's performance as well as additional
knowledge of the course of fiscal policy.
In Mr. Clay's opinion the net borrowed reserve target
might be set at $200 million, with recognition that the Manager
might not find it feasible to attain that goal within the
constraints already mentioned.
The money and capital markets
continued very sensitive to further upward movement in yields.
The impact of such open market operations would be increased by
the reduced liquidity of business firms and commercial banks at
this stage of the business upswing.
Moreover, the mid-March
seasonal pressures would need to be taken into account.
It
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also remained to be seen what would be the effect of further
reductions in reserve availability upon market expectations.
The draft economic policy directive, with alternative B
as its second paragraph, appeared satisfactory to Mr. Clay.
Mr. Wayne said that the productive facilities of principal
Fifth District industries apparently were being utilized about as
fully as the availability of labor and materials would permit.
The resulting pressures were reflected in reports of price and
wage increases, which were reaching the Richmond Bank with
increasing frequency.
Furthermore, unfilled orders, which had
been unusually large for many months, continued to rise.
Upward
pressures were particularly strong in textiles, where recent
trade reports had attributed maintenance of a considerable measure
of price stability to "industrial statesmanship."
In the Reserve
Bank's latest survey, business optimism appeared to be rising
again from an already high level, and manufacturers on balance
reported further increases in orders, employment, wages, and
prices.
A spokesman for an aluminum company which had headquar
ters in the District and recently announced a substantial program
of expansion, said that the national supply might increase by some
six per cent this year but not until the second half.
Meanwhile,
orders were already at new highs, requiring temporary use of
some mild form of nonprice rationing.
Among the District's weekly
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reporting banks, business loans rose more than seasonally in the
four weeks ended February 16 and were considerably stronger than
in the nation as a whole.
On the national front, Mr. Wayne was in general agreement
with the analysis of the staff as presented in the green book and
in the chart show this morning.
In the present situation, it seemed to Mr. Wayne that it
would be appropriate to continue the policy the Committee adopted
at its last meeting of a gradual reduction in the level of reserve
availability.
Reserve projections for the next few weeks
indicated that that could be accomplished by reducing the rate at
which reserves were supplied without the necessity of any actual
absorption of reserves.
He would be reluctant to try to project
policy beyond the next three weeks.
Alternative B of the draft
directives represented, as he saw it, a continuation of the policy
objective adopted at the Committee's last meeting and was
acceptable to him.
Mr. Robertson then made the following statement:
Both the reports of current developments and the
staff's projection of the future convey the picture of
a business expansion under more and more upward
pressure. Investment in inventories and fixed capital
is moving up at what appears to be an unsustainable
rate, price increases are becoming more pervasive, and
our vulnerability to a substantial degree of price
inflation is mounting.
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This picture could be altered sharply, of course,
for example by a major de-escalation of the war in
Vietnam and a change in public psychology. But this
eventuality seems too uncertain to count on.
Consequently, we need appropriate stabilization
policies to deal with the more likely alternative of
growing rather than declining pressures upon prices
and resources from this source. To be explicit,
absent any new stage of fiscal restraint, monetary
conditions will probably have to be tightened further.
Just how far and how fast monetary firming might
appropriately proceed at this stage can be a matter of
debate. The evidence reported for this meeting suggests
that a good bit of monetary tightening is already well
under way. And I suspect some people will soon be
raising questions as to how much more pressure the
banks and the money and capital markets can stand
without starting to become disorganized. Nonetheless,
I would not want to hang our policy on market rates
and terms alone--or even primarily.
Given these circumstances, and considering the tax
and dividend date strains lying just ahead, I think it
would be wise to continue, slowly and cautiously, the
gradual tightening of reserve availability. This I
would like to see accomplished by slowly deepening the
net borrowed reserve target, thereby forcing banks to
borrow somewhat more at the discount window or to
curtail the expansion of credit. A change in the
discount rate is not called for at this time.
To make my policy intent clear, let me say that I
would like to see net borrowed reserves averaging
around $150 million. At the same time, I would like
again to suggest that net borrowed reserves be permitted
to range up to as much as $100 million on either side of
$150 million, depending upon the accompanying strength
of bank deposit expansion. This would mean dropping
toward $250 million, if required reserves turn out to
be much stronger than expected, or, alternatively,
moving back down toward as little as $50 million net
borrowed reserves if credit demands are less than
expected.
Mr. Robertson added that he favored alternative B for the
directive.
He agreed with Mr. Scanlon's objective in proposing a
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rephrasing of the reference to inflationary pressures in the first
paragraph.
He thought, however, that the objective might be better
attained simply by deleting the words "the emergence of"; the
phrase would then read, "to resist inflationary pressures."
Mr. Shepardson said that both the staff presentation and
the comments around the table thus far seemed to be in agreement
on the high level of activity and the pressures existing in the
economy at present.
The uncertainties with respect to developments
in Vietnam also had been noted; but in his judgment the
probability of any immediate easing in that situation was smaller
than that of further escalation.
He shared the view that fiscal
action would be a desirable means of attempting to curb some of
the excess demands that seemed to be developing,
But he was
skeptical that fiscal action would be taken soon and he was
concerned about how far conditions might get out of hand before
such action was taken.
Mr. Shepardson did not think this was the time for a
drastic change in monetary policy and he agreed that there should
be a continuing gradual reduction in reserve availability.
He
was concerned, however, about the interpretation of the word
"gradual."
It seemed to him that too often a decision in favor
of a gradual approach was implemented in an overly gradual manner
and the System
found itself arriving "too late with too little."
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He did not advocate eliminating the word from the directive but
he would like to see continued movement toward the objective
agreed upon.
Net borrowed reserves of $200 million appeared to
be an appropriate target, and he hoped it would be reached in the
period before the next meeting.
Mr. Shepardson said that alternative B of the draft
directives was acceptable to him, and he agreed with Mr. Robertson's
suggestion with respect to the first paragraph.
Mr. Mitchell thought the staff's policy analysis was
correct except in one respect--he believed too much emphasis was
placed on interest rates and not enough on availability.
In the
present situation, he thought, the Committee should have less
implicit and explicit concern with the rate structure and more
concern with availability.
Mr. Mitchell went on to say that several members had
expressed the view today that fiscal policy could do a better job
than monetary policy in curbing excess demands at present.
He
agreed with that view; but he also agreed that it was not useful
for the Committee simply to confine itself to making that
statement.
The problem for the Committee was to decide what it
could and could not do.
He saw no possible way by which the
Committee could relieve the anxieties in the capital markets.
But there were problems the Committee could do something about,
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and it should focus its attention on them.
In particular, it
seemed to him that the banking system was not doing all that it
could to restrain the exuberance of its customers.
That was
because bankers were not sure just how far the Committee would
go in permitting them to accommodate loan demands.
In some way
the Committee should make it clear that it was not going to make
it possible for banks to meet all of the demands placed on them.
It was in this sense that he considered it important to focus on
availability.
Although the Manager had reported that on one occasion
he had had to sidetrack reserve objectives, Mr. Mitchell said,
for most of the recent period the Desk had been able to work
toward reduced reserve availability.
But open market operations
were not the System's only tool; the Reserve Banks also could
make a contribution through the manner in which they administered
their discount windows.
They might be a little firmer in defining
continuous borrowing, and they could make it clear to banks
borrowing continuously that adjustments had to be made in their
asset positions.
As to the directive, Mr. Mitchell thought the first
paragraph probably was adequate, and that the Committee might
dispense with the second paragraph entirely.
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Mr. Daane said he had little to add to the discussion.
He shared the hope several members had expressed that the
Administration would move on the fiscal front, calling for a tax
increase of some type with a view to curbing aggregate demand.
That curbing seemed to him clearly required by current cir
cumstances, and he feared that too great a burden would be
placed on monetary policy to achieve it.
In his judgment an
attempt by the Committee to implement such a monetary policy--and
he would not shirk the responsibility if the need arose--would
result in interest rate levels well beyond those projected by the
staff.
While continuing to hope for fiscal action, Mr. Daane
remarked, he would favor the course others had suggested of
trying to achieve the gradual reduction of reserve availability
decided on at the previous meeting.
His own target for net
borrowed reserves would be in the neighborhood of $200 million.
But he would like to emphasize one point--he hoped the Committee
would not ask for nor expect too much precision in moving to
such a target.
During a recent visit to the Desk he had been
particularly impressed with the difficulties the Manager faced
in meeting targets because of such factors as widely divergent
reserve projections.
Mr. Daane agreed with much of what Mr. Mitchell had to
say about the role the Reserve Banks might play.
He was
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disturbed by the seeming unwillingness of commercial bankers to
act on their own initiative in curbing their customers' demands.
That was highlighted a few weeks ago at the Board's meeting with
the Federal Advisory Council, when several members had indicated
that banks would welcome advice from the supervisory agencies on
the subject.
Although he was not sure how it might best be done,
he would be sympathetic to any steps the System could take to
help stiffen the attitude of bankers and lead them to exercise
more prudence and restraint.
Mr. Daane favored alternative B of the draft directives,
and would accept Mr. Robertson's proposed amendment to the first
paragraph.
Mr. Maisel thought there was little disagreement on the
present situation or need for monetary constraint.
He, therefore,
would discuss only the proposed directive which, particularly in
light of prior discussion around the table, seemed to him
unusually unclear.
In comparing the changes in reserves, bank credit, and
the money supply for the past three months, one found very sharp
differences.
Rates of growth were high in December, moderate in
January, and small in February.
Because of the sharp differences
among those months, Mr. Maisel found a good deal of difficulty
in interpreting the proposed directive.
Depending upon which
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period was used, the directive could be interpreted in very
different ways.
Since to be useful one must designate the
comparison period, he would suggest that the changes so far this
year be used as the proper base.
In accordance with his previous suggestions, Mr. Maisel
believed that for the period ahead the Committee should attempt
to set its goals in terms of the basic underlying monetary
variables rather than in terms of interest rates or net borrowed
reserves.
With that in mind, he would suggest replacing the
words "moderating the growth" near the end of the first paragraph
with the words "by maintaining reduced growth."
That suggestion
was based on the assumption that the preliminary reported growth
rates of 3.6 per cent for nonborrowed reserves and 6.7 per cent
for bank credit were correct.
Similarly, he suggested that
alternative A of the second paragraph, which he supported, be
revised to read "maintaining the present rate of growth in
reserve availability," rather than "maintaining the present
degree of reserve availability"; it was unclear to him whether
the word "degree" applied to an existing total or an existing
rate of change.
Around the table today it had appeared as if
the directives could be interpreted as a maintenance of existing
amounts of reserves, a cut in reserves, or a cut in the rate of
growth.
His point clearly applied equally to alternative B; it
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was not clear there either whether "reduction in availability"
meant in amount or rate of growth in reserves.
As he had also indicated previously, Mr. Maisel was
concerned that the Committee attempt to communicate more
information to the public to avoid speculation on Committee
action.
Thus, he would support the idea that free reserves be
allowed to vary more, depending upon what was happening in the
reserve base and in required reserves.
Under that policy in
the latest period the Committee might not have been as concerned
He
with reacting to unforeseen changes in required reserves.
also thought that it would be proper to indicate to the market
that in attempting to moderate credit expansion for the next
quarter or half year, the Committee would be less concerned than
in the past by changes in the amount of discounting or by
deviations between the discount and money market rates.
He
especially felt that the System should make it clear that
movements in the prime rate were a function of the commercial
banks.
It would be most unfortunate if discount rate policy
were used primarily to set prices for banks.
The System should
try to make it clear that it did not plan to use the discount
rate for that purpose.
Mr. Maisel added that because he thought the Committee
should be concerned with the rate of growth in total reserves
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he did not agree with Messrs. Mitchell and Daane; he felt that
borrowings at the discount window should be offset through sales
in the open market.
If borrowings of reserves rose, holdings
of nonborrowed reserves should fall.
The Committee should set
its goals in terms of a cut in the growth of total reserves to
a rate between that experienced in January and February.
Mr. Hickman observed that business activity continued to
speed ahead.
Evidence mounted that the type of policy prescribed
by the Committee at the previous meeting was appropriate for the
next three weeks.
It was now known that inventory accumulation had been
proceeding at a faster pace and in larger amounts than originally
estimated, Mr. Hickman noted.
The buildup of business
inventories in the fourth quarter, when steel inventories were
being reduced, was apparently associated with widespread
anticipations of future shortages and further price increases.
Those conditions were continuing and a further large expansion
of inventories was expected.
With new orders and backlogs still rising, particularly
in durable goods, the industrial sector remained under serious
pressure, Mr. Hickman said.
The steel companies that reported
regularly to the Cleveland Reserve Bank indicated that unadjusted
new orders in February, a seasonally weak month, were the same
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as in January, which in turn represented the highest level since
last March.
He had also been informed by one of the Bank's
directors, on a confidential basis, that lead times of suppliers
to the machine tool industry were more critical than at any
time since the Korean War.
Reflecting pressures in the industrial sector,
Mr. Hickman continued, prices of industrial commodities were
still moving up.
Spot prices of raw materials had risen sharply
since the Committee's previous meeting.
Farm and food prices
had also climbed sharply, but the Cleveland Reserve Bank's
analysts believed that wholesale prices of foodstuffs probably
were now at or near their peak.
Higher food prices at retail
were still indicated, which would inflate the consumer price
index, wage demands, and price expectations in general.
With
newspapers and other periodicals full of accounts of rising
prices, the country was faced with the type of inflationary
psychology that characterized the mid-1950's; that in turn
would make it all the more difficult to hold back prices and
wages.
Mr. Hickman said that the latest data on the financial
front suggested that System policy was finally beginning to bite.
The Manager was to be complimented on his contributions to that
result.
In February, increases in nonborrwed reserves, bank
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credit, and the money supply appeared to have been considerably
smaller than in the preceding two months.
The rise in long-term
bond yields had taken some of the steam out of the stock market,
which in turn should help to restrain capital spending.
Mr. Hickman went on to say that the Committee thus
appeared to be in a fairly good position to take whatever further
steps might be needed to help control the excessive pace of
economic activity.
It would, of course, be helpful if fiscal
policy complemented monetary policy in the period ahead.
Lacking such help, he believed the Committee should move very
gradually and cautiously towards further monetary restraint.
He would underscore the words "cautiously" and "gradually" partly
because monetary policy was already beginning to bite, and also
because more time would be needed to formulate appropriate
fiscal policy.
Mr. Hickman therefore recommended that the Committee move
gradually and cautiously towards a deeper level of net borrowed
reserves over the next three weeks, say a range of $175 to $200
million.
If credit demands, as reflected in the behavior of
required reserves, turned out to be as strong or stronger than
recently, he would favor Mr. Robertson's proposal to allow net
borrowed reserves to go even deeper.
Conversely, if credit
demands slackened, he would be satisfied with slightly shallower
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net borrowed reserves.
For the reasons indicated, he would prefer
alternative B of the draft directives.
With regard to Mr. Mitchell's suggestion, Mr. Hickman
said that the Cleveland Reserve Bank administered its discount
window in a firm fashion at all times.
He thought the figures
would support the statement that it was clear to banks in the
Fourth District that they were expected to repay their borrowings
as soon as possible.
Mr. Bopp remarked that a decision as to whether to take
further restrictive action today hinged primarily on an assessment,
first, of the strength of inflationary pressures and, second,
whether steps already taken were sufficient to contain them.
While industrial prices had not increased much more rapidly
recently, they were still rising, and pressures for further
increases--possibly much faster increases--were clearly present.
One new bit of information bearing on the problem was the
Wharton School's index of capacity utilization, just released.
The index showed that the rate of industrial utilization was
now at 94.2 per cent of capacity, higher than at any time in the
past fifteen years with the exception of the Korean War period.
One of the most disturbing evidences of pressure,
Mr. Bopp said, was the rapid buildup of new and unfilled orders
and of inventories.
As a straw in the wind, a discussion with
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executives of several large industrial firms in the Philadelphia
area revealed that at least part of the spurt in orders and
inventories was motivated by anticipations of price increases,
lengthening delivery schedules, and scarcities.
Pressures from
those sources did not pervade all industry groups; where they
existed, they were not regarded as being exceptionally severe.
At this point, Mr. Bopp continued, like everyone else
he felt far from complacent about prices and saw many signs of
possibly serious price pressures in the near future.
But he
would not now recommend drastic steps to meet that possibility.
A second question was the extent to which restraint had
already been effective, Mr. Bopp said.
The Philadelphia
Reserve Bank's survey of loan and deposit experience of
commercial banks in the Third District produced results that
were difficult to evaluate.
On the one hand, the tone of replies
was clearly that banks felt tight and expected stronger pressures
in the future.
To a certain extent, the data bore them out;
loan-deposit ratios were high and cash assets were at a low ebb.
On the other hand, there was some reason to believe banks might
not be so tight as they might indicate.
The seasonal slack in
loan demand had been slightly more pronounced this year than
last and the banks had been selling Federal funds.
Moreover,
there had been little selling of securities to meet loan demand,
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and the Philadelphia banks had not been so aggressive in the CD
market as banks in other areas.
instituted
The degree to which banks had
policies of vigorous credit rationing was
questionable.
On balance, it seemed to him that while the banks
were girding for an expected squeeze, it had not yet appeared
to any pronounced degree compared to other periods of restraint or
to the situation confronting banks in the New York City area.
The short time interval which had elapsed since the
February 15 refunding provided scant evidence of the effect of
action already taken, Mr. Bopp observed, and thus afforded little
in the way of guidance to determine whether additional policy
moves should be made at this time.
Given the current sensitive
condition of financial markets, any sudden and substantial move
toward more restraint now would likely reflect itself quickly in
substantial upward movements in rates.
He would, therefore,
continue the more moderate and gradual course adopted at the
last meeting of the Committee.
Mr. Bopp said he had serious qualms about a directive
expressed in terms of a single variable, particularly one over
which the Manager had no direct and immediate control.
Nevertheless, in the light of many discussions of the problem,
alternative B of the draft directives reflected his general
judgment of appropriate policy for the immediate future, with the
deletion of "the emergence of" from the first paragraph.
3/1/66
Mr. Patterson thought that the Committee, having altered
its policy only three weeks ago, wanted to be sure that economic
and financial conditions had really changed before deciding on
a different course of action.
Certainly, no developments in the
Sixth District indicated a dramatic change.
The vigorous pace
of consumer spending in the Southeast appeared to have carried
over into 1966, and the banks had contributed to that expansion
through further increases in consumer and other loans.
Many banks in the District were not yet under much
restraint, Mr. Patterson said.
Only 194 out of 521 member banks
found it necessary to liquidate Government securities this past
year to keep up with their lending.
Most of the banks surveyed
by the Atlanta Reserve Bank recently confirmed that they still
had some leeway in unpledged securities to accommodate future
loan demands.
How much room commercial banks had in meeting prospective
demands was something monetary policy should take into account,
Mr. Patterson continued.
By the same token, the Committee could
not overlook the fact that the demand for credit from other than
commercial bank channels had been very heavy and was likely to
rise even further.
Therefore, it was not surprising that
interest rates had continued to increase.
Even higher rates
were in prospect if savings slowed down significantly, and that
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would have the further effect of aggravating the inflationary
pressures present in the economy.
In that atmosphere, Mr. Patterson thought, the policy
shift formulated at the previous meeting was sound.
That course
of action had not been in effect long enough to be responsible
for the recent slowing down in reserves and deposits.
But those
developments were certainly consistent with the direction of
our operations.
He would not think that a policy change every
three or four weeks was advisable.
Thus, unless the Committee
felt the change of three weeks ago was in error, it should
continue such a policy.
At the last meeting, Mr. Patterson noted, he had suggested
that the Committee carry out a probing operation aimed at getting
a tighter control of reserves.
appropriate objective today.
That still struck him as an
Such a program would not make the
Committee especially popular either with those who saw no need
for restraint or with those eager to apply the brakes in earnest.
Thus, in allowing credit to expand at the fastest sustainable
rate, the Committee might be walking something of a tightrope.
Yet, that type of action was perhaps the best it could hope for
and one to be tested in the months to come.
He believed that net
borrowed reserves somewhere between $150 and $200 million over the
next three weeks would probably come close to meeting that
objective.
He favored alternative B of the draft directives.
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Mr. Francis commented that aggregate demand for goods and
services had been rising rapidly.
As one indication of total
demand, retail sales had risen at a 13 per cent annual rate since
October compared with a 4-1/2 per cent trend rate from 1953 to
1965.
Both employment and output had gone up at an advanced rate.
Yet, production had not been able to keep pace with the huge
demand, and prices had increased.
In contrast to the 1958 to
1964 period in which there was little net change, wholesale prices
had risen at a 4.7 per cent annual rate since September, double the
rate during the previous year.
The Government's fiscal actions appeared to Mr. Francis
to be expansionary.
The "high employment budget" apparently
would show a deficit in the current six-month period as against
a small surplus in the last half of 1965.
More important, the
Government was stimulating the private sector by increasing
sharply its orders for military goods.
Those orders did not all
show up as outlays in the current budget, but the economy got the
stimulus as industry began production.
Then, too, Government
debt had continued to become more liquid, despite some lengthening
of average maturity in the February refunding.
With the 4-1/4
per cent interest rate limitation on bonds, the average maturity
of the debt was likely to continue to shorten in the near future.
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With private demand rising with such great momentum and
with the Government acting in so stimulative a way, Mr. Francis
said, the Committee needed to do all it reasonably could to
restrict total demand to reasonable proportions.
It was
desirable that potential borrowers not get all the credit they
wanted.
If, in a time of excessive total demand, potential
borrowers received all the credit they wanted, that would
contribute further to excessive demand, resulting in further
acceleration in price rises.
As for policy, it seemed desirable to Mr. Francis to
keep the growth rates of total reserves and money to very modest
proportions.
The less expansionary developments regarding
Federal Reserve holdings of Government securities, total reserves,
and money since late December seemed to him to be quite
satisfactory.
near future.
He would like to see those trends continued in the
If such actions should motivate banks to reduce
their excess reserves or to increase their borrowings from Reserve
Banks, Federal Reserve holdings of Governments should be
correspondingly less in order to control total reserves, credit,
and money.
Mr. Francis said he would not be concerned if, in the face
of such policy, interest rates continued to rise.
High rates
were probably the most efficient method of rationing appropriately
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the available credit supplies among the competing demands and
would tend to reduce the rate of expansion in aggregate demand.
He would not raise the discount rate at this time, since he
believed that for the time being the Committee could accomplish
what was necessary through open market operations.
He favored
alternative B of the draft directives.
Chairman Martin commented that there was a high degree
of agreement on policy today, although the Committee still had a
problem with respect to its choice of target variables--a problem
that Mr. Maisel had pointed up very well.
sympathetic with Mr. Mitchell's remarks.
The Chairman also was
As to policy, he
thought the Committee was moving in the right direction and he,
too, favored the gradual approach.
Chairman Martin then noted that recently he and Secretary
of the Treasury Fowler had discussed the possibility of having
the three Federal bank supervisory agencies issue a joint
statement calling for restraint in extensions of credit.
He
personally was somewhat dubious about the proposal; it seemed
to him that it amounted to a program of voluntary domestic credit
restraint without detailed guidelines, and was likely to lead to
difficulties.
However, the Chairman continued, there was an alternative
possibility that he would like to raise for consideration, in
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which all Reserve Bank Presidents would hold informal discussions
with individual bankers in their Districts, as some were already
doing.
It could be pointed out in those discussions that
restraint on credit extensions was required at present, that it
was not desirable to meet all demands for credit, and that the
System did not intend to supply the reserves that would be needed
to do so.
It would be important to avoid any suggestion that the
discount windows were to be closed.
At the same time, it was
incumbent on the Reserve Banks to do a good job in administering
their discount windows, and if there were any instances in which
insufficiently rigorous standards were being applied they should
be corrected.
The Chairman said he recognized the difficulties of such
an approach and the problems that would arise in implementing
it, but he thought it would be preferable to a formal statement
by the supervisory agencies.
There was no better organization
than the System, with its twelve regional Banks, for pointing
out the nature of the current problem to commercial banks.
In the ensuing discussion a number of members expressed
agreement with the Chairman's view that a joint statement on
the subject of credit restraint by the supervisory agencies
would be undesirable.
Among the objections seen to such a
statement were that it would be a misuse of supervisory authority,
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and that it might be interpreted as implying a lack of willingness
to employ the usual tools of stabilization policy--both fiscal
and monetary--in curbing excessive demands.
A number of problems likely to arise in the suggested
informal discussions with bankers also were noted.
Among these
were the difficulties of setting priorities among various kinds
of bank credit, and the possibility that individual bankers would
ask the Reserve Banks to establish a system of priorities for
them to follow.
Several members expressed the view that it would
be undesirable for the Reserve Bank Presidents to indicate
priorities; such judgments, they thought, should be made by the
bankers themselves.
Some members thought the best course might
be for the System to confine itself to the question of the
aggregate volume of reserves to be supplied, but others indicated
that the bankers would find conversations of the type suggested
useful in subsequent discussions with their loan officers and
with customers.
The diversity in attitudes of individual
bankers and the consequent need for varying the approach taken
with them was noted, as was the desirability of talking both with
bankers that were frequent borrowers at the discount window and
with those that were not.
Also touched on was the desirability
of avoiding any implication that the System was attempting to
promote rationing over interest rate changes as a device for
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allocating bank credit, by remaining neutral on the subject of
interest rates.
At the conclusion of the discussion Chairman Martin
commented that he thought it was fair to say that a number of
members of the Committee were opposed to the suggested joint
statement by the supervisory agencies, and that there was
considerable sympathy with the thought that the System should do
what it could through conversations with bankers.
It was
important that these conversations be informal and held on an
individual basis, and that they not be viewed as an alternative
to the usual instruments of monetary policy.
He was not
particularly concerned about the possibility that the press would
exaggerate their implications; there already had been press
stories to the effect that some Reserve Bank Presidents had been
discussing the problems of credit restraint with bankers, and
keeping in continual touch with bankers on such problems was part
of the System's job.
Returning to the subject of today's policy decision,
Chairman Martin noted that the majority of the Committee appeared
to favor alternative B of the draft directives, and that several
had agreed with Mr. Robertson's suggested deletion of the words
"the emergence of" from the reference to inflationary pressures
in the first paragraph.
Mr. Maisel, however, had expressed a
preference for a different formulation.
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Mr. Maisel commented that he could accept alternative B.
He hoped, however, that the Desk would interpret the language
calling for a "gradual reduction in reserve availability" as
meaning a gradual reduction in the rate of growth of aggregate
reserves.
Mr. Hayes said he thought the language of the first and
second paragraphs of the directive taken together made that point
quite clear.
Thereupon, upon motion duly
made and seconded, and by unan
imous vote, the Federal Reserve
Bank of New York was authorized
and directed, until otherwise
directed by the Committee, to
execute transactions in the System
Account in accordance with the
following current economic policy
directive:
The economic and financial developments reviewed at
this meeting indicate 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
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 shall
be conducted with a view to attaining some further
gradual reduction in reserve availability.
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It was agreed that the next meeting of the Committee would
be held on Tuesday, March 22, 1966, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
February 28, 1966
Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on March 1, 1966
First Paragraph
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.
Second Paragraph
Alternative A (No change in policy):
To implement this policy, System open market operations
until the next meeting of the Committee shall be conducted with
a view to maintaining the present degree of reserve availability.
Alternative B (Moderate firming):
To implement this policy, System open market operations
until the next meeting of the Committee shall be conducted with
a view to attaining some further gradual reduction in reserve
availability.
Cite this document
Federal Reserve (1966, February 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19660301
@misc{wtfs_fomc_minutes_19660301,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1966},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19660301},
note = {Retrieved via When the Fed Speaks corpus}
}