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:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
on Tuesday, March 7, 1967, at 9:30 a.m.
Martin, Chairman
Hayes, Vice Chairman
Brimmer
Daane
Francis
Maisel
Mitchell
Robertson
Scanlon
Shepardson
Swan
Wayne
Messrs. Ellis, Hickman, and Patterson, Alternate
Members of the Federal Open Market Committee
Messrs. Clay and Irons, Presidents of the Federal
Reserve Banks of Kansas City and Dallas,
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. Baughman, Craven, Garvy, Hersey, Jones,
Koch, Partee, and Solomon, Associate
Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Cardon, Legislative Counsel, Board of
Governors
Mr. Fauver, Assistant to the Board of Governors
Mr. Williams, Adviser, Division of Research
and Statistics, Board of Governors
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Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Miss McWhirter, Analyst, Office of the Secretary,
Board of Governors
Messrs. Hilkert and Strothman, First Vice
Presidents of the Federal Reserve Banks of
Philadelphia and Minneapolis, respectively
Messrs. Eisenmenger, Eastburn, Mann, Taylor,
Tow, and Green, Vice Presidents of the
Federal Reserve Banks of Boston, Philadelphia,
Cleveland, Atlanta, Kansas City, and Dallas,
respectively
Mr. Haymes, Assistant Vice President, Federal
Reserve Bank of Richmond
Mr. Geng, Manager, Securities Department, Federal
Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
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, 1967, and that
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;
Edward A. Wayne, President of the Federal Reserve Bank of
Richmond, with George H. Ellis, President of the Federal
Reserve Bank of Boston, as alternate;
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Charles J. Scanlon, President of the Federal Reserve Bank
of Chicago, with W. Braddock Hickman, President of the
Federal Reserve Bank of Cleveland, as alternate;
Darryl R. Francis, President of the Federal Reserve Bank
of St. Louis, with Harold T. Patterson, President of
the Federal Reserve Bank of Atlanta, as alternate;
Eliot J. Swan, President of the Federal Reserve Bank of
San Francisco, with Hugh D. Galusha, Jr., President of
the Federal Reserve Bank of Minneapolis, as alternate.
Upon motion duly made and seconded,
and by unanimous vote, the following
officers of the Federal Open Market Com
mittee were elected to serve until the
election of their successors at the first
meeting of the Committee after February 29,
1968, with the understanding 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
Ernest T. Baughman, J. Howard Craven,
George Garvy, A. B. Hersey,
Homer Jones, Albert R. Koch,
J. Charles Partee, Benjamin U.
Ratchford, and Robert Solomon
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
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transactions for the System Open Market
Account until the adjournment of the
first meeting of the Federal Open Market
Committee after February 29, 1968.
Upon motion duly made and seconded,
and by unanimous vote, Alan R. Holmes
and Charles A. Coombs were selected to
serve at 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, respectively, 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 seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on February 7, 1967, were
approved.
Consideration then was given to the continuing authorizations
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.
Upon motion duly made and seconded,
and by unanimous vote, the following pro
cedures with respect to allocations of
securities in the System Open Market
Account were approved without change:
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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 to the average of all
the Banks. However, such adjustments 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.
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Thereupon, upon motion duly made
and seconded, and by unanimous vote,
authorization was given for the follow
ing distribution:
1.
2.
3.
*4.
*5.
*6.
*7.
8.
9.
10.
11.
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.
The 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 confiden
tial 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.
* Weekly reports of open market operations only.
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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 operation
of the Federal Open Market Committee
during an emergency was reaffirmed
by unanimous vote:
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 available
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
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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 affirm
ative 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.
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 unanimous 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 Com
mittee) 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
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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 obliga
tions 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 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 obliga
tions 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 Committee
reaffirmed the authorization, first
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-10given 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
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 1, 1966, 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 secretaries
and records and duplicating personnel) had recently been confirmed
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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.
Chairman Martin then noted that a memorandum from the
Account Manager had been distributed under date of February 28,
1967, regarding the continuing authority directive relating to
transactions in U.S. Government securities and bankers' accept
ances.1/
He invited Mr. Holmes to comment.
Mr. Holmes said that three of the recommendations in his
memorandum involved keeping as permanent features of the continuing
authority directive changes that had been made during the past
year, and the fourth involved a minor language clarification.
First, with respect to section 1(a) of the directive, on July 26,
1966, the Committee had increased from $1.5
billion to $2.0 billion
the limit on the amount that the aggregate Account holdings of
Government securities could be increased or decreased during the
interval between Committee meetings as a result of open market
activity, and he suggested retaining the $2.0 billion figure.
1/ A copy of this memorandum has been placed in the Committee's
files.
-12
3/7/67
Secondly, he suggested clarifying the language in section 1(b)
describing the two limits specified on aggregate Account holdings
of bankers' acceptances, in line with the manner in which that
language had always been understood, by adding the phrase "which
ever is the lower."
The affected clause would then read:
"provided that the aggregate amount of bankers' accept
ances held at any one time shall not exceed (1) $125
million or (2) 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, whichever is the lower."
Third, Mr. Holmes continued, section 1(c) had been revised
on June 28, 1966, to remove the previous 24-month limit on the
maturity of Government securities that could be acquired under
repurchase agreements at times other than during Treasury financings.
That action had been intended as a temporary measure.
However,
because the ability to buy securities of any maturity under RP's
had proved, and was likely to remain, helpful, he recommended
continuing it as a permanent feature of the directive.
Finally,
with respect to section 2 of the directive, he would recommend
retaining the limit of $1 billion on special short-term certificates
of indebtedness that the Federal Reserve Bank of New York could
buy directly from the Treasury, in view of the possibility that
the Treasury might have difficulty in managing its cash balances
for some time to come.
The limit in question had been increased
to its present level from $500 million on November 22, 1966.
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-13Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of New York
was authorized and directed, until
otherwise directed by the Committee,
to execute transactions in the System
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 matur
ing 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 $2.0 billion during the period
commencing with the opening of business on the day follow
ing 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 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
10 per
$125 million or (2)
one time shall not exceed (1)
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, whichever is the
lower.
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(c) To buy U.S. Government securities, obligations
that are direct obligations of, or fully guaranteed as
to principal and interest by, any agency of the U.S.,
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,
obligations, 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 agree
ment 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 or agency issues 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.
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 accommondation 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 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
$1 billion.
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
3/7/67
-15
for the period February 7 through March 1, 1967, and a supplemental
report for March 2 through 6, 1967.
Copies of these reports have
been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs stated that
it was indeed a pleasure to report that conditions in the gold
and foreign exchange markets had taken a turn for the better during
the past month.
The Treasury gold stock would be unchanged again
this week and, perhaps more importantly, there had been some wel
come relief from pressure on the London gold market.
While
speculative demand for gold remained at high levels, the flow of
South African gold to London had been running 30 to 50 per cent
above normal and a sale of nearly $30 million of gold by another
country on the London market had further improved the supply
situation.
As a result, the market price had declined to $35.14
this morning, and the Pool took in $47 million in February and a
further $10 million so far in March.
That meant that the Pool
now had $96 million on hand, which was the most comfortable margin
it had had for a long while.
How long the present situation would
last depended upon balance of payments developments in South
Africa; if they moved back into surplus from their present deficit
they would withhold gold, and a gap in the supply would develop.
On the exchange markets, Mr. Coombs continued, sterling
suffered a sinking spell during the middle of February, mainly
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-16
owing to announcement of some very high Government spending
figures for the coming fiscal year, but it recovered strongly
at month-end.
The consequent inflow of dollars to the Bank of
England had enabled the British to clean up early in March the
last remaining $100 million due to the Federal Reserve under
the swap line, while short-term debt to the U.S. Treasury had
also been completely liquidated.
As the Committee might recall, Mr. Coombs said, last
July such short-term borrowing by the Bank of England rose to a
peak of $1.5 billion.
It had subsequently been reduced to a
residual of $450 million still due to the Bank for International
Settlements and the European central banks included in the
sterling balance credit package negotiated last July.
The British
were hoping that March would be another good month, and if so they
might succeed in cleaning up completely all of their short-term
debt sometime this spring.
Mr. Coombs remarked that the French had moved back into
small surplus during February.
There might be some likelihood,
however, that the Bank of France would rebuild its dollar balances
to the extent of roughly $200 million before coming to the U.S.
for gold.
More generally, Mr. Coombs said, he would like to note
that at present, close to the end of the fifth year that the
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-17
System's swap network had been in existence, there were no draw
ings outstanding on either side of the ledger.
He hoped it would
be possible to maintain that situation for at least a few months.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
February 7 through March 6, 1967, were
approved, ratified, and confirmed.
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 7 through March 1, 1967, and a supplemental
report for March 2 through 6, 1967.
Copies of these reports
have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
As the written reports to the Committee indicate,
the interval since the last meeting was characterized
first by a period of rising interest rates and a money
market atmosphere that was surprisingly taut in light
of reserve availability, followed by a period of more
comfortable money market conditions and generally
declining interest rates. Shifting market expectations,
as is so often the case, played a major role in deter
mining the characteristices of each subperiod.
At about the time of the last Open Market Committee
meeting a more cautious note was beginning to develop
in the securities markets as many participants began to
conclude that the earlier sharp decline in interest rates
might have gone too far. Given the size of underwriter
3/7/67
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inventories and the steady stream of announcements
adding to the calendar of new corporate and municipal
issues, some technical market adjustment was inevitable
and, indeed, needed if inventories were to be cleaned
out to make room for the new issues coming to the
market. In addition, however, market participants
began to reappraise the future prospects for monetary
policy in light of Congressional testimony pointing
to the likelihood of a strong economy in the second
half of the year. Unfortunately, a firmer money market
tone strengthened the belief that further monetary ease
was unlikely, and some market participants even felt
that the System might already have let monetary
conditions begin to tighten in the light of prospective
credit demands.
Open market operations attempted to head off the
tauter money market conditions in line with the policy
adopted at the last meeting, but were not notably suc
cessful in doing so until just before the Washington's
Birthday holiday. This was so despite massive reserve
injections, and a rapid rise in aggregate reserve
measures. Actual reserve availability consistently
fell short of projected levels; in each of the two
weeks following the last Committee meeting we went
over the weekend anticipating free reserves ranging
from $80 to $200 million, only to see the estimates
revised sharply downward after new data were received.
The money market itself proved hard to judge as the
funds rate on several occasions declined in response
to open market operations only to snap back again after
it was too late for us to supply additional reserves.
It is perhaps small consolation, but many money market
participants were as puzzled as we about the behavior
of the market. After publication of a free reserve
figure of over $100 million for the week ending
February 22 many of the money market banks were asking
themselves why they had been willing to bid up the
funds rate in light of the availability of reserves
in the banking system.
The securities markets, already reassured that
the Federal Reserve intended to maintain comfortable
money market conditions, were given further psycholog
ical impetus on February 24 by heavy Government trust
fund purchases of securities, as the Treasury had to
forestall a rise in the debt over the ceiling. And the
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Board's action on February 28 to reduce required
reserves then generated expectations of some moderate
further easing of monetary policy.
The failure of Congress to act before March 1
on an increase in the temporary debt ceiling to $336
billion left the Treasury with the prospect that the
public debt would be $1.5 billion over the ceiling on
February 28. In order to avoid this the Treasury
redeemed special nonmarketable debt held by the
Civil Service Retirement Fund, the Federal Deposit
Insurance Corporation, the Home Loan Banks, and the
Exchange Stabilization Fund. In order to keep the
trust accounts and the Home Loan Banks fully invested,
$700-$800 million of marketable issues were purchased,
including $233 million of coupon issues bought by the
Trading Desk for the Federal Deposit Insurance Corpora
tion and Social Security accounts. The details of
these operations were spelled out in the written
reports, and I would only comment here that they were
carried out without causing undue repercussions in
either market prices or expectations. This was mainly
due to the Treasury's willingness to have us tell the
market more about the size and character of the opera
tion than normally has been done.
The Board's action on February 28 to lower
reserve requirements added further to the stronger
market tone and encouraged a better flow of funds in
the capital markets. The move was generally interpreted
as confirming the System's desire for continued monetary
ease in light of the current slowdown of economic
activity and, to most market participants, it indicated
some further ease, designed to see the capital market
through its peak pressure in March. It also eased
concern about the possibility of market pressure in
April when the speed-up of corporate tax payments occurs.
The timing of the reserve injection through lower reserve
requirements was well designed to coincide with expected
reserve needs and so far has not complicated open market
operations in the least.
After all the gyrations that took place during the
interval between Committee meetings, the three-month
Treasury bill rate wound up about 20 basis points below
the level prevailing at the time of the last meeting.
In yesterday's regular weekly auction there was some
bidding for new three- and six-month bills at rates as
3/7/67
-20-
low as 4.29 per cent, but average issuing rates were
established at about 4.34 per cent for both issues, as
tenders were cautiously spread over a wider than normal
range in the wake of recent rate declines. Yields on
most coupon issues maturing within 6 years were down 2
to 6 basis points over the interval, reflecting recent
market strength. Longer-term Governments have also
fallen about 15 to 20 basis points since February 23,
but are about 4 to 6 basis points above their levels at
the time of the last Committee meeting. I should also
note, parenthetically, that the System was able last
Friday to purchase $50 million coupon issues maturing
within 5 years without much impact on market rates or
market expectations.
Prices of corporate and municipal obligations
declined quite sharply in response to the heavy demands
placed upon those markets by heavy current offerings
and a steadily mounting calendar of prospective flota
tions. New issues moved slowly in this environment,
and upward yield adjustments of 20 to 40 basis points
were made on most new issues before any significant
demand emerged. Both markets improved fairly sharply
in the wake of the change in reserve requirements, with
corporate issues recovering about one-third of earlier
price declines. A heavy supply of new issues is still
scheduled for the month ahead, however, including about
$1.1 billion corporates and $750 million municipals,
and a sizable backlog of tax exempts remain in dealer
inventories.
As the blue book 1 / notes, the bank credit proxy
and reserve aggregate measures were very strong over
the past four weeks. The credit proxy expanded at a
15 per cent annual rate compared with the 9 - 11 per
cent rate expected at the time of the last meeting.
For March the Board staff anticipates a 6 - 8 per cent
average rise in the credit proxy and a 10 - 12 per
cent rise from the beginning to the end of the month.
Projections at the New York Bank center near the upper
end of these ranges.
Looking into the period ahead, I would agree
wholeheartedly with the blue book statement that
1/
The report, "Money Market and Reserve Relationships,"
prepared for the Committee by the Board's staff.
3/7/67
-21-
"the difficulties in specifying consistent money
market relationships are compounded by the uncertain
effects of the reserve requirement reductions." And,
it should be added, by the uncertainties involved in
individual interpretations of current economic and
credit developments, by the state of mind of various
classes of market participants, and by international
developments.
I would agree that substantial free
reserves may be needed at times to keep the funds
rate averaging a little under 4-3/4 per cent, unless
country banks put the funds released by the reserve
requirement change to work more quickly than normally
would be the case. But I expect that persistent free
reserves, even of moderate size, will be interpreted
as confirming the reserve requirement change as a
moderate move towards further ease. Expectations may
consequently play a major role in determining the
course of interest rate developments, and also the
rate of growth of bank credit. I am afraid that we
will have to wait and see how these variables interact
on a continuing basis. While I am by no means sure
that it is possible to predict the relationships among
reserves, credit, and interest rates over the next
month, I have nothing constructive to add to the
thorough discussion in the blue book. Open market
operations will undoubtedly have to be flexibly
adapted to emerging developments, and I hope that
members of the Committee will indicate the priorities
they would attach to the different variables with which
we are usually concerned.
The Treasury is auctioning today $2.7 billion June
tax anticipation bills, its last cash financing of the
fiscal year. There should be few problems with the
issue, and last night the market was anticipating an
average issuing rate of about 4.30 per cent, with the
50 per cent tax and loan credit estimated to be worth
about 15 basis points to commercial banks. Because the
issue had to be postponed until Congress acted on the
debt ceiling and since the Treasury lost cash as the
result of the switch of trust funds out of special
issues into market issues, the Treasury's cash balance
is at a low ebb, and some borrowing from the System
appears likely over this coming weekend and perhaps
before. Additional borrowing from the System may be
necessary in early April. While infrequent Treasury
borrowing should not be a major cause of concern to
-22-
3/7/67
the System, more frequent recourse to Federal Reserve
credit could, if it occurs, be a source of trouble in
managing the reserve supply. One can only hope that
the next round of Congressional action on the debt
ceiling, which will have to take place before June 30,
will give the Treasury greater flexibility in managing
its cash position than it has had in the past several
months. I should also note that the Federal National
Mortgage Association is expecting to announce tomorrow
morning an issue of participation certificates, of which
the bulk will mature within 5 years and only a modest
amount will be long-term.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period February 7 through
March 6, 1967, were approved, ratified,
and confirmed.
Chairman Martin then called for the staff economic and
financial reports, supplementing the written reports that had been
distributed prior to the meeting, copies of which have been placed
in the files of the Committee.
Mr. Partee made the following statement on economic condi
tions:
Last Friday's Wall Street Journal reported
optimistically that Government analysts see "silver
linings in [the present] economic storm clouds." But
I, for one, must admit to failure on this score. It
seems to me that virtually all of the economic news
that has become available since the last meeting of
the Committee is bearish--ranging from moderately to
substantially so. And I do not think that recent
unfavorable developments can be accommodated within
the Administration's economic model described in some
detail to you four weeks ago. In my view, if the
economy is not now in an actual downturn, it very
soon will be.
3/7/67
That is also the implication of the staff GNP
projection for the first half contained in the green
book.1/ A current dollar GNP expansion of $5 billion
per quarter would bring almost no further gain in
real output of goods and services, and would be
consistent with a decline in industrial production
over the period of around 5 per cent. With continued
substantial expansion in industrial facilities, the
factory utilization rate could drop below 85 per cent
by midyear; and unemployment, despite slower growth
in the labor force, could show an appreciable rise.
In this situation, some dampening in the upward
movement of prices and wages certainly would be
expected. But existing pressures to obtain higher
wage rates are exceptionally strong and, given the
unfavorable impact of declining output on productivity,
unit labor costs in manufacturing would be likely for
some time to show substantial further increases. Under
these conditions, a sharp decline in corporate profits
would be probable. In turn, lower profits and reduced
operating rates could soon take the steam out of
business capital spending plans. Thus, in the private
sectors, we seem to have all of the ingredients of a
full-fledged business recession.
It may be that my gloomy prognosis is exaggerated,
but the signs of recessionary tendencies in the economy
over recent weeks are unmistakable. Of greatest concern
to me is the continuing dramatic weakness in consumer
goods demand. Total retail sales were essentially
flat from June through January; and allowing for
price increases, there was a decline in physical volume.
February appears to have shown a further drop, judging
from the weekly figures, although unusually bad weather
undoubtedly was a factor. The most pronounced weakness
has been in new car sales, which declined sharply further
to a 7 million annual rate in February, but many other
retail lines have also shown declines or little growth.
Excluding autos, the balance of retail trade increased
very little after mid-1966; dollar volume in January was
no higher than last June.
Personal income has continued to expand rapidly
thus far, on the other hand, so that the rate of personal
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
3/7/67
-24-
saving appears to have moved sharply upward. Such a
sharp adjustment in the savings rate is unusual but not
unprecedented; a similar rise occurred in 1956, when
new car sales dropped back from the 1955 high. Then,
as now, a sizable part of the savings increase was
reflected in reduced use of instlament credit. Neverthe
less, the 7 per cent savings rate projected for the first
half looks high relative to other recent years. Perhaps
consumers will spend more freely in the months ahead,
although if the environment is one of layoffs and
shortened workweeks, one would not expect a buoyant
buying psychology. And it should be noted that, even
with the expectations of substantial future income gains
shown in recent consumer surveys, buying intentions have
not been strong.
The slackness in retail sales has extended and
accentuated the problem of accomplishing needed adjustments
in business inventories. Despite a one point drop in
industrial production, manufacturers' inventories increased
further in January, by about the same high $12 billion
annual rate that characterized the last half of 1966.
Over the past nine months, such stocks have increased by
one-eighth while shipments have shown only modest further
growth. Much of the increase in stocks--over 40 per
cent--is accounted for by the defense and business equip
ment industries, but here too inventories have risen much
more sharply in recent months than have order backlogs
and shipments. The remainder of the inventory expansion
had centered in other durable goods lines until recently,
but in December and January there were substantial increases
in holdings of nondurable goods.
The result of the inventory buildup has been a sharp
rise in manufacturing stock-sales ratios, to the highest
As an indication of the dimensions of
levels since 1961.
the problem, restoration of the ratios prevailing during
1965 and early 1966--given continuation of recent levels of
shipments--would require an actual cutback in manufacturing
inventories--not just reduced accumulation--amounting to
$7 billion. In wholesale and retail trade, also, inventories
have increased considerably more rapidly than sales over
the past year; to restore the relationship between distri
butors' stocks and retail sales that prevailed in late
1965 would have required, as of year-end, an inventory
liquidation of $2-1/2 billion. It seems unlikely that
reductions of these magnitudes are in prospect. Inducements
3/7/67
-25-
to hold inventories may well be greater now than before,
and any future increases in sales will, of course, reduce
the size of needed corrections. But it also seems
unlikely that the corrections can be made without major
production cutbacks. In sum, I believe that these figures
indicate that the potential is there for a much larger
and more extended inventory adjustment than is contem
plated in most current GNP projections.
There are, of course, major prospective supports for
the economy that should help keep an inventory adjustment
from getting out of hand. State and local expenditures
and consumer outlays for services continue to rise at a
rapid rate. Residential construction shows every
prospect of increasing as the year progresses, though
the recent pickup in housing starts probably should be
discounted in view of the very large seasonal adjustment
factors applied at this time of year. And the recent
surveys of business capital spending plans, although
showing a leveling off in outlays, hold out some hope
that a substantial decline will not develop. We have
just learned, on an extremely confidential basis, that
results of the latest Government survey indicate a
smaller year-to-year increase than do recent private
surveys, and with no further gain during the first half
from the fourth quarter 1966 rate.
The major factor offsetting developing weaknesses
in the private economy, however, continues to be the
prospect of rising Federal outlays for defense, There
is already some speculation that defense spending may
rise more than projected in the January budget, although
I have nothing new to offer on this score. But we have
estimated the full employment fiscal implications of
existing budget projections, taking fourth-quarter
unemployment and a 4 per cent real growth rate as the
basis for our calculations. This shows a rise in the
full employment deficit from an annual rate of about
$5 billion in fourth quarter of 1966 to an average of
nearly $7 billion in the first half of this year. If
the tax increase goes through, there would be a marked
drop in the full employment deficit in the second half.
But if the tax increase is not approved, and assuming
an increase in social security benefits only about half
that proposed--both seem increasingly likely prospectsthe full employment deficit would rise slightly further
in the second half, to $8 billion or a little more.
3/7/67
-26-
Continuation of a deficit even of this size
probably would not fully counterbalance weaknesses
in the private sector--certainly it has not offest
the recessionary tendencies of recent months--but
it should provide important stimulus once the major
impact of the inventory adjustment has been absorbed.
Further, the automatic stabilizing features of the
tax system will be cushioning any slowing in income
flows; past relationships suggest that one-third to
one-half of the shortfall in incomes below full
employment levels will be compensated for by lower
Federal tax accruals. Finally, the cumulative impact
of easier money will serve to bolster the economy,
not only through its effect on construction but also
by tipping the scales in favor of marginal spending
decisions in a wide variety of markets.
These considerations lend strong support to the
view that any downward movement in the economy will
be relatively shallow and short-lived. Nevertheless,
near-term prospects for the next six months or so are
distinctly unfavorable, and it must be recognized--as
Mr. Mitchell commented at the last meeting--that there
is usually more certainty in a short-term forecast
than when we look further ahead. Accordingly, I would
recommend a fully accommodative monetary policy for
the present--one that is easy enough to assure the
ready availability of funds at gradually falling
interest rates in all sectors of the credit markets.
Mr. Brill made the following statement concerning financial
developments:
The turbulence in financial markets over the past
four weeks has been pretty thoroughly reviewed in the
green book, the blue book, and the Manager's report;
I'll resist the temptation, therefore, to indulge in
additional post-mortems. By and large, we've gotten
back to, or a shade easier than, the money market condi
tions prevailing at the time of the last meeting, but
we still have some distance to go in restoring the
capital market conditions of early February. Long-term
market rates are still higher than at that time--some
significantly so--and the prospective volume of private
and public demands for long-term funds is larger. And
while expansion of reserves and bank credit in February
3/7/67
-27-
was greater than anticipated earlier in the month,
banks have used the reserves provided to increase
liquidity rather than to encourage expansion of
customer loans.
As we look to the weeks ahead, the question
confronting monetary policy formulation is less one
of the appropriate direction of policy than of the
extent to which this direction should be pursued.
The near-term economic outlook, as Mr. Partee's
analysis makes clear, is bleak. Prospects are not
only weaker than the sluggish pattern projected in
the Administration's model, but even weaker than the
staff's own earlier projection. Disquietingly, this
let-down in the pace of U.S. expansion comes at a
time when several other countries are already in, or
seem headed for, economic slowdown.
It seems doubtful to me that we can bank on self
correcting forces to forestall or curtail a downturn
here at home. A resurgence of consumer spending may
be a possibility, but--along with Mr. Partee--I
wouldn't rate the odds very high in an atmosphere of
declining production, reduced workweeks, and rising
unemployment. And while the possibility of additional
fiscal stimulation probably deserves higher odds, until
fiscal talk is translated into specific expenditure and
tax programs, such a possibility must remain--as it did
most of last year--too weak a reed on which to base
current monetary policy decisions. At the moment, then,
there doesn't seem much alternative to continuing to
press for easier financial conditions.
In deciding just how much easier, the first task
is to assess what's been accomplished to date. Clearly
the turn in policy last fall was timely, but we must
guard against indulging in self-congratulation just
because bank credit expansion over the past three months
has proceeded at an annual rate of between 11 and 12
per cent. You will recall that the staff's projection
of a bank credit growth rate consistent with the Council
of Economic Advisers' model of GNP averaged about 9 per
cent over the whole of 1967. Within that average, it
was expected that credit expansion would be larger in
the first half of the year than in the second, since we
anticipated very large financing demands from business
to restore depleted liquidity and to meet heavy tax pay
ments. And within the first half, we suspected that
3/7/67
-28-
financial flows would be large but would taper off
before mid-year.
I won't pretend that we had any specific numbers
in mind for bank credit expansion on a month-to-month
basis, since our analytic tools are still far from
competent to project for such short periods the
expansion rate required to move back toward a full
employment economy. On balance, however, the order
of magnitude of bank credit expansion since November
does not seem far out of line with our chart show
specifications as to what would have to accompany
the CEA's model of GNP.
But since the economy is moving much more slug
gishly than the CEA model, it may well be that what
we've accomplished so far in the way of providing
bank credit is barely adequate--and possibly inadequateto provide the financial stimulation the economy needs.
Certainly it does not seem to have achieved as yet what
the economy needs in the way of borrowing terms and
conditions to finance a really vigorous housing recovery;
the results of the Reserve Banks' survey of mortgage
flows indicate some general loosening of fund availability,
but no gushing of credit into the housing area such that
would suggest an acceleration of housing activity beyond
that built into our model. And corporate borrowing
costs--at banks and in the capital markets--are still
high at a time when business capital spending and
capital spending plans are being pared. Overall, then,
I'm not so impressed by two-digit bank credit growth
numbers as to feel that we've done all we can or all
we have to do.
In determining how much further we might have to go,
let me raise another warning signal--this against the
danger of misconstruing the staff's projections of bank
credit expansion, as given in the blue book and in our
weekly perspective tables. It should be emphasized that
these projected rates of bank credit growth are not
"full-employment" estimates. Rather, they are crude
estimates of the results for bank credit of a short-run
interaction between a specified monetary policy and the
real economy as projected in the green book. When we
project, as we did in the current blue book, that
unchanged money market conditions would likely accompany
an increase in the credit proxy in March at an annual
3/7/67
-29-
rate of 6 to 8 per cent with real expansion in GNP
running at a negligible rate, we are not suggesting
that this is the appropriate bank credit increase to
help restore the economy to a 4 per cent rate of real
growth. Nor are we suggesting that the somewhat
easier money market conditions called for in alter
native B of the directives 1/--conditions we estimate
could result in a bank credit expansion rate of at
least 10 per cent in March--are sufficient in themselves
to stimulate return to target rates of growth in real
GNP.
We recognize that the appropriate course for the
staff would be to specify both the credit conditions
and the rate of credit expansion needed to help turn
the economy away from an impending recession and put
it back on a path toward full employment. The sad fact
is that we can't--at least not on a 3 or 4 week basis.
It would be silly for us to pretend that our knowledge
of the interaction of financial variables with non
financial developments is as yet adequate to such an
assignment.
The best we can do at the moment is to advise the
Committee--as we do in the blue book--that maintaining
present money market conditions, with long-term rates
still undesirably high, would likely be associated with
a bank credit expansion of about 6 to 8 per cent, and
that pressing toward somewhat easier financial market
conditions should be accompanied by a larger bank credit
expansion, on the order of 10 per cent or more. But if
somewhat easier market conditions do not result in a
more vigorous credit expansion, we would construe this
as a signal of greater than expected weakness in the
economy, calling for even easier market conditions.
In choosing among these policy alternatives, let
me suggest that it is not too soon for the Committee
to index its concern for the softening economic situation,
and to act thereon. First, I would propose for Committee
consideration a change in the wording of the first
paragraph of the draft directive, substituting, in the
last sentence of that paragraph, some alternative wording
1/ Alternative draft directives submitted by the staff
for Committee consideration are appended to these minutes
as Attachment A.
3/7/67
-30-
which recognizes sagging economic prospects. Instead
of ". . . fostering . . . conditions conducive to non
inflationary expansion ..
." we might consider language
such as " . . . fostering . . . conditions to combat
recessionary tendencies .
."
Next, I would recommend adoption of alternative B
for the second paragraph, or some variant that left
room for prompt action by the Desk to accelerate reserve
provision if bank credit expansion appeared to be falling
short of projections over the next 4 weeks, but indicated
less concern if expansion should exceed the projections.
The guide to reserve provision should in the first
instance come from the market, and in particular from
an objective of achieving money market conditions that
permit and encourage a continuing declining trend in
long-term rates, even in the face of the prospective
volume of public and private capital market financing.
A "one-way" proviso such as in alternative B would guard
against an arbitrary limitation on the Manager's latitude
to take the steps necessary in achieving the desired
rate trends. An asymmetrical proviso is not unprecedented;
the Committee operated with such a directive--then pointed
toward the possibility of greater restraint--on a number
of occasions last spring and summer.
Finally, after a decent interval--so as not to
imply a sense of panic at the Fed--I would suggest the
desirability of considering a reduction in the discount
rate. Perhaps the next reduction should be only 1/4 of
1 per cent, which would leave financial market partic
ipants fully aware of the possibility of more to come
if and when needed, rather than suggesting that the Fed
had moved to another frozen position. Such a package
of System actions seems to me appropriate to the emerging
economic situation.
Mr. Hickman asked whether Mr. Brill would explain what
timing he had in mind in connection with his comments on possible
discount rate action.
In particular, was he suggesting a change in
the discount rate between now and the next meeting of the Committee?
3/7/67
-31In reply, Mr. Brill said he did not have a specific recom
mendation on the timing of a discount rate change in mind.
number of factors would have to be considered:
A
one concerned the
way in which developments in short-term markets proceeded; the
three-month bill rate recently had dropped below the discount rate,
but not by as much as 25 basis points as yet.
Another factor was
the desirability of avoiding undue rapidity in a sequence of
Federal Reserve actions, since that might lead to more widespread
concern than desirable about the System's assessment of the
economic outlook.
Perhaps a change some time around or after the
next Committee meeting would be appropriate.
Mr. Mitchell noted that the GNP projections in the green
book suggested that disposable income was rising rapidly in the
first quarter and that the personal saving rate would reach the
abnormally high level of 7 per cent and remain at that level in
the second quarter.
While he agreed that the kind of economic
environment described was not one in which an upsurge in consumer
spending could be expected, he wondered whether there was not
significant doubt about the projection that so high a rate of
personal saving would be sustained for two quarters.
Mr. Partee agreed that it required some stretching of the
imagination to expect the savings rate to remain at 7 per cent for
two quarters.
Of course, personal income might well rise less
3/7/67
-32
than projected in the second quarter and the savings rate go down
on that account.
The staff had estimated the income increase at
the rather low annual rate of 4 per cent, allowing for no appreci
able increase in employment and only the normal rise in wages and
salaries, but it was possible that actual income growth could be
still weaker.
He pointed out, however, that there had been periods
in the past in which the savings rate had remained at a high level
for some time.
In particular, the rate had been stable at a level
above 7 per cent from the second quarter of 1953 through the first
quarter of 1954--a period leading into and encompassing the early
part of the 1954 recession.
In 1957 and 1958 also, the savings
rate fluctuated around 7 per cent, although it was not as stable
then as in 1953 and 1954.
There was a sharp rise in the savings
rate in 1956 much like that in recent quarters, followed by two
years of little change--first because spending was weak and then
because income was weak.
Mr. Brill added that in his judgment the odds favored a
lower savings rate than projected, but it was more likely to
result from weaker performance of income than from a rise in
spending.
Mr. Maisel asked whether the expectation of little further
increase in plant and equipment spending might not imply an actual
3/7/67
-33
reduction in the capital spending components of GNP, since producers'
durable equipment included autos.
Mr. Partee replied that it probably did.
He added that the
producers' durable equipment item included certain other outlays
not included in the plant and equipment figures--such as oil-well
drilling--and he did not know whether the expansion expected there
was strong enough to offset the automobile decline.
In any case,
the latest plant and equipment estimates showed no increase from the
fourth quarter of 1966.
Mr. Swan referred to Mr. Brill's suggested change in the
first paragraph of the draft directive, and asked what implications
the change might have for the last clause of the affected sentence,
relating to the balance of payments.
Mr. Brill replied that he thought the Committee still had
to recognize that the balance of payments deficit remained a problem.
Mr. Hersey then presented the following statement on the
balance of payments and related matters:
The news on the balance of payments that has devel
oped since the Committee's last meeting can be quickly
summarized. Disappointingly, in view of the behavior of
U.S. industrial production, imports were still rising
through January though less rapidly than up to the middle
of last year. Gratifyingly, outstanding bank credit to
foreigners declined considerably in January. U.S. banks'
borrowings from the Euro-dollar market have not changed
much in the past few weeks, and so they still stand at a
level about $1 billion below the mid-December peak.
3/7/67
-34-
None of these bits of news calls for revaluation of
the outlook ahead. We are still projecting an absolute
decline in imports during coming months as domestic
inventory accumulation slows. On the other hand, the
January reflow of bank credit and the February stability
in use of Euro-dollar money by U.S. banks are by no means
inconsistent with the possibility that later we may see
outflows of both sorts.
The balances owed by U.S. banks to their branches
abroad, after dropping by $1 billion from mid-December to
the end of January, still stood last week at a level
$1-1/2 billion higher than a year ago.
Last summer and
autumn when these balances were rising rapidly, Euro
dollar rates moved up a good deal more than British and
German money market rates, under the pull of the bidding
by American banks. Then when the American banks let a
sizable chunk of the money they had taken from their
branches run off, Euro-dollar rates fell sharply, and in
fact moved down relative to sterling money rates enough
to stimulate a considerable flow of funds into sterling.
During February the movement of funds was small and rates
were level or rising a bit.
Now, with Federal funds
easier in our markets than they were two weeks ago, we
may see a further return of money from U.S. banks to the
Euro-dollar market.
I will come back later to the policy implications of
this outflow. I should like first to make some comments
on recent monetary policy developments in Germany and
Britain, the second and third largest economies of the
Western world.
At this distance it is difficult to judge whether
these two economies, after half a year or so of declining
industrial production, are already getting in position
for an upturn or not. British monetary policy remains
cautious.
The British Government is planning on a considerable
increase in government expenditures, but private investment
prospects are so weak that most people predict only a slow
recovery this year from the recession Britain has been
having since last summer. The British may reasonably hope
to keep their import growth slow, and they will try to get
some benefit in export growth out of hoped-for economic
expansion in the rest of the world.
German policy also looks pretty cautious still, though
it has eased a great deal since last summer. To the
3/7/67
-35-
outsider, this caution looks misplaced, with Germany's
export surplus shockingly large by now, while excess
pressures on German resources are probably less now than
at any time in the last ten years, and prices are
virtually stable.
Can we learn any policy lesson from British and
German caution? If the United States were another middle
sized country, instead of having a GNP six times Germany's
and more than double the whole Common Market Community's,
we ought to be following their examples. A country with
as serious a drain on its gold and IMF reserves as we
will probably be having this year ought to be moving
cautiously in monetary policy, letting other countries
take the lead in promoting expansion. We might hope, for
example, that a new advance in Germany would add momentum
to European expansion in general and in that way foster
continuing growth of world trade. But the size and
predominance of the United States impose on it a responsi
bility to maintain its own economic growth, in a
noninflationary way, in the world's interests as well as
its own.
This being so, what can be said about using monetary
policy in one way or another to help ease our balance of
payments problem? There are various prescriptions to
choose from, all palliatives, not cures.
The first prescription is to be as cautious as
possible about letting interest rates decline, with the
justification that we may thus stave off as long as
possible large gold drains or the necessity of drawing on
our credit line with the IMF. Under present circumstances,
this seems to me wrong advice, not only because this policy
might put undue limitations on domestic monetary action,
but also because it is not the course of true prudence
internationally. The main issue involved, given the
existence of the IET and the voluntary programs, is
whether monetary policy should try to postpone what may
well be an inevitable reflow of more of the Euro-dollar
funds U.S. banks have been using. My own view is that the
course of wisdom is to let this reflow of Euro-dollars
proceed sooner rather than later. We ought to be taking
some of the pressure while seasonal factors are favorable
in the first half of the year, while imports are falling off
as we hope they will be soon, and while we are still many
months away from the necessity of changing the Federal
Reserve note gold reserve requirement. The balance of
3/7/67
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payments is still sick, and Administration policy makers
should not have that fact disguised from them. We should
be spreading out our reserve losses, not piling up IOU's
to the future, lest some day an overwhelming mass of
claims be thrown at us all at once and bring a crisis of
confidence in the dollar. For such reasons as these a
policy of inhibiting declines in U.S. interest rates now
ought to be unacceptable as a balance of payments
palliative.
An alternative prescription for how to live through
a time of difficulties in the balance of payments can be
written in various ways.
The advice might be to avoid
so much bank credit expansion that barriers to outflows
set up by the voluntary program would break down. Or,
with a strongly expansionary monetary policy, the advice
might be simply to slow down as soon as signs appear of
new inflationary pressures. What advice can be given
depends on what monetary policy is adopted. No quick
solution of the balance of payments problem is available
to this Committee, and its decision today should be based,
I submit, solely on appraisal of the current domestic
situation and judgments about the strategy and tactics
best suited to fostering renewed economic expansion of a
noninflationary character. I could not play down
immediate balance of payments considerations in this way
if a crisis of confidence in the dollar were already
blowing up.
I would not play them down if the domestic
economy were heading toward a new boom, with growing
pressures on capacity. But that is not the situation
now.
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:
When we met four weeks ago I commented on the low
"visibility" of the business situation and especially on
the apparent sharp contrast between shorter-term and
longer-term prospects. Nothing has happened in the
interim to diminish the uncertainties, and the contrast
in question is, if anything, even sharper. The expansion
appears to have slowed somewhat more than had been
expected, probably in large part because consumer
3/7/67
-37-
spending has been even less buoyant than seemed probable
a month ago.
The January survey of consumer buying
intentions does not suggest an early upsurge in consumer
outlays--although it should be added that it also does
not point to any further significant weakening.
There is, of course, still a risk that the recent
weakening might cumulate and bring about a general
deterioration in the business climate.
Indeed, the fact
that inventory accumulation continued strong in January
and that inventory-sales ratios rose is one element that
I find worrisome. But I think the more likely develop
ment is a gradual return to more rapid economic growth
later in the year. General business sentiment has not
deteriorated. It seems probable that residential
construction, which already appears to have turned the
corner, will revive strongly. At the same time I believe
it likely that fixed investment spending will not turn
down but will continue to grow slowly, the uptrend of
Government spending will continue, and consumption
outlays will regain some of their earlier vigor, helped
by the sizable current and prospective gains in personal
income.
Unemployment has remained close to its recent low
point. There may be a tendency for corporations to hold
on to their workers in the expectation that output will
soon be moving up again. There is every likelihood that
we shall be confronted with excessive wage settlements in
the coming months, even if productivity gains should
recover somewhat from their recent slow pace. And while
price pressures have subsided with the slackening of
aggregate demand, any resurgence of demand pressures in
the fall, coupled with a cost push, could provide a climate
conducive to renewed sharp price gains.
Balance of payments developments, though not as
unfavorable as in the fourth quarter of 1966, continue to
give cause for serious concern. Excluding special trans
actions, the January liquidity deficit was possibly at a
seasonally adjusted annual rate of nearly $2 billion, and
preliminary February data indicate a worsening of the
deficit. The trade surplus remains far below what is
needed to take care of our various obligations abroad.
We should not lose sight of the great risk to our payments
position that would result from any resurgence of
inflationary pressures.
3/7/67
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On the credit front, I am impressed by the strong
growth in total bank credit of the past three months.
It
has, of course, been a useful development, coming on top
of the stagnation or decline in credit in the September
November period. While further growth would be welcome,
there could be some risks in a long-continued expansion
at the recent rapid pace. Much of the expansion has oc
curred in bank investments rather than loans. While the
banks have been able to rebuild their liquidity to some
extent, I think that most banks hope to progress further
in this direction and therefore tend to retain a cautious
attitude toward lending. The sluggishness of aggregate
bank loans in February as compared with January may be
attributable in part to the January tax speed-up
program. Most banks in our District seem to feel that
underlying loan demand remains quite strong, except in
the consumer loan area; and of course current credit
demands in the capital markets are at a very high level.
Since our last meeting market interest rates have
swung rather widely in response to changing expectations.
The unwarranted fear that Federal Reserve policy might be
tightening was pretty well dissipated about ten days ago,
and the reversal was clinched by the announcement of the
reduction in reserve requirements for savings and certain
time deposits. Not unexpectedly, the latter development
was regarded rather widely as a significant move toward
easier money; and the effects in the capital markets were
quite pronounced. Feeling as I do about the likelihood
of an acceleration of economic expansion later in the
year, with a probable intensification of inflationary
pressures, I would hope that we would not give these
market interest rate declines a strong further push
through open market operations. I would like to regard
the reserve requirement reduction as in large part a
substitute for open market purchases that would otherwise
have been required--although, as I have already indicated,
it has inevitably had important psychological effects.
I have no objection to such effects, provided they don't
generate excessive expectations of still further easing.
For the next four weeks I think we would do well to
maintain about the present degree of ease in money market
conditions, with a Federal funds rate of 4-1/2 to 5 per
cent and a bill rate probably fluctuating somewhat under
the discount rate.
In terms of the reserve figures it is
hard to predict what will be needed; but many of the
3/7/67
-39
reserves released by the requirement reduction may tend
to pile up in the form of excess reserves, so that a
moderate free reserve figure--say $50 to $150 millionmay be consistent with the money market objectives I
have suggested. However, there are enough uncertainties
so that the Manager will need at least the usual degree
of flexibility. I think he should resolve doubts on the
side of ease; but I would like to see the directive include
the existing two-way proviso and would not push credit
expansion too rapidly--say at anything close to the 15 per
cent February rate--even if market interest rates should
show signs of moderate firming.
The staff's draft directive with alternative A as
the second paragraph seems satisfactory. However, I think
I could also accept alternative B if "somewhat" were
changed to "slightly" and if the proposed one-way proviso
were replaced by the two-way proviso of alternative A.
I would suggest that the first paragraph include the
clause "to combat weakening tendencies in the economy."
Use of the term "recessionary tendencies," as Mr. Brill
proposes, might be somewhat too alarmist under present
circumstances.
Mr. Francis commented that economic activity had been on a
plateau in recent months.
Government outlays, both Federal and
local, continued to grow while the private sector recorded some
declines.
Retail sales, industrial production, and construction were
down from their 1966 peaks, and real incomes had been rising at a
reduced rate.
Although total employment had continued to rise, the
average workweek had declined.
The situation of shortages, bottle
necks, and speculative purchases of last summer had been replaced
by rapid involuntary buildup of inventories threatening to cause
further cutbacks in production.
declined.
Demand-pull influence on prices had
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With the advantage of hindsight, Mr. Francis said, it
appeared that restrictive monetary actions were appropriate from
the spring of last year to the fall.
Demands for goods and
services were in excess of the economy's ability to produce, and
there was a pronounced rise in prices.
From April to November,
member bank reserves, demand deposits, and money declined; interest
rates rose on balance, and the growth in the demand for goods and
services slowed to a more nearly sustainable rate.
In November, Mr. Francis continued, the Committee became
concerned that monetary conditions might become too restrictive,
especially since monetary action has a lagged effect, and a policy
was adopted to relax the monetary restriction.
At subsequent
meetings policy resolutions moved toward greater ease.
It had now
been three months or more since the Committee undertook to achieve
an easier policy, but it was not yet certain that it had been able
to put such a policy into effect.
It was true that total bank credit had increased rapidly
since November, Mr. Francis said.
But bank credit had been a very
unreliable measure of Federal Reserve policy during the past year.
Bank credit increased rapidly, at a 10 per cent annual rate, last
summer from May to August.
It then declined in the fall, from
August to November, at a 2 per cent rate.
But that did not mean
that monetary policy was tighter in the fall than in the summer.
3/7/67
-41
The change reflected primarily the inability of commercial banks
to hold large certificates of deposit after August when the rates
they could pay were below open market rates.
Similarly, Mr. Francis observed, the shift of bank credit
from declining in the fall to rising in the winter was not, in and
of itself, a measure of easier monetary policy in the winter than
in the fall.
Rather, the shift in December reflected the fact
that with lower open market interest rates the banks were again able
to attract and hold large certificates of deposit.
In view of that
evidence, the rate of increase of bank credit recently had not been
a useful indicator of monetary policy or of the direction of
monetary influence.
Interest rates had declined markedly since
November, but that might reflect a decline in the demand for loan
funds and expectations of lower rates rather than any real
influence on the Committee's part.
When one deducted the increased reserves required for the
reintermediation of the banks and for Treasury deposits, Mr. Francis
said, one found that there had been no increase of bank reserves
for net credit expansion from the second week of December to the
present time.
By that measure reserves were now a little higher
than they were in last November, about the same as they were late
last summer and early fall, and less than they were last April to
June.
The money supply did rise in the past month, but possibly
3/7/67
-42
the Committee should not give much weight to that upturn of the
money stock if it could not see anything to support it in "reserves
available for private demand deposits."
He noted that the recent
increase of money supply reflected in part a decrease in Treasury
deposits and he noted that the staff expected no increase of money
supply during March.
Mr. Francis believed the Committee should make a concerted
effort to get the effective bank reserves measure moving ahead
somewhat more than was necessary to accommodate the bank reinterme
diation.
That would be something the Committee had not succeeded
in doing in the past two-and-one-half months.
To that end, it
seemed to him the Committee had to let some of the current reduction
of reserve requirements have some real stimulative effect.
The
Committee's net dealings in Government securities should be such
that net reserves might be as much as $300 million, the top figure
mentioned by the staff.
A bill rate substantially below the
discount rate should be looked on with favor--possibly one as low
as 4.15 per cent, the bottom interest rate mentioned by the staff.
So far as total bank credit was concerned, that was so much a
function of the varying intermediation role of the banks that the
Committee should let it go where it would, keeping its eye on total
reserves, net of those required for time deposits and for Treasury
deposits.
3/7/67
-43
Mr. Francis favored alternative B of the staff's draft
directives with the change that had been suggested in the first
paragraph.
Mr. Patterson reported that in the Sixth District the
effects of the turn toward an easier monetary policy showed up more
in evidence that the availability of funds was improving than that
the pace of economic activity was quickening.
District member banks
were now in a substantial free reserve position and had sharply
reduced their reliance on the discount window and borrowing from
the Federal funds markets.
Their deposits, because of growth in
time deposits, had been rising on a seasonally adjusted basis, and
that growth had occurred in practically all sub-areas of the
District.
However, the banks were apparently concentrating on
rebuilding their liquidity rather than on building up their loans.
The major exception was in construction lending, which
picked up sharply in February at the large banks, Mr. Patterson
said.
Funds were becoming more available to mortgage bankers and
other mortgage originators, and the net savings flow into savings
and loan associations had improved markedly.
An eventual stimulus
to public works construction might result from the successful
marketing of several municipal issues that had previously been
postponed.
What the latest data for the District seemed to
indicate was that there was a strong chance that the weaknesses
3/7/67
-44-
would eventually be overcome if there was no sudden cut-off in
the availability of funds.
On the national scene, Mr. Patterson continued, interpreting
the economic and financial indicators was extremely difficult, as
the Committee knew; and, because of special circumstances, the
Desk had had a very difficult job.
Despite all the complications,
however, the final result was an increase in bank credit, something
that the Committee had wanted.
The bank credit growth that occurred
seemed especially appropriate in the light of the further weakening
in private demand discussed in the current issue of the green book.
The lowered projections of GNP discussed in the current
green book certainly implied that conscious or unconscious tightening
of policy was inappropriate, Mr. Patterson said.
A "wait-and-see"
policy, he was afraid, might lead to the kind of unconscious
tightening the Committee wanted to avoid.
ease seemed to be in order now.
Steps toward further
How great those steps should be
and the way they should be measured were perplexing problems.
Treasury financing might preclude action for a short time.
However,
by the next meeting of the Committee he would like to see that open
market operations, together with the reduction in reserve require
ments, had supported a bank credit growth in March higher than the
6 to 8 per cent projected in the blue book, and on the order of the
average annual rate that had occurred since last November.
He
3/7/67
-45
would hope also that there would be no upward movement in the
structure of rates.
Under those conditions, he favored alternative
B for the directive.
Mr. Hilkert remarked he was in the same boat with many
observers of the economic scene who found the current and prospec
tive situation especially difficult to evaluate.
That was less
true of the Third District economy than of the national economy.
Following a year of strong pressure on economic resources, there
were increasing signs of slack in the economy of the Third District.
Demand for labor had eased, resulting in a greater-than-seasonal
increase in unemployment in the majority of the labor market areas.
Manufacturing output and employment had dropped from fall peaks,
and final demand showed little signs of new strength.
Construction
contracts awarded, auto registrations, and the net change in con
sumer credit outstanding were considerably below comparable periods
of the previous year.
In studies the Philadelphia Reserve Bank had made of the
behavior of the local economy over the 1950's, Mr. Hilkert said,
there was some indication of a lag behind the national economy at
cyclical peaks,
With all the attention being given currently to
leading and coincident indicators, recent behavior of that lagging
indicator suggested the rather frightening conclusion that the
economy had been in a recession for some time.
Although statistics
3/7/67
-46
on the national economy did not bear that out, they were not
encouraging.
The Bank's informal survey a month ago indicated
that manufacturers were not cutting back the rate of inventory
accumulation substantially because they expected rising sales to
take care of excessive stocks.
Data for January indicated that
manufacturers, in fact, added to inventories at a faster rate than
in the fourth quarter.
There was now increasing doubt whether the
expectation of rising sales would materialize.
The results of the
survey now appeared in a different light, therefore, and suggested
that the longer the adjustment was postponed, the more serious it
would become.
On the other hand, Mr. Hilkert continued, information about
a second key uncertainty--housing--led him to a position of mild
optimism.
Lenders in the Third District believed that the supply
of money for mortgages would increase somewhat within the next
ninety days.
Commitments had been worked off, so most institutions
were in a relatively strong position to expand mortgages if
demand picked up and if the trend of current savings flows continued.
But although lenders' attitudes had improved in the past few weeks,
a watch-and-wait attitude still prevailed.
Because information on demand was not best gathered from
lenders, Mr. Hilkert said, the Bank had extended its inquiries to
realtors and builders.
Here the response had been more encouraging.
3/7/67
-47
A number of realtors had indicated that demand was stronger than
usual for this time of year.
New listings were still low, however,
possibly because potential sellers were discouraged by costs to
them and recent terms of sale.
Realtors believed more listings
would come quickly once sellers learned about the demand.
Of course, Mr. Hilkert added, the sample was small and it
was still very early in the season.
But the results suggested that
pressures of demand might become strong enough to overcome lenders'
caution.
Given an ample supply of savings--and the selective
nature of the reduction in reserve requirements should help in that
respect--the outlook for housing was brighter.
Mr. Hilkert thought the heavy flow of new issues in the
corporate and municipal markets--despite the problems it had caused
in the past few weeks--was also a favorable sign, even though watered
by the greatly reduced volume of private placements.
To the extent
such financing needs could be accommodated easily, the possibilities
that an inventory adjustment would have serious repercussions on
capital spending might be reduced.
Again, the reduction in reserve
requirements should help in easing congestion in those markets.
In Mr. Hilkert's judgment, open market policy for the next
four weeks should reinforce and sustain the effects of the reduction
in reserve requirements.
Expectations had been altered substantially
and open market policy should confirm those changes in expectations.
3/7/67
-48
If that should require fairly liberal net free reserves, he would
have no objection.
If it should mean permitting another strong
increase in bank credit, that would be all to the good.
And if,
as he would hope, market rates continued to decline, it might
later be necessary to make a technical adjustment in the discount
rate.
Mr. Hilkert favored alternative B of the draft directives.
Mr. Hickman recalled that at the Committee's last meeting
he had voted for a policy of "no change," shaded toward ease, partly
because of the imminence of Treasury financing and partly to give
the economy time to catch up with financial developments.
He
agreed fully with the directive as adopted, and with the intent
to resolve doubts on the side of ease.
Having said that, Mr. Hickman continued, he had to say that
market developments following the meeting departed sharply from
what he thought was the Committee's intent, although in the last
few days the market had again moved in the intended direction.
In
fact, the reaction to the reduction in reserve requirements demon
strated that the market was waiting for a signal from the System,
which up to that point it had failed to provide.
The tighter
money market that developed throughout most of February upset the
capital market, and largely reversed the easier tone that the
Committee had sought to foster in preceding months.
-49-
3/7/67
There was a growing awareness that the economy was in a
precarious situation, Mr. Hickman said.
As the green book noted,
and as he had been attempting to convey to the Committee for
several months, weaknesses and imbalances in the economy were
pervasive and deep-seated.
Indeed, it was now an open question
whether the economy was approaching--or had already past--the
upper turning point in the business cycle.
At the present juncture
it was imperative that the Committee do all that it could promptly
to prevent weakening tendencies in the economy from cumulating
into a general downward spiral.
Heavy inventories, coupled with
the unfavorable outlook for consumer takings and business spending,
increased the likelihood of sizable inventory adjustments in the
near term.
Thus far, inventory adjustments had been minimal--but
the portents were ominous.
Mr. Hickman went on to say that it was thus clear, to him
at least, that the Committee had to try to make up for lost time,
and do more than it had done to stimulate final demand.
Because of
distributed lags in the effects of monetary policy on output and
employment, the Committee knew only too well that the economy could
not be turned on a dime.
If it hoped to achieve anything like the
second-half gains in economic activity envisaged by the Council of
Economic Advisers, additional monetary stimulus should have been
provided in February, and had to be provided now.
If the Committee
3/7/67
-50
failed to head off weaknesses in the economy, it would be faced with
a massive, and perhaps unmanageable, task later on.
Thus, Mr. Hickman supported alternative B of the staff's
draft directives with the first paragraph modified as proposed by
Mr. Brill.
That alternative clearly called for greater ease.
As
for the targets, he would move fairly promptly towards free reserves
of between $200 and $300 million, as suggested in the blue book,
which presumably would keep the bill rate and Federal funds rate
at or below the discount rate most of the time.
He would also
attempt to nudge long-term bond yields downward, in an effort to
enlarge the flow of funds to the mortgage market, although that
would be difficult because of the large calendar.
If the System
had any influence in the area of fiscal policy--which he doubtedhe thought it should press for prompt reinstatement of both the
investment tax credit and accelerated depreciation, and should
encourage an early announcement that the proposed surtax on cor
porate and personal incomes would be dropped until such time as
the economy appeared to be overheating.
Mr. Brimmer commented that he would like to endorse much of
what Mr. Hickman had said.
He had followed open market operations
in the past month on almost a day-to-day basis and, while he certainly
would want to commend the Manager's vigorous efforts to cope with
market pressures, he thought that the outcome for much of the period
3/7/67
-51
was opposite to that which the Committee had intended to encourage.
At the previous meeting he had joined the majority in voting
favorably on the directive after the staff's original draft was
modified to indicate an intention of leaning toward ease, and he had
hoped that market conditions would become somewhat easier.
Now,
with the unfortunate outcome, he thought the Committee had to make
up the ground that had been lost.
Mr. Brimmer agreed completely with Mr. Hersey's remarks on
the balance of payments.
The payments problem was serious and, if
anything, it was likely to get worse.
The question facing the
Committee was how to mesh appropriately its international and
domestic objectives, and he saw nothing in the short run that would
suggest a course of action with respect to the balance of payments
other than that Mr. Hersey had suggested.
It appeared that the
voluntary foreign credit restraint program had been making a useful
contribution and would continue to do so.
There seemed to be little
prospect for a rapid revival of direct investment outflows.
The
current reflow of bank credit to foreigners was not indicative of
what could be expected over the course of the year, and he would
not be averse to the System's looking at its program in that area
to see what might be done to dampen a later outflow of bank credit
if that should prove necessary.
The outlook for Congressional
approval of the proposed extension and strengthening of the interest
3/7/67
-52
equalization tax appeared promising, and he thought that such a
strengthening could be counted on for help.
He certainly would
not like to see the Committee try to head off the reflow of
funds from American banks to the Euro-dollar market.
That reflow
had been expected, and it would be undesirable to hamper domestic
policy by an effort to head it off.
With respect to the domestic situation, Mr. Brimmer
continued, the only question in his mind was when, in retrospect,
the National Bureau of Economic Research would date the downturn.
They might decide that the turning point occurred late in the
first quarter or early in the second.
He agreed completely with
Mr. Brill that it was time for the Committee to take note of
recessionary tendencies, and he would endorse Mr. Brill's proposed
language for the first paragraph of the directive.
He saw nothing
to indicate remaining autonomous strength in the private sector.
Plant and equipment spending might, in fact, be lower than
Mr. Partee had suggested; at this stage of the cycle successive
revisions of capital spending estimates were likely to be down
ward, not upward as during an expansion.
The earlier private
surveys suggesting increases in fixed investment in 1967 on the
order of 6 or 8 per cent should be discounted.
He agreed with
the staff's expectations for consumer spending, and he did not
think the Committee should count on growth in defense spending to
3/7/67
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compensate for the weakening in the private sector.
Personally,
he foresaw a plant utilization rate in the low 80's, and an
unemployment rate possibly as high as 4.5 per cent.
In sum, he
felt that expansion was not simply weakening, but that the economy
was probably on the verge of a recession if not already in one.
As to the discount rate, Mr. Brimmer favored encouraging
the Federal Reserve Banks to consider possible action.
He agreed
with Mr. Brill that the discount rate should be reduced soon and
that the problem was primarily one of timing.
He favored alter
native B of the staff drafts for the directive, with Mr. Brill's
suggested change in the first paragraph.
Mr. Maisel commented that he fully agreed that the economy
was at a point of weakness.
It was clear that the almost flat
trend in real GNP projected for the first half of the year would
mean a decrease in industrial production and an increase in
unemployment.
If such developments occurred they were almost
certain to result in lower spending and production than the
Council had projected for the second half of the year, and a
further increase in unemployment.
That meant that monetary policy
should be more aggressive, particularly to permit long-term
interest rates, including mortgage rates, to fall toward their
levels in previous years.
3/7/67
-54
Mr. Maisel said that he would not engage in additional
post-mortems on market developments since the preceding meeting.
The main lesson was that the kind of market move that had devel
oped three weeks ago should not recur in the coming period;
market expectations of easing had to be confirmed.
Mr. Maisel thought that reserves should be furnished
aggressively.
Given the country-wide distribution of the effects
of the reduction in reserve requirements, he would assume there
was a need for large net free reserves--in the $200-$300 million
range.
He favored a Federal funds rate fluctuating below the
discount rate, and continued declines in the bill rate.
He
agreed with Mr. Brill that the rate of expansion of bank credit
projected under those conditions was not unduly high; in fact,
the growth in required reserves projected for the next six weeks
was a good deal lower than experienced earlier.
He would like
to see bank credit continue to rise at a rate at or above the
average rate since last November, and he assumed that that might
be possible as a result of the increase in free reserves that he
favored.
Mr. Maisel concluded by saying he thought that a discount
rate change should be considered.
However, he would hope that a
reduction would be delayed until the bill rate had moved lower, so
that the action would confirm rather than lead market developments.
3/7/67
-55
That condition might well be fulfilled by the time of the Committee's
next meeting.
He supported alternative B of the draft directives.
Mr. Daane said he hoped the Committee would not undertake
to tilt against windmills.
He thought that monetary policy at
this juncture could not stem a wage-cost push reflecting the
inadequacies of fiscal and incomes policies of the previous period.
Secondly, he thought the Committee could not stem an inventory adjust
ment that reflected the backwash from the earlier overheating of
the economy.
Whatever one might wish, he did not think that was
feasible--certainly not in a short period.
Third, he thought that
at this juncture the Committee should not try to tilt quixotically
against a sick balance of payments; monetary policy alone could
not effect a cure,
However, Mr. Daane continued, he agreed with Mr. Brill
that the Committee certainly should do all that it could do, and
had to do, with the instruments at its disposal at this juncture.
The main problem, as he saw it, was to sort out the psychological
and expectational aspects of both the economic and financial envi
ronments.
It was particularly necessary to aid in restoring
confidence in economic prospects.
Mr. Daane said that, like others, he had been disturbed
by the fact that market developments in the recent period had led
observers to conclude that monetary policy had stopped trending
-56
3/7/67
toward ease.
It was important that the market should not again
have any doubt about the posture of System policy; it should be
made perfectly clear, as it had been in recent days, that the
System's posture was one of continuing ease.
As Mr. Brill had
noted, however, the key question concerned the rate at which the
Committee should move toward ease.
He (Mr. Daane) thought the
Committee also had to guard against the risk of deluding the
market and generating expectations that outran the Committee's
intentions, as had occurred earlier in the year.
On that basis, Mr. Daane said, he would go along with
much of Mr. Brill's analysis.
He was disturbed, however, by the
latter's suggestion that the phrase "to
combat recessionary
tendencies" be included in the first paragraph of the directive,
because it suggested that monetary policy alone could stop an
inventory recession in its tracks.
He would prefer instead to
say that it was the Committee's policy "to foster such money and
credit conditions, including bank credit growth, as may contribute
to a continuation of economic expansion and help to prevent any
weakening tendencies in the economy from cumulating."
That
objective was one the Committee could accomplish; he did not
think it should imply in its directive that it could do something
it could not.
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Mr. Daane leaned toward alternative B for the second
paragraph.
However, he suggested a revised formulation reading,
"To implement this policy against the background of the current
reductions in reserve requirements, System open market operations
until the next meeting of the Committee shall be conducted with
a view to continuing to ease moderately, but operations shall be
modified as necessary to further moderate any apparently signif
icant deviations of bank credit from current expectations."
He
thought that language carried the appropriate sense of continuing
to move toward ease but of not generating expectations going
beyond what was intended.
He would not change the discount rate
at this juncture.
Mr. Mitchell observed that seldom had previous speakers
at Committee meetings said so little with which he disagreed as
they had today.
Accordingly, he had little to add.
He endorsed
the staff's analysis and most of the comments that had been made
about it.
In his judgment the main objective of monetary policy
now should be to change bank lending policies as quickly as possible.
The System had already accomplished a good deal in that connection,
in that banks' liquidity desires had been largely met.
But their
lending policies had not yet changed to any significant extent;
and until those policies were changed drastically the contribution
of monetary policy would be very limited.
3/7/67
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Mr. Mitchell agreed with Mr. Hickman that the Committee
had to act quickly.
Developments in the next month or two were
already water over the dam, but the Committee could have some
effect on events of the summer and fall if it did not back and
fill now.
He favored a much more aggressive policy, limited
only as necessary to avoid the psychological impact that would
result from an impression that the Federal Reserve was deeply
worried about the economic outlook.
He would not want to move
so aggressively as to create that impression.
With respect to operating targets, Mr. Mitchell agreed
with Mr. Francis that the Committee should get the money supply
growing, and on some basis other than shifts out of Treasury
balances; the money supply should grow because reserves were
being aggressively supplied.
In that connection he noted that
the credit proxy chart in the blue book seemed to indicate the
absence of any significant growth in February.
As far as bill
rates and free reserves were concerned, he would let them go to
whatever levels were needed to accomplish the desired expansion
of the aggregates.
He thought a fairly low bill rate would be
required--perhaps around 4 per cent--but he would go along with
a 3-1/2 per cent rate if necessary or, for that matter, with a
4-1/2 per cent rate; the bill rate should be treated strictly as
a residual.
3/7/67
As to the directive, Mr. Mitchell said, he thought Mr. Daane's
objections to Mr. Brill's proposed phrase for the first paragraph
could be met by saying it was the Committee's policy to combat "the
effects of" recessionary tendencies.
He favored alternative B for
the second paragraph, but would delete the word "somewhat" before
"easier conditions in the money market."
In his judgment easier
conditions were definitely needed and the qualification was undesir
able.
Mr.
Shepardson said that,
like Mr. Mitchell, he agreed
essentially with the analyses that had been presented thus far.
He agreed particularly with the inference he drew from Mr. Hersey's
remarks that a balanced approach was necessary to the problems
facing the Committee.
In the present situation, Mr. Shepardson continued, it
seemed to him that there were grounds for moving toward an easier
monetary situation.
He had been disturbed for a considerable time
over what seemed to be a reluctance to act vigorously against
excessive rates of economic expansion.
The Committee had tended
to move too little and too late, so that it had found itself faced
with the kind of severe adjustment that had occurred last summer.
Two wrongs did not make a right, and he did not favor moving too
slowly when ease was required simply because earlier moves toward
firmness had been too slow.
In sum, he agreed that there should
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be some further easing at this time.
He would hope, however,
that the Committee would arrive at a point where it would be just
as aggressive in restraining economic excesses as some members
thought it should be in acting against adjustments in the other
direction that in many cases seemed to him to be healthy.
Mr. Shepardson liked Mr. Daane's suggestion for the first
paragraph of the directive.
He agreed with Mr. Hayes that about
the same results could be accomplished with either alternative A
or B for the second paragraph if the language of B was modified
somewhat.
He would not be opposed to alternative B if it were
tempered as Mr. Daane had suggested.
Mr. Wayne said that to conserve time he would omit all
reference to District business conditions.
In general, he agreed
with the analysis of national developments given in the green
book.
The staff comments this morning were indeed sobering.
On the policy for the period ahead, Mr. Wayne favored a
distinct but gradual easing of credit conditions.
The major
problem was to achieve an orderly and gradual movement.
In the
turbulent conditions of the past two months, largely because of
volatile expectational factors the market had swung too far, first
in one direction and then in the other.
No monetary policy could
be effective in such conditions, which necessarily left both bor
rowers and lenders uncertain and confused.
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Mr. Wayne noted that he had participated in the daily
telephone conference call during the past month, and had been
impressed by the unreliability of the projections, by the wide
fluctuations that had occurred in market conditions, and by the
difficulties that the Desk had faced from day to day in trying
to carry out the terms of the directive without at the same time
engendering further volatile expectations in the market.
He had
never seen a more difficult period for open market operations,
and he thought that the Desk had performed quite well.
As Mr. Holmes had noted, Mr. Wayne continued, the Treasury
had authorized the Desk to inform the market fully about the
character of the massive operations that were carried out in the
recent period for the trust accounts.
He would suggest that the
Committee might give careful thought to the fact that the Desk's
explanations had a highly desirable effect on the market's ability
to absorb the operations without undesirable repercussions.
He
was not suggesting that explanations of what was being done should
be made to the market each day.
He was merely noting an experience
in which large operations, which could have led to undesirably
sharp movements in the market, had in fact been handled smoothly
by fully informing the market; and suggesting that the Committee
might give some thought to following such a policy if similar
conditions arose in the future.
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In resisting the rapid upsurge of rates in February,
Mr. Wayne observed, the Desk had found it necessary to supply
larger amounts of reserves than might have been anticipated.
The banks apparently used all of those additional amounts to
increase their investments, partly in an effort to rebuild their
liquidity.
In addition, borrowing had reached a very low level
and banks would not feel the full effect of the reduction in
reserve requirements until next week.
The Treasury balance also
had been reduced to a nominal amount and the Treasury might borrow
from the FederaL Reserve within the week.
All of those devel
opments provided fuel for a further easing of rates, which was
desirable.
If possible the Committee should avoid the development
of expectational factors which might trigger a stampede in either
direction.
To summarize, Mr. Wayne said, he favored a definite move
toward ease but with safeguards to prevent it from getting out of
hand.
To accomplish that, it seemed to him that the Desk should
place primary emphasis on interest rates and be prepared to see
wide fluctuations in free reserves.
The goal should be to hold
the bill rate and the Federal funds rate moderately below the
discount rate with the expectation that that would exert downward
pressure on longer rates.
In the process, he would hope that the
growth of the bank credit proxy would be above the 6 to 8 per cent
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figure mentioned in the blue book but somewhat below the rates
of January and February.
Mr. Wayne agreed with Mr. Mitchell that a change in the
direction of ease in the credit practices of the commercial banks
was badly needed.
Some further reduction in the prime rate might
be necessary as an overt move to achieve that result.
If the
easier policy contemplated by alternative B for the second par
agraph of the directive as modified by Mr. Daane--which he favoreddid not lead to downward adjustments at commercial banks during
this month, a reduction of 1/4 per cent in the discount rate would
be appropriate.
As of now, he would hope that no change in the
discount rate would be required in the next four weeks.
Mr. Clay commented that recent evidence concerning the
performance of the national economy had not been particularly
encouraging.
Unseasonably severe weather in important marketing
and production areas undoubtedly had taken its toll.
Nevertheless,
recent news on the economy's performance had raised considerable
question about the strength of the economy in the months ahead.
Certainly the prospects were less encouraging than they had
appeared a month ago.
The economy continued with many cross-currents, Mr. Clay
observed, and generalizations for the total economy were by no
means unambiguous.
One of the seeming contradictions was the
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-64
continuing strength in employment and the marked shortage of
qualified labor despite the slow progress of economic expansion.
Adjustments in labor inputs had been made, however, by reducing
the length of the workweek.
Moreover, total employment tends
to lag other activity measures, especially when uncertainty
about the future suggests to business firms the advisability of
holding together a qualified labor force.
In view of the current state of the economy, further
monetary action to encourage economic expansion appeared to
Mr. Clay to be in order.
That judgment was underscored by the
probability of further deterioration in business prospects.
The
recent turnaround in short-term interest rates to lower levels
had been encouraging, but action to further ease interest rates,
particularly long-term rates, was called for.
While the large
volume of financing was an important factor stiffening long-term
interest rates, monetary policy action could be a moderating
force in those financial markets.
Such a policy, Mr. Clay said, would embrace further easing
of money markets and thus a move toward lower levels of interest
rates.
It presumably would also involve a larger rate of increase
in bank credit in March than that projected by the staff on the
basis of current monetary policy.
Obviously, the implementation
of policy should take into account the availability of reserve
3/7/67
-65
funds resulting from the reductions in reserve requirements on
time and savings deposits.
Alternative B of the draft economic policy directives
was satisfactory to Mr. Clay for the period ahead, essentially
in line with the relevant discussion in the blue book.
Mr. Scanlon reported that February brought additional
evidence in the Seventh District that demand pressures on avail
able manpower, materials, and facilities were easing.
Development
of pessimistic attitudes on the part of businessmen and consumers
was spreading.
With retail sales about level, total business
inventories relatively high and rising rapidly, large user
holdings of recently purchased long-lasting goods, and continued
upward pressure on costs, he agreed with those who felt the
economy could be entering a period of substantial adjustment in
both the rate of growth and the mix of private demand.
At present, Mr. Scanlon said, the only manufacturing
activities in the Seventh District that showed good prospects of
continued expansion were farm machinery, electrical generating
and transmission equipment, defense equipment, and color television.
In the latter case a shift of product mix, placing greater emphasis
on the lower-priced sets, was in process.
Recent sharp declines
in orders for such capital equipment as machine tools, presses,
and railroad equipment reflected, in part, the growing view that
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the investment tax credit would be restored before the end of the
year, perhaps before midyear.
Adverse weather conditions, of course, had had a partic
ularly severe impact on construction activity, Mr. Scanlon noted.
Permits for apartments in the Chicago area in January were the
lowest for any January since 1959 and permits for homes were the
lowest since January 1945.
But experts in the area believed the
home building picture was certain to improve rapidly.
Mortgage
credit terms were easing and rates on new loans were down as much
as 50 basis points from last year's highs.
Reports of layoffs in
various hard and soft goods lines continued, but large increases
from last year in new claims for unemployment compensation had
been confined largely to the automotive centers.
Help-wanted
advertising had declined in recent months after a long increase,
but remained at a relatively high volume.
Reserve positions of
major Chicago banks had become more comfortable in the past month
and none of them was currently borrowing at the discount window.
In light of the further weakening of the over-all economic
outlook, it appeared wise to Mr. Scanlon to continue to provide
reserves at a rapid rate to accommodate any current desires of
financial institutions and other businesses to rebuild liquidity.
He believed the current discount rate was appropriate for the
current period, but agreed with those who thought the System should
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consider a move shortly.
He favored alternative B of the draft
directives, as amended by Mr. Daane.
Mr. Strothman said that he needed to spend little time
in commenting on economic developments in the Ninth District,
for the pattern had been essentially similar to that of the
nation as a whole.
Modest differences might be noted in some
components, but since those were truly modest and were to some
extent evidenced by fragmentary data, he was left on balance
with the conclusion that what was good for the United States was
good for the Ninth District, and vice versa.
The economic outlook of recent weeks, and now, seemed to
the Minneapolis Reserve Bank to call for modestly greater monetary
ease, Mr. Strothman continued.
Consequently, he had welcomed the
change in reserve requirements and would hope to see it confirmed
to market participants as an overt move toward greater ease.
He
was apprehensive lest the reserve requirement change be dismissed
as simply a device for supplying seasonal reserve needs.
The
maintenance of consistently positive free reserves would seem to
be necessary.
However, Mr. Strothman said, he would hasten to add that
his inclination was to focus somewhat more sharply on market
interest rates than on free reserves.
He would wish to see a
continuing modest easing of money market rates.
Although at
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present some emphasis might be placed on the word "modest," he
rather expected that, as the near-term future unfolded, short
term rates generally would find levels significantly below 4-1/2
per cent, and that in the not too far-term future, a discount
rate change might be called for.
That, of course, was only a
suggestion of the need for serious thought to the possibility
of a discount rate change.
In offering it he was perhaps swayed
by some skepticism that further significant reduction in the
world level of interest rates could be achieved without a signal
from the United States.
Mr. Strothman favored alternative B of the draft directives.
Mr. Swan said he would make two brief observations about
economic conditions in the Twelfth District.
First, the strength
in the aggregate employment figures was somewhat paradoxical in
light of certain other aspects of the District economy.
The
contrast was particularly marked in January when a rise in employ
ment, seasonally adjusted, brought the sharpest drop in the
unemployment rate in some time--from 5 to 4-1/2 per cent.
January figure was the lowest in eight months.
The
On the other hand,
seasonally adjusted private housing starts, which rose 18 per cent
in the rest of the country in January, dropped below the low levels
of November and December in the Twelfth District.
If housing
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starts were rounding the corner nationally, the Twelfth District
was somewhat behind.
Mr. Swan went on to say that he would certainly favor
some further easing in view of the prospects for the economy
that had been discussed this morning and in view of the situation
that developed in financial markets in the last month.
The reduc
tion in reserve requirements had been particularly timely in terms
of its influence on market expectations.
As had been mentioned,
one of the Committee's aims in the period ahead should be to
confirm market expectations that that action was not intended
simply as an alternative to open market operations as a means of
supplying reserves, but rather to add significantly more reserves.
At the same time, like Mr. Mitchell he would want to stop short
of the point at which observers would believe that the System was
overly concerned about the outlook.
In any case, he favored free
reserves of $200-$250 million and somewhat lower bill rates and
Federal funds rates through the next four weeks.
He hoped that a
discount rate decrease would not be found necessary during that
period.
While a discount rate change might have a direct effect
on bank lending attitudes, a preliminary review of the results
of the recent lending practices survey in the Twelfth District
indicated that some change had already occurred in such attitudes.
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Obviously, Mr. Swan said, he favored alternative B for
the second paragraph of the directive.
For the last sentence of
the first paragraph, he could accept either Mr. Daane's proposed
language or Mr. Hayes' suggestion that the term "weakening tend
encies" be substituted for the term "recessionary tendencies" in
the phrase Mr. Brill had proposed.
Mr. Irons observed that economic conditions in the Eleventh
District were following the national pattern closely.
There had
been weakening in various sectors of the District economy, including
retail trade, construction, and industrial production.
Rising
defense expenditures, however, were offsetting the weakness in
private spending to some degree.
The agricultural situation was
not as satisfactory as it had been earlier, partly because of
weather conditions and partly because of price developments.
District banks were more liquid than some months ago,
Mr. Irons said.
However, he thought more time would be required
for the banks to reach a position that they would regard as
adequate; they continued to recall with concern the extremely
illiquid position in which they had found themselves last summer.
Their concern with liquidity might be one factor explaining the
composition of the recent rise in bank credit.
Certainly the
larger banks in the Eleventh District were relying much less on
borrowings, both in the Federal funds market and from the Reserve
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Bank.
The volume of discounts at the Dallas Bank had been neg
ligible recently, with no large banks coming to the window.
Only
a few small country banks with seasonal needs were borrowing,
District banks also were less ready buyers of Federal funds; while
they remained net purchasers, the volume was small.
Loan demand
had been strong recently, but it was not frantic, as had been the
case earlier.
Mr. Irons said he had found the staff's forthright analysis
of the national economy to be quite helpful.
As to policy, the
reduction in reserve requirements had been interpreted by bankers
and others in the Eleventh District as a clear indication of an
overt move toward greater ease.
For a while prior to that action
there had been some feeling of uncertainty as to whether the
easing that occurred earlier was being continued, or whether a
firmer policy was creeping back.
by the Board's move.
That uncertainty was dispelled
He thought the System now should avoid
confusing the market; its open market operations should not be
inconsistent with that overt signal of ease.
Accordingly, Mr. Irons favored alternative B for the
directive.
He thought emphasis in the coming period should be
more on interest rates than on the level of free reserves, and he
would prefer to see the credit proxy rise faster than projected
in the blue book.
In his judgment, a Federal funds rate in the
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neighborhood of 4-1/4 to 4-1/2 per cent, a bill rate of about
4.25 to 4.30 per cent, and free reserves possibly ranging around
$200 million would not be an inappropriate alignment.
He would
not favor immediate action on the discount rate but, depending
on conditions, the System might well be giving thought to such
a step by the time of the next meeting.
Like a previous speaker,
he would prefer to act on the discount rate at a time when market
rates had fallen further rather than to take an anticipatory action.
Mr. Ellis complimented Messrs. Partee, Brill and Hersey on
their persuasiveness but added that, as would become obvious from
his remarks, he had not fully acquired the sense of gloom that
wove through the green book and their discussion.
He suspected
that resulted partially from looking at a region which did not
depend heavily on automobile production and had not been hard hit
by heavy storms this winter, and did feel the impact of continuing
heavy defense ordering.
For example, Mr. Ellis continued, a recent article in the
press contained a dire prediction of downturn in the textile
industry.
The Boston Reserve Bank's survey of the New England
portion of that industry suggested that their capital outlays
would hold close to 1966 levels, which were 14 per cent above 1965
outlays.
Reporting firms expected their 1967 sales to hold at
1966 levels.
Manhours in the region's textile industry rose
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(seasonally adjusted) in January and the production index held
at the December level.
In the past three weeks seven regional
firms received over $7 million in defense orders and the Defense
Department had announced intentions to buy 10.6 million yards
of wool cloth this year.
He concluded that the forecast for the
regional textile industry was not bleak for 1967.
On a more general level, Mr. Ellis said, the Reserve
Bank's capital expenditures survey of New England manufacturers
tended to support the recent McGraw-Hill estimate.
With the
sample presently not completed, he anticipated the forecast for
1967 would fall in the plus 6 to 10 per cent area.
Only one firm
in ten looked for sales to drop this year, and the expected
increases averaged out to 10 per cent.
By virtue of $60 million of dividend credits, deposit
balances at the District's 80 mutual savings banks increased by
$52 million in January, Mr. Ellis noted.
only $24 million.
Last year the gain was
Their real estate loans increased only $8 mil
lion in January, compared with $35 million last year.
They were
still seeking to rebuild their cash positions before resuming
aggressive lending.
The Reserve Bank's monthly survey of the cash
flow and commitments activities of the insurance companies revealed
about the same type of improvement.
The January increase in
policy loans was below the average increase for the closing months
3/7/67
-74
of 1966 but higher than the normal monthly increases of past
years.
Total mortgages were staying unchanged but new commit
ments on securities had turned up materially--from a very low
1966 level.
In evaluating economic trends to be affected by monetary
policy, Mr. Ellis emerged with a conviction that the underlying
position was still one of continued strength camouflaged by an
inventory "situation" and further confused by an automobile
"situation."
If the full impact of slowed sales and production
of autos could be successfully identified and subtracted, he
thought one would find the remaining components of the industrial
production index would still be expanding.
Of course, Mr. Ellis said, there was little point to such
an exercise unless there was some reason for anticipating that
the present fact of slowed auto sales and general retail sales
might be reversed.
Here he came to a point on which Mr. Mitchell
had already commented.
The green book said that "the estimated
levels of personal and disposable income have been revised upward
appreciably for the first quarter."
But, pressing further, the
green book emphasized that the first quarter increase in dispos
able income of $10.5 billion would be associated with a rise of
only about $3.5 billion in consumer spending, with a consequent
rise in the savings rate to 7 per cent where it was projected to
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-75
hold through the first half.
difficult to accept.
He still found such a projection
It would seem to him more logical to
anticipate that the savings rate would return to more traditional
levels, that consumers would spend a more traditional portion of
a sharply rising income, and that consumer spending would be
counted along with rising Government outlays as a strong and
rising demand component of GNP.
Accordingly, he ended up antic
ipating that the first and second quarter GNP gains would exceed
the $5 billion now projected by the staff.
Mr. Ellis felt that a monetary policy in harmony with that
type of economic projection, and recognizing the built-in aspects
of cost-push inflation now at work, would seek to provide reserves
liberally--but would avoid such rapid credit expansion as to add
demand-pull price pressures to those already at work.
Viewed in
retrospect, the Committee might properly credit monetary policy
since November with such a stance.
Bank credit had been expanding
at a 10.7 per cent annual rate and money supply, narrowly defined,
had increased at a 6.2 per cent rate.
He had no apologies for the
rate of nonborrowed reserve creation of 21 per cent in February.
As to Mr. Mitchell's observation regarding the movement of the
bank credit proxy in February, he noted that a table in the blue
book showed a rise of $3 billion in that month.
Perhaps there
was an error in the chart to which Mr. Mitchell had referred.
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Looking ahead, Mr. Ellis continued, the Committee might
anticipate some further stimulation from the recent cut in
reserve requirements and the easier posture indicated to the
market by a switch last month to a record of net positive free
reserves averaging $48 million.
There was ample evidence that
banks were prepared to utilize the reserves the Committee made
available.
It would be surprising indeed if the current projec
tions for a 6 - 8 per cent gain for March in the bank credit
proxy were not substantially exceeded, at least to match the
cumulative rate of 10.7 per cent that had been achieved since
November 16, 1966.
The competition for funds in the market for the next few
months was likely to become intense, Mr. Ellis said.
The record
corporate calendar faced the prospect of competing with Government
sales of participation certificates.
In that atmosphere an attempt
to bolster housing by pushing substantial funds into the mortgage
market via commercial banks might well result in leading the
Committee to push reserve creation beyond safe limits.
Construc
tion employment in the latest data was within 4 per cent of the
all-time peak reached in March of last year.
It was difficult to
conceive that the housing industry could be restored to its
earlier peak levels without developing severe strain on real
resources.
In that situation, it would seem wise to avoid casting
monetary policy principally with such an objective in mind.
3/7/67
-77All of that led Mr. Ellis to the conclusion that the
Committee need not make substantial further moves of policy at
this time.
The reserve requirement reduction had spoken for the
System for now, and expectations should not be overly stimulated.
Either alternative A of the draft directives, or alternative B as
modified by Mr. Hayes, would seem appropriate for the next few
weeks.
Mr. Robertson made the following statement:
I can be quite brief this morning, for our choice,
as I see it, is fairly clear. I believe we must direct
open market policy toward further ease. As a practical
matter, we need to do this in order to carry through the
easing atmosphere created by our reserve requirement
reduction. The credit climate that has developed in
the wake of that action seems salutary to me, particu
larly after the unfortunate tightening episode of
previous weeks. But to preserve and extend this better
atmosphere requires that a significant part of the
required reserves released be left with the banks to
encourage more ample credit availability, rather than
being mopped up promptly by offsetting open market opera
tions. This is particularly true on this occasion, when
a sizable part of the reserve cut accrues to banks that
may be slow to put their excess reserves to work.
Operationally, this means allowing free reserves
to increase substantially during the weeks immediately
ahead--and allowing them to increase enough to keep
central money market conditions on a gradually easing
trend all through the coming tax payment period.
How the banking aggregates might behave in these
circumstances is more than ordinarily conjectural, as
already has been suggested in the comments here this
morning. My own view is that we should be more sensitive
to shortfalls in bank credit expansion during this period
than to overshoots in excess of projections. This is
fundamentally because I think the economy is in the
process of a difficult transition from a period of
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-78
excessive demand pressures to a period of sustainable
growth. And I want bank credit to be amply available
so that the transition can be accomplished with a
minimum of loss in potential output--and preferably,
of course, without any. I am basically bullish rather
than bearish as to our ability to work out of this
adjustment without having to endure a full-fledged
recession, but I want to be sure that monetary condi
tions are a constructive influence rather than a drag
on that adjustment.
With these views in mind, I would be in favor of
directive alternative B essentially as drafted by the
staff, and I would have in mind about the kind of
money market and reserve conditions associated with
that alternative in the blue book. Given the attitude
toward bank credit expansion to which I have already
subscribed, I could vote for the one-way proviso
clause contained in the staff draft but I would prefer
the usual two-way proviso clause with the understanding
that deviations on the upside would have to be a good
deal larger to be interpreted as "significant" than
would deviations on the downside.
Mr. Robertson added that he favored Mr. Brill's suggested
change in the final sentence of the first paragraph.
Unlike
Mr. Daane, he thought that saying it was the Committee's policy to
"combat" recessionary tendencies did not imply that the Committee
thought it could control such tendencies.
He would suggest a
revision in the latter part of that sentence, however.
Rather
than indicating that it was the Committee's policy to foster condi
tions conducive to progress toward reasonable balance of payments
equilibrium, he would prefer to conclude the sentence with the
phrase, "while recognizing the need for progress toward reasonable
equilibrium in the country's balance of payments."
3/7/67
-79Mr. Mitchell said he would like to clarify his earlier
comment on changes in the bank credit proxy in February.
The
relatively level trend shown on the blue book chart related to
the three weeks ending March 1.
Growth in the preceding two
weeks was stronger, and, as Mr. Ellis had noted, growth on
average from January to February was $3 billion.
Mr. Holmes commented that the rapid growth in the proxy
in the earlier part of February had occurred at a time when the
Desk was combatting a tightening money market.
The small sub
sequent growth was associated with easing money market conditions.
Chairman Martin remarked that the Committee seemed to be
in agreement today on the desirability of moving toward easier
money market conditions.
He concurred in the comment by
Mr. Mitchell and others that the Committee did not want to give
the impression that it was extremely concerned about the economic
outlook.
In general, the Chairman continued, he was quite pleased
with the course of monetary policy since last November.
In that
period the Committee had been moving steadily and gradually toward
easier monetary conditions without going overboard.
Perhaps the
Committee had not been completely successful in achieving its
objectives over the past four weeks, but the situation had been
corrected quite promptly.
Looking back through the minutes of
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previous meetings, as he had done in preparing for today's meeting,
it struck him that this was the first time since 1960 that the
economy had experienced some semblance of the February doldrums.
The fact that there were doldrums this February did not necessarily
suggest that the economy was on the verge of a major collapse.
Rather, it might be going through a healthy adjustment.
The Chairman agreed with Mr. Daane that monetary policy
could not be expected to correct all of the difficulties that
resulted from the fact that appropriate fiscal policies had not
been pursued in the past.
Nevertheless, the Committee had to do
everything that it could.
Chairman Martin then noted that various suggestions had
been made for revising the final sentence in the staff's draft of
the first paragraph of the directive.
He thought the Committee's
intent was perfectly clear; the problem was to arrive at the best
form of statement.
After discussion, it was agreed that the sentence in
question should read, "In this situation, it is the Federal Open
Market Committee's policy to foster money and credit conditions,
including bank credit growth, conducive to combatting the effects
of weakening tendencies in the economy, while recognizing the need
for progress toward reasonable equilbirium in the country's balance
of payments."
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The Chairman then noted that most members had indicated
a preference for a second paragraph along the lines of alter
native B.
Although some proposals had been made for revising
the language, he would suggest adoption of alternative B as
drafted by the staff.
Mr. Hayes asked whether there was any disposition to
accept Mr. Robertson's proposal that a two-way proviso clause be
used, with the understanding that there was more concern about
possible downward deviations of bank credit from expectations
than about upward deviations.
Mr. Daane noted that he also had expressed a preference
for a two-way proviso, in addition to proposing other language
changes.
Messrs. Mitchell and Maisel indicated that they preferred
the one-way proviso of the staff's draft.
Mr. Maisel added that
a two-way proviso might interfere with the objective of achieving
further interest rate declines.
Chairman Martin then proposed that the Committee adopt
alternative B for the second paragraph, with the understanding
that a special meeting of the Committee could be called if bank
credit expansion appeared to be getting out of hand.
that the Manager bear that possibility in mind.
He suggested
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-82Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of New York
was authorized and directed, until
otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the follow
ing current economic policy directive:
The economic and financial developments reviewed
at this meeting indicate some decline in industrial
production and a marked slowing of expansion in over
all economic activity. Lack of growth in retail sales
may be retarding adjustment of inventory accumulation
from its recent excessive rate. Average commodity
prices have changed little recently, but unit labor
costs in manufacturing have risen further. Bank credit
expansion has been vigorous and, after a period of
rising interest rates and congested bond markets,
financial conditions have again turned easier. Recent
data suggest little improvement in the foreign trade
surplus but also little increase in the outflow of U.S.
capital. In several important countries abroad,
economic activity has been softening for several months
and monetary and fiscal policies have eased somewhat.
In this situation, it is the Federal Open Market Committee's
policy to foster money and credit conditions, including
bank credit growth, conducive to combatting the effects
of weakening tendencies in the economy, while recognizing
the need for progress toward reasonable equilibrium in
the country's balance of payments.
To implement this policy against the background of
the current reductions in reserve requirements, System
open market operations until the next meeting of the
Committee shall be conducted with a view to attaining
somewhat easier conditions in the money market, and to
attaining still easier conditions if bank credit appears
to be expanding significantly less than currently
anticipated.
Chairman Martin then noted that there had been distributed
to the Committee a memorandum from Mr. Hackley dated February 20,
1967, and entitled, "Effect of 'Freedom of Information Act' on
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Procedures of the Federal Open Market Committee." 1 /
The Chairman
suggested that the Committee discuss the subject preliminarily
today and plan on considering it further at its next meeting.
He
asked Mr. Hackley to open the discussion.
Mr. Hackley noted that at the meeting of the Committee
held on November 22, 1966, he had summarized the provisions of
the so-called "Freedom of Information Act" and had indicated in
general terms how the Act might affect the operations of the
Committee when it became effective on July 4, 1967.
At that time
he had noted that the Department of Justice was preparing a Manual
for guidance of Government agencies in modifying their procedures
to comply with the Act.
The Board's Legal Division had received
a draft of the Manual in January and had found it helpful, although
not to the extent that had been hoped.
After reviewing the draft
and studying the law further, the Legal Division had offered to
the Justice Department some suggestions for additions to the
Manual that would help clarify the application of the Act to the
procedures of the Committee and the Board.
Mr. Hackley suggested that the Committee follow the general
principle of aiming for the minimum changes in its procedures
necessary to comply with the spirit as well as the letter of the
1/ A copy of this memorandum has been placed in the files of
the Committee.
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-84
law, without endangering functions.
The draft Manual was helpful
in suggesting at a number of points that the new law did not
require any disclosures that would impair the effectiveness of
an agency's statutory functions.
Today, Mr. Hackley continued, he would not attempt to
review the more detailed provisions of the law as set forth in
his memorandum.
Instead, he would concentrate on two main points:
the documents of the Committee that were required to be published
in the Federal Register, and the other records that would have to
be made available to members of the public on request.
With respect to the first point, Mr. Hackley said, the
new law made no change in the kinds of documents required to be
published in the Federal Register--i.e.,
substantive rules and
regulations, rules of organization and procedure, interpretations,
and statements of general policy.
However, the scope of the
requirement was drastically changed as a result of changes in
exemptions.
In the past, the Committee's Regulation, its Rules
of Organization, its Rules Regarding Information, Submittals, and
Requests, and its Rules of Procedure had been published in the
Federal Register and they would continue to be published.
Some
minor revisions probably would be necessary in the Rules of
Organization and Rules of Procedure, and the Rules Regarding
Information would have to be recast.
The new law, like the old,
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required publication in the Federal Register of "statements of
general policy and interpretations of general applicability."
Four documents would seem to fall in this category:
the contin
uing authority directive with respect to domestic operations, the
authorization for System foreign currency operations, the foreign
currency directive, and the domestic current economic policy
directive adopted at each meeting of the Committee.
In the past
these documents, and any amendments of them, had been set forth
in the Board's Annual Report, as required by section 10 of the
Federal Reserve Act.
They had been exempt from publication in
the Federal Register, however, under the provision of the 1946
Administrative Procedures Act that permitted non-publication on
the ground that it was justified in the "public interest" or "for
good cause found."
Those exemptions would not be available under
the new law; non-publication in the Federal Register would have
to be based on one of nine grounds specified in the new law and
listed in his memorandum.
There was no question in his mind, Mr. Hackley continued,
that the authorizations and directives did reflect "statements of
general policy."
Even though they were literally issued for the
guidance of the Federal Reserve Bank of New York, in his judgment
they were among the most important statements of general policy
adopted by any agency.
The question was not whether those
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documents should be published--as he had noted, they were published
now--but whether the new requirement that they be published
"currently" permitted a time lag.
The Justice Department's draft
Manual indicated that the word "currently" should be given a
reasonable construction, but to clarify the matter further the
Board's Legal Division had suggested to the Justice Department
that specific language be added to indicate that publication in
the Federal Register could be deferred for a reasonable time in
cases where immediate publication would impair an agency's
functions.
In its letter to the Justice Department the staff
had suggested that a lag of 60 days might be appropriate--having
in mind the current economic policy directive in particular--but
it had selected that period rather arbitrarily.
Perhaps a longer
lag might be required--say, 90 days--either as a general rule or
in particular circumstances in order not to defeat the purposes
of an action with respect to the current policy directive.
With
respect to the continuing authority directive and the authorization
and directive for foreign currency operations,
it
might be appro
priate for the Committee to publish them as soon as possible after
their adoption or amendment.
While the question was,
of course,
for the Committee to decide, some of the staff economists seemed
to feel that no harm would be done by immediate publication of
those documents.
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As to the second point--that certain other Committee
records had to be made available to any person on requestMr. Hackley noted that any person whose request was denied
could bring a court action in which the burden of proof would
be on the Committee to justify that denial under the terms of
the law.
Most of the Committee's records--including the green
book, the blue book, and the written reports of the Manager and
Special Manager--clearly would be exempt on the ground that they
were inter-agency or intra-agency memoranda or letters that would
not be available to a private party in litigation--one of the
nine specific exemptions in the law.
The most important remaining
records were those that had traditionally been described as the
Committee's minutes.
To the extent that those documents con
stituted a record of discussion prior to action, he thought they
could be considered as inter-agency memoranda and thus exempt;
and he had suggested language for the Justice Department's Manual
that would so indicate.
However, insofar as the minutes consisted
of records of action, they clearly were not exempt.
Accordingly,
he recommended that in the future the documents traditionally
described as Committee "minutes" be divided into two documents:
one, to be called "memorandum of discussion," would be identical
with what was now called the "minutes";
the second, consisting
simply of a statement of the actions taken at the meeting, would
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be called "action minutes."
The latter document would be similar
in form to the kind of "minutes" that he understood most multi
member agencies maintained.
The action minutes would be made
available upon request but, since they would include the current
policy directive adopted, only after a reasonable time.
It would
appear appropriate to refuse access to the action minutes until
such time as the directive was published in the Federal Register.
While those recommendations might best be described as
preliminary, Mr. Hackley said, he thought they would comply with
both the letter and the spirit of the law.
He had not referred
to the possibility of publishing the current policy directive and
the reasons for its adoption--perhaps in the form of the present
policy record entries--in the Federal Reserve Bulletin because
such a procedure would go beyond the requirements of the law, but
it was one that the Committee might wish to consider.
He thought
that the main question for the Committee to decide was what con
stituted a "reasonable" time lag for publishing particular documents
or otherwise making them available; that is, how soon after their
adoption they could be released without endangering the Committee's
functions.
Mr. Robertson commented that Mr. Hackley presumably had
selected 60 days as a reasonable time lag on the ground that in
the past the Committee had made its policy record for the preceding
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year available to the public early in the new year, roughly 60
days after the December meeting.
That point had merit.
However,
if it lay within the Committee's discretion to determine what
time lag was reasonable, it might be desirable to select some
longer period at the outset and shorten the period later if that
was found feasible.
Thus, it might be best to start with a lag
of one quarter for all actions and then, perhaps, work down to
60 days.
Mr. Maisel thought it might be preferable to stay closer
to the present procedure by publishing all of the actions taken
during a quarter 60 days after the end of the quarter.
In his
judgment there would be a great advantage in having the directives
become public in groups, four times a year, rather than singly.
Mr. Brimmer agreed in general with Mr. Maisel but thought
that the Committee should keep certain other considerations in
mind.
First, as illustrated by the experience this year, there
was something to be gained by releasing the policy record entries
for the closing months of the year early enough in the new year
for them to be available around the time the Economic Report and
the Budget Message were being discussed.
should not preclude such timing.
The schedule adopted
Secondly, he had been thinking
in terms of publishing the complete policy record entries, rather
than the directives alone.
But the entries drew extensively on
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the economic analyses in the staff reports which, in turn,
frequently rested on information that had not yet been publicly
released.
He hoped the staff would consider the question of
how quickly the entries could be released without violating
confidentiality.
As he had noted, however, he agreed that
there were advantages to publishing a well-reasoned spectrum
of experience quarterly rather than separate entries for each
meeting.
Mr. Hackley said he thought the crucial question concerned
not what publication procedure would be most desirable in general
but what procedure would comply with the requirements of the new
law--which, he emphasized, required publication of general policy
statements "currently."
He was not sure that publication of the
Committee's directives on a quarterly basis with a 60-day lag
would be legally defensible.
The Committee would have to justify
refusal of any request for access to unpublished directives, and
he was concerned with the possibility that it might not be possible
to muster reasons satisfactory to a court in defense of such a
schedule.
Mr. Robertson noted that quarterly publication with a
60-day lag would result in a five-month delay for the first actions
of a quarter.
purpose.
Five months appeared to be a long time for the
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Mr. Hickman suggested that it might be desirable to
release the policy record entries individually, with an appro
priate lag, and supplement them with quarterly reviews that
would provide a longer perspective.
Mr. Maisel commented that further analysis of the question
was obviously required.
To his mind, however, releasing informa
tion on Committee actions serially was likely to be confusing.
He thought it made more sense to release the information quarterly,
and that a schedule such as he had suggested, if fixed and known,
probably could be justified.
Mr. Daane thought that the question the Committee should
answer first was whether, as Mr. Hackley had suggested, the
Committee was required by the new law to publish its directives
in the Federal Register.
He thought the Committee should make
its records more generally available, and he was quite sympathetic
with Mr. Maisel's suggestion for quarterly publication of the
policy records rather than annual publication as at present, keeping
in mind the points Mr. Brimmer had made.
But if the Committee was
required to publish its policy statements "currently," he was not
persuaded that it could justify a lag of 60 days.
The fact that
that had been the minimum lag in the past did not seem, in itself,
to provide a very strong defense under the new law for 60 days as
opposed to some other interval.
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Mr. Hackley said that his view that the Act required
publication of the directives in the Federal Register as state
ments of general policy was based on the fact that in the past
the Committee clearly had regarded them as policy statements,
and had included them in its Record of Policy Actions published
in the Board's Annual Report under the terms of the Federal
Reserve Act.
It would be very hard to overthrow the argument
that they were policy statements.
He thought that a 60-day lag
might be justifiable on the grounds that it had been the minimum
lag in the past.
Moreover, there might be times when a partic
ular directive was so sensitive that it would be desirable to
withhold it for more than 60 days.
But the Committee might be
on the defensive at the outset with regard to lags because of
the language of the law specifying that policy statements be
published "currently."
As he had indicated, the Legal Division
was attempting to have the Justice Department clarify the point
in its Manual.
Mr. Daane asked whether the President had not indicated
on signing the new law that there would be an element of
flexibility in terms of making information available consistent
with the national interest.
Mr. Hackley replied affirmatively, but added that that
statement, as well as several statements in the Congressional
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Committee reports on the bill, might be hard to support in view
of the literal language of the law.
The President could exempt
certain matters by Executive Order in the interest--to quote the
law--of "national defense or foreign policy."
Mr. Daane remarked that the Committee obviously had
thought in the past that it was not in the national interest to
publish its directives currently.
He was not questioning
Mr. Hackley's legal judgment, but simply expressing the view
that the Committee should give careful consideration to the
point that if it was agreed that the law required publication
of the directives it might be difficult to justify any partic
ular time lag.
Mr. Brimmer said that at this stage he was not prepared
to rule out the possibility of obtaining an exemption by Exec
utive Order as quickly as Mr. Hackley evidently was.
More
generally, he would hope that the Committee would adopt a
procedure that it thought consistent with the law and then, if
necessary, stand ready to have its judgment tested in court.
Moreover, he would hope that the Committee would take a cautious
approach and not decide immediately that 60 days was the maximum
defensible lag.
Once such a decision was taken it
feasible to backtrack.
would not be
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Mr. Mitchell asked whether the Manager thought a 60-day
lag would be detrimental.
Mr. Holmes replied that publication of the directives
after 60 days could lead to difficulties in that the market was
likely to interpret the last published directive as indicating
the Committee's current policy.
On that basis, a three-month
lag would be much better; after such an interval the actions were
more likely to be thought of as a matter of history.
As long as
monetary policy was operating flexibly there might be risks in a
60-day lag.
Mr. Mitchell noted that the Committee had faced such risks
in the past when its policy record was published, but of course
that had occurred only once a year.
Mr. Wayne agreed that there was a real danger that serial
publication of the directives might lead the market to believe
that the last directive published reflected current policy.
Chairman Martin then suggested that the members of the
Committee continue to think about the matter and plan on discussing
it further at the next meeting.
Chairman Martin then noted that at its preceding meeting
the Committee had agreed to hold a further discussion today of
criteria for increasing membership in the Federal Reserve network
of reciprocal currency arrangements.
In accordance with the
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Committee's request, memoranda had been distributed on the four
countries under consideration, namely, Denmark, Norway, Mexico,
and Venezuela, on February 28, 1967.1/
The Chairman asked
Mr. Solomon to open the discussion.
Mr. Solomon said that the four papers examined the
countries concerned from the point of view of the criteria set
forth in the earlier staff memorandum, which the Committee had
discussed at its previous meeting.
A few additional but related
criteria were also applied, including political stability and
creditworthiness.
It was clear from the papers that only one of
the four countries was now eligible on the basis of the criteria
used--only Mexico's currency was convertible within the meaning
of Article VIII of the Articles of Agreement of the International
Monetary Fund.
Chairman Martin then invited Mr. Wayne to comment, noting
that copies of some recent correspondence of his with staff members
had been distributed to the Committee.
Mr. Wayne said his letter to Mr. Holland of February 23,
1967,2/ was prompted by his concern about a possible interpretation
1/ Copies of these memoranda have been placed in the Committee's
files.
2/ Copies of this letter, and of a letter of comment from
Mr. Solomon to Mr. Wayne dated February 27, 1967, have been
placed in the Committee's files.
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of the earlier staff memorandum--and of some of the Committee's
discussion at the preceding meeting--to the effect that the
Committee should consider adopting some arithmetic or mechanical
criteria for the inclusion of additional countries in the swap
network.
His contention was that System participation in the
swap network had one overriding purpose, which was fairly well
spelled out in the record of the Committee's actions in the
foreign currency area--namely, to further the interests of the
United States by contributing to the protection of the dollar
and to the preservation of its role as an international currency.
Accordingly, he thought that the System should enter into a swap
arrangement with a particular foreign central bank only if doing
so would be in the interests of the United States.
The Committee,
of course, had to exercise judgment in making such determinations,
and if the conclusion was that a particular arrangement was in
the interests of the United States he would be prepared not only
to consider it but to authorize the Special Manager to seek it.
If, on the other hand, the addition of a particular country to
the network would appear not to have a material effect on the
position of the dollar, he would prefer not to add that country
even though doing so might improve its international status or
perhaps contribute to diplomatic relationships.
The Committee
had the inescapable responsibility for determining whether partic
ular actions were in the interests of the United States.
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Mr. Coombs suggested that the Committee first concentrate
on two of the countries in question, Denmark and Norway, from
whom specific requests for swap arrangements had been received.
In his judgment, it was virtually certain that they would achieve
Article VIII convertibility by early April.
Mr. Wayne had put a
direct question that required a direct answer--namely, whether
such arrangements would be in the interests of the United States.
He personally felt that arrangements with Denmark and Norway def
initely would be.
First, with respect to the risk of gold sales,
the Danes had bought gold in 1960, when the price on the London
market broke out, and either country could change its gold ratio.
Secondly, the swap network, by and large, had become focused on
the Basle group of countries, which gave undue weight to the members
of the Common Market. 1/
The staff papers on the two countrieswhich he thought were excellent--suggested that they were stable
financially, economically, and politically, and that they could be
expected to observe the rules of the game.
Third, Mr. Coombs said, a network of credit lines with
foreign central banks provided a nucleus for rounding up additional
support for a country in case of need.
Last September, when an
effort was being made to round up $400 million of additional help
1/ A sentence has been deleted at this point for one of the
reasons cited in the preface. The sentence reported a comment by
Mr. Coombs concerning a possible consequence of expanding the
swap network to include Denmark and Norway.
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for the Bank of England, it was found possible to raise only $350
million from the System's swap partners.
The sum desired was
obtained because the Danes and Norwegians contributed $50 million
to the package even though they were not members of the network.
Their sense of responsibility and their willingness to help deal
with emergencies were evident.
Finally, Mr. Coombs said, while avoiding losses of gold
was important to the United States, the swap network had the addi
tional important purpose of protecting the international role of
the dollar.
In that connection countries with low gold ratios
could contribute just as effectively as those with high ratios.
The availability of the swap arrangement to them could help to
reinforce their willingness not to buy gold.
Chairman Martin commented that Mr. Wayne had pointed up
the question clearly.
Assuming that Denmark and Norway achieved
Article VIII status, he thought there would be no objection to
including them in the network under the criterion that Mr. Wayne
had mentioned.
Mr. Wayne said that he personally was persuaded by the
comments of Mr. Coombs that the inclusion of Denmark and Norway
would definitely be in the interests of the United States, assuming
they met the Article VIII requirement.
But to him that did not mean
that any other country would necessarily fall in the same category.
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Mr. Mitchell remarked that he would like to say a word in
support of including the Latin American countries.
The U.S. role
in international financial affairs was not just a defensive one;
the United States should be a positive force for the improvement
of world economic conditions.
If the swap network was extended
only to the countries that foreseeably could help the United
States, it would consist of an undesirably selective group.
In
his judgment, a failure to include Latin American countries, if
they were able to qualify under Article VIII, would be a serious
mistake.
The Committee should recognize now that it would be
desirable to include qualified Latin American countries.
Mr. Daane said he would underscore the point that the
overly sharp focus on the Basle countries in the swap network
had been adverse to the U.S. interest in the operations of the
network and to the U.S. interest in encouraging the concept of a
wider rather than a narrower group of countries in the discussions
of international monetary reform.
In his judgment, these factors
argued for expanding the network.
Mr. Wayne had made a good point
in his letter when he suggested that the Committee should not be
discriminatory in admitting new members.
But it should be
possible to keep the network open and at the same time act in
a nondiscriminatory manner.
Fairly well-developed criteria would
help the Committee extend the network in an appropriate way.
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Mr. Wayne agreed that the Committee should stand ready to
extend the swap network and, indeed, should welcome opportunities
to do so.
His contention was that the Committee had to assume
the responsibility for making determinations on a country-by
country basis.
Mr. Hayes commented that he agreed with most of what had
been said.
The staff had done the Committee a real service in
working on objective criteria, but he shared the view that such
criteria could only be aids to judgment.
The Committee should
not have rigid standards for admitting countries to the network;
it should consider each case on its merits.
On that basis, and
with Mr. Coombs' comments in mind, he would favor proceeding in
connection with Denmark and Norway when they complied with the
requirements of Article VIII.
Among the Latin American countries
of major importance, only Mexico seemed to him to really qualify.
Some of the statements in the staff memorandum with regard to
economic and political conditions in Venezuela made him dubious
about the desirability of including that country at present.
He
did not know whether or not this was the appropriate time to
include Mexico.
Having one Latin American country in the network
would undoubtedly lead to some pressure to include others, but
the Committee would have to face and resolve that problem at some
point.
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Chairman Martin suggested that the Committee authorize
negotiations at this time with the central banks of Denmark and
Norway looking toward their inclusion in the swap network.
He
did not think the Committee should turn its back on Mexico and
Venezuela, but Mr. Robertson had made a good point at the last
meeting when he suggested that it was desirable to proceed cau
tiously in enlarging the network.
He thought Mr. Wayne had done
the Committee a service in raising the questions he had.
Mr. Scanlon commented that he assumed that the completion
of swap arrangements with Denmark and Norway would be conditional
on their attaining Article VIII status, and Chairman Martin agreed.
Mr. Coombs raised the question of the size of the swap
arrangements with Denmark and Norway that the Committee would
consider appropriate.
Noting that the smallest arrangement in
the present network was $100 million, he suggested that he be
authorized to propose that figure in the negotiations.
There was general agreement with Mr. Coombs' suggestion.
Mr. Solomon said he would like to make two points before
the present discussion was concluded.
First, the staff had tried
in the memoranda to give the Committee some flavor of the political
situations existing in the four countries in question.
But the
staff's remarks on that score should be considered against the
background of the political situations in various countries that
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were already members of the network; not all countries now in the
network had always been free of political instability.
Secondly,
he thought that before the Committee moved formally on swap
arrangements with Denmark and Norway it would be desirable to
consult with the U.S. Treasury and possibly also with the Depart
ment of State.
Mr. Coombs commented that he understood from discussions
with Treasury staff members that they would have no objection and,
indeed, would be pleased to have the System enter into the arrange
ments in question.
Mr. Wayne observed that since the System's swap network
impinged on both international financial relations and diplomatic
relations of the United States, inter-agency consultations would
be desirable.
Chairman Martin then asked whether there were any objections
to proceeding with negotiations with Denmark and Norway on the
basis of the discussion today, and no objections were raised.
Chairman Martin then noted that the authorization for
forward commitments in Italian lire in the amount of $500 million,
contained in paragraph 1(C)2 of the authorization for System
foreign currency operations, had last been discussed at the meeting
held on November 22, 1966.
It had been agreed at that time that
the matter should be reviewed again after three months.
In
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preparation for such a discussion today memoranda on the subject
from the staffs of the Federal Reserve Bank of New York and the
Board, both dated February 27, 1967, had been distributed to the
Committee.1/ The Chairman asked Mr. Coombs to comment.
Mr. Coombs said that he thought there could be very little
question but that the forward operations in Italian lire had been
successful.
They had relieved pressure on the Bank of Italy to
buy gold, and they had had the highly useful effect of channeling
dollars back to the Euro-dollar market at a time when U.S. banks
were reducing the volume of dollars they provided to that market
or were actually pulling dollars back.
The Treasury was willing
to continue such operations, and the question before the Committee
was whether or not the System should continue to participate in
them along with the Treasury.
At the moment, Mr. Coombs continued, he had no firm view
as to the length of time for which the forward commitments would
have to be rolled over; that depended on developments in the
Italian balance of payments.
But as a general rule central banks
were not particularly concerned about the duration of such opera
tions.
The time factor that was considered so important for
maintaining discipline in connection with swap drawings simply
1/ Copies of these memoranda have been placed in the
Committee's files.
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did not enter into this type of operation, since it was directed
toward maintaining a desirable degree of ease in a particular
money market, the Euro-dollar market.
While the Committee became
concerned when a swap drawing threatened to remain outstanding
for more than six months, he did not think a similar limit should
be imposed on these technical forward commitments.
In general, he
hoped that the System would continue to participate along with the
Treasury and the Bank of Italy in this operation.
It was useful
in bringing the System into direct contact with the Bank of Italy
and with the Euro-dollar market, and at the same time preventing
a disruptive effect on the gold stock.
Mr. Solomon said that the Board's staff did not have any
policy recommendations different from those of Mr. Coombs.
In
its paper it had tried to give the Committee some of the history
of the Bank of Italy's swap operations with Italian commercial
banks, to review some of the economic effects of those operations,
and to outline some of the policy issues as it saw them.
The
matter was extremely complicated, both in terms of economic effects
and policy questions.
One fact that came out of the staff's review, Mr. Solomon
continued, was that the net foreign exchange assets of the Italian
commercial banks against which the forward commitments were held
consisted much more of claims against Italian residents than
3/7/67
-105
against foreigners.
A second fact the staff thought worth bring
ing to the Committee's attention was that the Bank of Italy's
swaps with Italian commercial banks had, indeed, kept down their
official reserve accruals and reduced the pressure for Italy to
buy gold from the United States.
But an important element in
that situation in 1966 was the fact that U.S. banks had been in
the Euro-dollar market, absorbing the dollars which the Italian
banks were putting in.
If that had not been the case, the dollars
might have gone to countries that had a greater propensity than
Italy to buy gold.
Accordingly, it could not be assumed that the
operations in question would minimize U.S. gold losses under all
circumstances.
The staff also had tried to consider what might happen
if the System swap commitments were withdrawn, Mr. Solomon observed,
although it was not suggesting such a course.
The specific question
examined was whether the Bank of Italy would then be inclined to
reduce the volume of its swaps with Italian commercial banks.
The
conclusion was that the Bank of Italy might want to maintain those
swaps in any event, to avoid the increase in lira liquidity that
would result if the commercial banks converted their foreign
dollar claims back into lire.
Finally, it did not, by any means,
appear certain that a shift toward deficit in the Italian balance
of payments or a change in Italian monetary policy would automatically
-106
3/7/67
result in a reduction in the volume of the Bank of Italy's swaps.
The relationships here were both complicated and loose.
The
problem was a complex one, with many conflicting considerations,
and he would repeat that the Board's staff was not suggesting a
course different from that recommended by Mr. Coombs.
Mr. Daane said that one alternative to U.S. forward lira
commitments mentioned in the Board staff's memorandum--that of
issuing additional Roosa bonds to Italy--had been explored from
time to time but had met with complete resistance on the part of
the Italians.
Thus, he did not think it was a real alternative.
Like Mr. Coombs, he thought the forward operations had proved
extremely useful.
Mr. Hickman asked whether it was not true that funds
going into the Euro-dollar market via Italy tended to flow to
Britain.
If so, that would be a desirable result from the stand
point of the United States.
Mr. Coombs replied that such funds had tended to flow
both to Britain and to the United States.
Mr. Hickman then suggested that the Committee reconsider
the operations in question every three months and plan on
discontinuing them at any time when their results appeared to
have become inimical to the interests of the United States.
3/7/67
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Mr. Daane commented that the operations in question
involved no risk to the System, and Mr. Coombs agreed.
The
latter added that the Treasury was prepared to take over the
System's commitments if the Committee decided to discontinue
them.
Mr. Mitchell noted that the System's forward lira commit
ments had been in existence for over a year, and asked whether
that was consistent with the Committee's general policy in the
foreign currency area of attempting to deal only with short-run
situations.
Mr. Coombs replied that the commitments had run on
primarily because the Italian balance of payments had continued
in surplus.
As he had mentioned in the discussion last November,
he thought the Committee should review them from time to time.
But he thought there was a real distinction between, on the one
hand, swap drawings--which were extensions of credit and thus
were appropriately kept to a short term--and, on the other hand,
operations of the sort under discussion, which were undertaken
in concert with a foreign central bank to help deal with condi
tions in an important money market while at the same time
relieving the pressure on that central bank to convert dollars
into gold.
The purpose of the operation was to improve
international liquidity.
-108
3/7/67
Mr. Mitchell then commented that the difficulty he saw
with an ad hoc approach, such as was involved here, was that it
could lead to different treatments in the System's relations
with each of its counterparts.
If a particular operation with
a foreign partner was found to serve a useful purpose, it should
be undertaken; but once that was done the Committee should offer
to enter into the same type of operation with each of its coun
terparts.
Mr. Coombs replied that he did not think any other central
bank was interested in the sort of arrangement that had been made
with the Bank of Italy.
Mr. Hayes remarked that in the five years since the System
had undertaken foreign currency operations many possibilities had
been explored with other central banks as efforts were made to
devise procedures that suited particular situations.
In the case
of Italy, operations of the kind under discussion had been found
useful.
He did not think the Committee had precluded similar
operations with others but, as Mr. Coombs had noted, evidently
no other country was interested in them.
Mr. Daane said he thought the Committee would not want to
broadcast the fact that it was willing to enter into some partic
ular kind of operation.
It was necessary to take into account
the different approaches to reserve policies in different countries.
3/7/67
-109
It was often desirable, he thought, to deal with particular
problems by means of operations tailored in the manner found
most useful to the United States and the other country concerned.
It was his personal impression also that other European central
banks were not interested in arrangements of the kind the System
had made with the Bank of Italy.
However, while he felt it
would be unwise for the Committee to indicate that it was prepared
to enter into such arrangements with any central bank, it should
stand ready to consider any specific proposals made.
Mr. Brimmer agreed with Mr. Coombs about the usefulness
of the forward lira operations.
He thought the Committee should
reject any suggestion that it would necessarily confine such opera
tions to lire; the objective was simply to employ techniques that
were useful in particular situations.
As long as the Committee
was not discriminating against any country, he would not want to
see it dismantle a useful arrangement simply to achieve uniformity
in the procedures followed with each partner.
Mr. Mitchell asked whether the System was not, in effect,
giving the Bank of Italy a gold guarantee on dollar holdings by
the forward commitments, and Mr. Robertson added that, if it was,
the real question was whether it would be prepared to give a
similar guarantee to all countries.
If not, Mr. Robertson said,
3/7/67
-110-
he did not think such a guarantee should be given to Italy.
The
longer the arrangement was continued the more difficult it would
be to disengage from it.
Mr. Coombs replied that the System's forward lira commit
ments did not involve a gold guarantee which, he agreed, would be
undesirable.
The type of exchange guarantee involved was identical
to that given in drawings under the swap arrangements.
In a way,
the essence of the System's foreign currency operations was to
increase the willingness of foreign central banks to hold dollars
without having gold guarantees.
Upon motion duly made and
seconded, and by unanimous vote,
the authorization for System
foreign currency operations as
amended on September 9, 1966, was
reaffirmed:
AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY OPERATIONS
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve Bank of
New York, for System Open Market Account, to the
extent necessary to carry out the Committee's foreign
currency directive:
A. To purchase and sell the follow
ing 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 U.S. Stabilization Fund established by
Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, and with the Bank for
International Settlements:
3/7/67
-111Austrian schillings
Belgian francs
Canadian dollars
Pounds sterling
French francs
German marks
Italian
lire
Japanese yen
Netherlands guilders
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in
paragraph A above, up to the following limits:
(1) Currencies held spot or purchased
forward, up to the amounts necessary to fulfill outstanding
forward commitments;
(2) Additional currencies held spot
or purchased forward, up to the amount necessary for
System operations to exert a market influence but not
exceeding $150 million equivalent; and
(3) Sterling purchased on a covered
or guaranteed basis in terms of the dollar, under agree
ment with the Bank of England, up to $200 million equivalent.
C. To have outstanding forward commitments
undertaken under paragraph A above to deliver foreign cur
rencies, up to the following limits:
(1) Commitments to deliver to the
Stabilization Fund foreign currencies in which the United
States Treasury has outstanding indebtedness, up to $200
million equivalent;
(2) Commitments to deliver Italian
lire, under special arrangements with the Bank of Italy,
up to $500 million equivalent; and
(3)
Other forward commitments to
deliver foreign currencies, up to $275 million equivalent.
3/7/67
-112-
D. To draw foreign currencies and to permit
foreign banks to draw dollars under the reciprocal currency
arrangements listed in paragraph 2 below, provided that drawings
by either party to any such arrangement shall be fully liquidated
within 12 months after any amount outstanding at that time was
first drawn, unless the Committee, because of exceptional circum
stances, specifically authorizes a delay.
2. The Federal Open Market Committee directs the
Federal Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for System Open Market Account
with the following foreign banks, which are among those designated
by the Board of Governors of the Federal Reserve System under
Section 214.5 of Regulation N, Relations with Foreign Banks and
Bankers, and with the approval of the Committee to renew such
arrangements on maturity:
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Netherlands Bank
Bank of Sweden
Swiss National Bank
Bank for International Settlements
System drawings in Swiss francs
System drawings in authorized
European currencies other than
Swiss francs
Amount of
arrangement
(millions of
dollars equivalent)
Maximum
period of
arrangement
(months)
100
150
500
1,350
100
400
600
450
150
100
200
12
12
12
12
3
6
12
12
3
12
6
200
6
200
6
3. All transactions in foreign currencies undertaken
under paragraph 1(A) above shall be at prevailing market rates and
no attempt shall be made to establish rates that appear to be out
of line with underlying market forces. Insofar as is practicable,
foreign currencies shall be purchased through spot transactions
3/7/67
-113-
when rates for those currencies are at or below par and
sold through spot transactions when such rates are at
or above par, except when transactions at other rates
(i) are specifically authorized by the Committee, (ii)
are necessary to acquire currencies to meet System
commitments, or (iii) are necessary to acquire currencies
for the Stabilization Fund, provided that these currencies
are resold forward to the Stabilization Fund at the same
rate.
4. It shall be the practice to arrange with
foreign central banks for the coordination of foreign
currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign
currencies, the Federal Reserve Bank of New York shall
not commit itself to maintain any specific balance,
unless authorized by the Federal Open Market Committee.
Any agreements or understandings concerning the administra
tion of the accounts maintained by the Federal Reserve
Bank of New York with the foreign banks designated by
the Board of Governors under Section 214.5 of Regulation N
shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested
insofar as practicable, considering needs for minimum
working balances. Such investments shall be in accordance
with Section 14(e) of the Federal Reserve Act.
6. 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) is authorized
to act on behalf of the Committee when it is necessary
to enable the Federal Reserve Bank of New York to engage
in foreign currency operations before the Committee can
be consulted. All actions taken by the Subcommittee
under this paragraph shall be reported promptly to the
Committee.
7. 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) is authorized:
3/7/67
-114-
A. 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;
B. To keep the Secretary of the Treasury
fully advised concerning System foreign currency opera
tions, and to consult with the Secretary on such policy
matters as may relate to the Secretary's responsibilities;
and
C. From time to time, to transmit appropriate
reports and information to the National Advisory Council on
International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized
to transmit pertinent information on System foreign cur
rency operations to appropriate officials of the Treasury
Department.
9. 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.
10. The Special Manager of the System Open
Market Account for foreign currency operations shall
keep the Committee informed on conditions in foreign
exchange markets and on transactions he has made and
shall render such reports as the Committee may specify.
Upon motion duly made and
seconded, and by unanimous vote,
the foreign currency directive
as adopted on June 7, 1966, was
reaffirmed:
FOREIGN CURRENCY DIRECTIVE
1. The basic purposes of System operations
in foreign currencies are:
3/7/67
-115-
A. To help safeguard the value of the
dollar in international exchange markets;
B. To aid in making the system of
international payments more efficient;
C. To further monetary cooperation with
central banks of other countries having convert
ible currencies, with the International Monetary
Fund, and with other international payments
institutions;
D. To help insure that market movements
in exchange rates, within the limits stated
in the International Monetary Fund Agreement
or established by central bank practices,
reflect the interaction of underlying economic
forces and thus serve as efficient guides to
current financial decisions, private and public;
and
E. To facilitate growth in international
liquidity in accordance with the needs of an
expanding world economy.
2. Unless otherwise expressly authorized by
the Federal Open Market Committee, System operations in
foreign currencies shall be undertaken only when necessary:
A. To cushion or moderate fluctuations
in the flows of international payments, if
such fluctuations (1) are deemed to reflect
transitional market unsettlement or other
temporary forces and therefore are expected
to be reversed in the foreseeable future;
and (2) are deemed to be disequilibrating
or otherwise to have potentially destabilizing
effects on U.S. or foreign official reserves
or on exchange markets, for example, by
occasioning market anxieties, undesirable
speculative activity, or excessive leads and
lags in international payments;
B. To temper and smooth out abrupt
changes in spot exchange rates, and to moderate
3/7/67
-116forward premiums and discounts judged to be
disequilibrating. Whenever supply or demand
persists in influencing exchange rates in
one direction, System transactions should be
modified or curtailed unless upon review and
reassessment of the situation the Committee
directs otherwise;
C. To aid in avoiding disorderly conditions
in exchange markets.
Special factors that might
make for exchange market instabilities include
(1) responses to short-run increases in interna
tional political tension, (2) differences in
phasing of international economic activity
that give rise to unusually large interest
rate differentials between major markets, and
(3) market rumors of a character likely to
stimulate speculative transactions. Whenever
exchange market instability threatens to
produce disorderly conditions, System transac
tions may be undertaken if the Special Manager
reaches a judgment that they may help to
reestablish supply and demand balance at a
level more consistent with the prevailing flow
of underlying payments.
In such cases, the
Special Manager shall consult as soon as
practicable with the Committee or, in an
emergency, with the members of the Subcommittee
designated for that purpose in paragraph 6 of
the Authorization for System foreign currency
operations; and
D. To adjust System balances within the
limits established in the Authorization for
System foreign currency operations in light of
probable future needs for currencies.
3. System drawings under the swap arrangements
are appropriate when necessary to obtain foreign currencies
for the purposes stated in paragraph 2 above.
4. Unless otherwise expressly authorized by
transactions in forward exchange, either
Committee,
the
in
conjunction with spot transactions, may be
or
outright
3/7/67
-117
undertaken only (i) to prevent forward premiums or
discounts from giving rise to disequilibrating move
ments of short-term funds; (ii) to minimize speculative
disturbances; (iii) 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; (iv) to
allow greater flexibility in covering System or
Treasury commitments, including commitments under swap
arrangements; (v) to facilitate the use of one cur
rency for the settlement of System or Treasury
commitments denominated in other currencies; and (vi)
to provide cover for System holdings of foreign
currencies.
Chairman Martin then noted that at a recent meeting the
Board had given preliminary consideration to a draft review of
System foreign currency operations in 1966 prepared by the Special
Manager for inclusion in the Board's 53rd Annual Report.
At that
time it had been suggested that it would be desirable for the
Committee to discuss the policy it would consider appropriate in
the future with respect to publication of information regarding
System foreign currency operations and the understandings that
might be reached with other interested parties with respect to
publication of information on particular operations.
To provide
the necessary background, the Board's staff had been asked to
prepare a report on prior discussions of publication policy in
the foreign currency area.
The staff's memorandum, dated March 2,
1967, had been distributed to the Committee, along with copies of
a letter from Mr. Coombs commenting on the reasons for the
3/7/67
-118
omission from the draft text of information concerning a drawing
made by the Bank of Canada on its swap line with the System in
the fall of 1966, and the reasons for limiting the information
given on System operations in sterling during the course of the
year.
1/
Mr. Brimmer asked whether the issues that had been raised
in the Board's discussion had not already been largely resolved.
Mr. Coombs replied affirmatively.
He noted that the Bank
of England had raised questions regarding certain figures included
in an early draft that had been sent to them for comment and,
accordingly, he had deleted those figures from the text sent to
the Board for review.
However, when the sterling situation took
a turn for the better in late February the British attitude
regarding publication became more relaxed, and the current plan
was to include all of the data on sterling that had been questioned
earlier.
The sterling report would thus be complete.
The Bank
of Canada still preferred to have information on its 1966 drawing
withheld at this time, but that information would be included in
the Special Manager's next semi-annual report.
Apart from that
drawing, the only information that would not be made public concern
ing operations through the end of 1966 related to the dollar volume
of the System's forward lira commitments.
1/ Copies of the documents referred to have been placed in
the Committee's files.
3/7/67
-119
Mr. Robertson commented that, looking toward the future,
there was a question of policy in this area that the Committee
should resolve, although not necessarily today.
While he rec
ognized the need for flexibility, he thought the Committee might
want to consider presenting a statement along the following lines
to each of its partners in the swap network:
It is the general policy of the FOMC that all foreign
currency operations in which it is involved, whether at its
initiative or that of partner central banks, be disclosed
within a reasonable period of time. The Committee intends
to continue to publish information on Federal Reserve use
of these facilities with a time lag of no longer than seven
months.
In addition, the Committee desires to propose to its
partners in the network that they agree to a similar pub
lication procedure by us with respect to their use of
these facilities, with the understanding that exceptions
will be made only after discussions between the Governor
of the central bank proposing the exception and the Chairman
of the FOMC.
Final decision on this proposed procedure will be
postponed until after consideration thereof by the partners
in the network.
Mr. Daane commented that he did not question the desirability
of full publication.
He was concerned, however, that presenting
such a statement to foreign central banks might affect their attitudes
toward the swap network in a manner that would inhibit the most
effective use of the network.
Chairman Martin, noting the lateness of the hour, suggested
that the Committee plan on continuing the discussion of publication
policy with regard to foreign currency operations at its next meeting.
-120
3/7/67
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, April 4, 1967, at
9:30 a.m.
Thereupon the meeting adjourned.
Secretary
Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on March 7, 1967
FIRST PARAGRAPH
The economic and financial developments reviewed at this
meeting indicate some decline in industrial production and a marked
slowing of expansion in over-all economic activity. Lack of growth
in retail sales may be retarding adjustment of inventory accumula
tion from its recent excessive rate. Average commodity prices have
changed little recently, but unit labor costs in manufacturing have
risen further. Bank credit expansion has been vigorous and, after a
period of rising interest rates and congested bond markets, financial
conditions have again turned easier. Recent data suggest little
improvement in the foreign trade surplus but also little increase in
the outflow of U.S. capital. In several important countries abroad,
economic activity has been softening for several months and monetary
and fiscal policies have eased somewhat. In this situation, it is
the Federal Open Market Committee's policy to foster money and credit
conditions, including bank credit growth, conducive to noninflationary
economic expansion and progress toward reasonable equilibrium in the
country's balance of payments.
SECOND PARAGRAPH
Alternative A
To implement this policy against the background of the
current reductions in reserve requirements, System open market opera
tions until the next meeting of the Committee shall be conducted with
a view to maintaining the prevailing easier conditions in the money
market, but operations shall be modified as necessary to moderate any
apparently significant deviations of bank credit from current
expectations.
Alternative B
To implement this policy against the background of the
current reductions in reserve requirements, System open market
operations until the next meeting of the Committee shall be conducted
with a view to attaining somewhat easier conditions in the money
market, and to attaining still easier conditions if bank credit
appears to be expanding significantly less than currently anticipated.
Cite this document
Federal Reserve (1967, March 6). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19670307
@misc{wtfs_fomc_minutes_19670307,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1967},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19670307},
note = {Retrieved via When the Fed Speaks corpus}
}