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, April 4, 1967, at 9:30 a.m.
Martin, Chairman
Hayes, Vice Chairman
Brimmer
Daane
Francis
Maisel
Mitchell
Robertson
Scanlon
Shepardson
Swan
Wayne
Messrs. Ellis, Hickman, Patterson, and Galusha,
Alternate Members of the Federal Open Market
Committee
Messrs. Bopp and Irons, Presidents of the Federal
Reserve Banks of Philadelphia 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, 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
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
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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. Link, Eastburn, Mann, Brandt, Tow,
and Green, Vice Presidents of the
Federal Reserve Banks of New York,
Philadelphia, Cleveland, Atlanta, Kansas
City, and Dallas, respectively
Messrs. Meek and Snellings, Assistant Vice
Presidents of the Federal Reserve Banks
of New York and Richmond, respectively
Mr. Arena, Financial Economist, Federal
Reserve Bank of Boston
Mr. Kareken, Consultant, Federal Reserve
Bank of Minneapolis
Chairman Martin said that he felt honored to have been asked
by the President to continue to serve in the capacity of Chairman
of the Board of Governors, and would do his best to fulfill the
responsibilities of that office.
He considered his redesignation
as Chairman not as a tribute to himself but as an indication of the
attitude of the President toward the System and the importance of
its work.
He regretted that the President had not found himself
able to waive the provisions of law that required Mr. Shepardson to
retire from the Board at the end of this month rather than continuing
to serve until the end of his term in January 1968.
However, he
fully understood the President's position, and he thought Mr. Shepardson
did also.
It was clear from his conversations with the President
that the decision was based on a desire to carry out Civil Service
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retirement procedures.
Unless the Committee happened to hold a
special meeting later this month, today's meeting would be the
last that Mr
Shepardson would attend.
He was sure that all of
the Committee members shared his feeling that it had been a priv
ilege to have served in the System with Mr. Shepardson over the past
thirteen years.
Mr. Hayes, speaking as Vice Chairman of the Committee,
expressed the sense of pleasure that he knew everyone present had
felt on learning of Mr. Martin's redesignation.
Upon motion duly made and
seconded, and by unanimous vote,
the minutes of the meeting of the
Federal Open Market Committee held
on March 7, 1967, were approved.
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Open
Market Account on foreign exchange market conditions and on Open Market
Account and Treasury operations in foreign currencies for the period
March 7 through March 29, 1967, and a supplemental report for March 30
through April 3, 1967.
Copies of these reports have been placed in
the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
said that the Treasury gold stock was unchanged again this week.
The Stabilization Fund now had roughly $75 million of gold on hand,
with no important orders in sight.
In addition, the Canadians would
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be selling $50 million in gold to the United States tomorrow, so
the Stabilization Fund might well end up the month with a comfortable
balance of more than $120 million.
On the London gold market, Mr. Coombs continued, South
African deliveries continued to run well above normal and enabled
the London gold pool to take in $18 million during March.
The pool
now had available a reserve of $106 million, which would provide a
useful cushion when the flow of gold from South Africa returned to
normal--or what was perhaps more likely, subnormal--levels during
coming months.
Sterling was in very strong demand throughout March,
Mr. Coombs said.
The Bank of England took in a total of nearly $700
million in what was probably the best month sterling had ever had.
Of that gross inflow, only $90 million had been allotted to a
reserve increase that was being announced today; $350 million had
been used to pay off central bank debt, including a $100 million
payment to the Federal Reserve early in the month; and a sizable
reduction in forward contract liabilities also was made.
The March
debt repayments left $180 million still outstanding at month-end
under the so-called sterling balance credit arrangement, and that
1/
figure was reduced to $150 million yesterday.
1/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence cited figures on the Bank of
England's obligations to foreign central banks and in the forward
market as of the previous summer.
4/4/67
In
effect, they had now repaid all but $150 million of their central
bank debt, as well as substantially reducing their forward commit
ments.
That represented a tremendous turnaround in their position.
He would hope that the publication today of good figures for March
would give further stimulus to the demand for sterling, and that
April would start off well.
Mr. Coombs added that near the end of March the United
States had sold to the Bank of England a total of $56 million of
sterling, divided equally between System and Treasury account, that
had been held under that Bank's guarantee.
If sterling remained
strong during April, he thought it would be wise to reduce the
holdings of guaranteed sterling substantially further in order to
reconstitute, as far as possible, a facility that had proved
extremely useful in several difficult situations during the past
eighteen months.
The Bank of England had no objection to such a
procedure as long as it was not carried to the point at which it
would impair their end-of-month reserve position.
Elsewhere on the exchanges, Mr. Coombs reported, the German
mark remained extremely strong, mainly owing to the reemergence of
a huge trade surplus.
Much of the dollar inflow was being channeled
back into the international credit markets, however, and the Bundesbank
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had, in any event, undertaken to refrain for the time being from
converting into gold any increases in its dollar reserves.
Finally, Mr. Coombs said, there were indications that France
might be slipping more deeply into deficit.
In the next day or so
the Bank of France might be announcing another reserve loss of $15
or $20 million for March, despite the fact that during the course
of the month the Bank of England had purchased $80 million of French
francs in anticipation of debt repayments to the International
Monetary Fund.
That would suggest that during March the French
deficit might have run close to $100 million.
In conclusion, Mr. Coombs noted that after the last Basle
meeting he had stopped off in Copenhagen and Oslo to discuss with
the central banks of Denmark and Norway the possibility of their
joining the swap network, with lines of $100 million each, after
they had achieved Article VIII status.
interest, as they had earlier.
Both central banks indicated
They had a good many questions
regarding the purposes and operating details of the arrangements;
the visits gave him an opportunity to answer such questions and to
point out the mutual advantages of the swap arrangements and the
responsibilities undertaken by members of the network.
On the basis
of those rather brief visits he thought the Danes and Norwegians
could be relied on to take an appropriate attitude toward any arrange
ments the System might make with them.
As to timing, Denmark probably
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would be able to qualify for Article VIII status at almost any
moment.
Norway had somewhat more complicated problems which, while
not serious, might delay their attaining Article VIII status for a
few weeks after the Danes had done so.
Both central banks preferred
to join the network simultaneously, but there was some feeling on
the part of the Danes that they might wish to negotiate with the
System separately if the Norwegians did not resolve their problems
within a reasonable time.
He would hope to have some definite
action to recommend to the Committee later in the month, or at
least by the time of the next meeting.
Mr. Hayes asked how Mr. Coombs viewed the near-term outlook
for monetary policy actions abroad.
Mr. Coombs replied that last week, in his opinion, the
Bundesbank had been close to a decision to cut its discount rate
again, from 4 to 3-1/2 per cent, and he hoped that they would take
such action soon.
If the Germans moved, the British probably would
follow, and there might be a round of one-half per cent decreases
by central banks.
What action the System did or did not take on
the discount rate this week would have a bearing on developments
abroad; a reduction of 1/2 per cent in the Federal Reserve discount
rate might well trigger fairly widespread cuts of the same size by
European central banks.
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Mr. Brimmer asked how the European central banks might react
to a 1/4 per cent reduction in the Federal Reserve discount rate.
Mr. Coombs replied that he could only guess at the answer.
He suspected that while a 1/2 per cent reduction in the U.S. discount
rate would make it highly probable that there would be widespread
similar reductions abroad, a 1/4 per cent reduction by the U.S. might
inject an element of uncertainty in the minds of European central
bankers, perhaps leading to less widespread and less decisive actions
on their part.
Mr. Brimmer then asked about the likely effects of a general
round of discount rate reductions on flows of funds between the
Euro-dollar market and the U.S.
Mr. Coombs replied that if the discount rate--and, more par
ticularly, the CD rate--in the U.S. came down, the impact on the
flows in question would depend in large measure on whether Euro-dollar
rates fell sympathetically.
Developments in the Euro-dollar market
were always difficult to predict; rates there were sticky at times,
and they might remain sticky after other interest rates here and
abroad moved down.
In that eventuality it might be desirable to
arrange for the Bank for International Settlements to draw again on
its swap line with the System and to put a moderate amount of money
into the Euro-dollar market in order to nudge the rates down.
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4/4/67
Mr. Daane commented that he had talked with officials of the
Bank of England last week, while in London enroute to the G-10
meeting.
From those conversations he felt that Mr. Coombs was quite
correct in saying that both Britain and Germany were poised to lower
their discount rates, and that a reduction in the Federal Reserve
discount rate might well trigger action by them.
They were likely to
act whether the U.S. reduction was 1/2 or 1/4 per cent, although
that choice might affect the sizes of their reductions and the extent
to which similar actions spread to other countries.
Mr. Hickman asked whether the U.S. would not be in a better
position with respect to the Euro-dollar market if the Federal
Reserve discount rate was lowered by 1/4 per cent, assuming other
central banks made 1/2 per cent cuts.
Mr. Coombs replied that the outcome would depend primarily on
the response of the CD rate and the Federal funds rate here, and the
changes in Euro-dollar rates on comparable maturities.
Upon motion duly made and
seconded, and by unanimous vote,
the System open market transactions
in foreign currencies during the
period March 7 through April 3,
1967, were approved, ratified, and
confirmed.
Mr. Coombs noted that the standby reciprocal currency arrange
ment with the Bank of France, in the amount of $100 million, would
reach the end of its three-month term on May 10, 1967.
He recommended
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renewal of that arrangement at that time for a further period of three
months.
Renewal of the $100 million standby
swap arrangement with the Bank of France
for a further period of three months was
approved.
Chairman Martin suggested that the Committee continue its
discussion, begun at the preceding meeting, of the possible inclusion
of Mexico and Venezuela in the swap network.
He invited Mr. Mitchell
to comment.
Mr. Mitchell noted that Mexico had already attained Article VIII
status.
He knew of no reason for not inviting that country to join
the swap network, and he understood that the Treasury favored such a
step.
Accordingly, he thought the Committee should consider asking
the Special Manager to discuss the question with the Mexicans.
Venezuela had not yet achieved Article VIII status, and the present
case for a swap line with that country was not so clear.
However, they
had bought gold in the past and he was not sure that the question
should not be explored with them also.
Mr. Coombs said that recently he had been moving increasingly
to the view that if swap arrangements were made with Denmark and
Norway it would be well to take a similar step with Mexico.
On
checking with Treasury officials before approaching the Danes and
Norwegians, he found that they not only favored arrangements with those
countries but volunteered that they also would take a favorable view
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with respect to Mexico.
He gathered that they might have reservations
about including Venezuela at this time, but would put no obstacles in
the way of possible future action.
In general, it would be his
inclination to take the initiative with respect to negotiating with
Mexico, but not to do so with Venezuela until they had achieved
Article VIII status.
Mr. Mitchell agreed with Mr. Coombs' conclusion, primarily
because only Mexico qualified at the moment.
However, he felt it was
important to recognize that the Venezuelans were highly sensitive
about their position relative to Mexico.
While he had no specific
procedure to recommend, he thought that the Committee should proceed
carefully, in full awareness that questions of national prestige were
involved.
Mr. Hayes agreed that it would be desirable to include Mexico
in the swap network, but he was doubtful about Venezuela at this
point.
While he was not in a position to assess fully the importance
of the sensitivity problem, he hoped the Committee would not act
prematurely on a swap arrangement with Venezuela simply because of
that problem.
On the other hand, if the sensitivity of Venezuela
was considered sufficiently serious, that could be a reason for
delaying the Mexican arrangement.
He would prefer to act on Mexico
alone now, while not precluding the possibility of including Venezuela
in the network later.
4/4/67
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Chairman Martin suggested that the best way of dealing with
the problem might be to hold discussions with Venezuelan officials
as well as Mexican, explaining the standards for membership in the
network and pointing out the differences between their status and
that of Mexico.
Mr. Daane said that in his discussions with Treasury officials
they had evidenced more enthusiasm about System swap arrangements
with Mexico and Venezuela than with Denmark and Norway.
He had not
gotten the impression that they made the sharp distinction between
Mexico and Venezuela that Mr. Coombs had suggested.
Mr. Coombs commented that he and Mr. Daane may have talked
with different officials at the Treasury who held dissimilar views.
In any case, since Venezuela had not yet attained Article VIII status
they were not immediately eligible.
Mr. Wayne expressed the hope that the System would not enter
into a swap arrangement with a country that had not achieved
Article VIII status simply because of a desire by that country to
enhance its prestige.
Mexico met the Article VIII requirement, but
unless other countries did so he would not favor entering into swap
agreements with them.
Chairman Martin thought Mr. Wayne's point was well taken; the
Committee should not let questions of sensitivity be controlling.
At
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the same time, it would be worthwhile to make sure that the
Venezuelans understood what the standards for membership in the net
work were.
Mr. Mitchell thought that Venezuela probably would undertake
to meet the standards once they understood the importance of doing
so.
Mr. Wayne referred to Mr. Coombs' earlier suggestion that
one's impression of the Treasury's views regarding the desirability
of particular swap lines might depend on the Treasury official with
whom one talked.
While he would not propose that the Committee
should give the Treasury veto power in connection with all such
decisions, the importance of coordination with the Treasury had been
recognized from the outset of the System's foreign currency
operations.
Accordingly, he thought the Committee should not move
ahead on expanding the network without clarification of the Treasury's
position.
Mr.
Solomon reported that he had talked recently with Under
Secretary of the Treasury Deming, and had checked with the Deputy
of the Assistant Secretary of State for Economic Affairs, about the
fact that the Committee was studying the possibility of enlarging the
swap network.
He had been informed that both the Treasury and the
State Department were agreeable to the inclusion of Denmark and Norway,
and both were receptive to the inclusion of the Latin American countries
if they met the requirements.
4/4/67
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Mr. Hayes said that while, as he had indicated, he was
sympathetic to a swap arrangement with Mexico he now wondered whether
it might not be better to hold exploratory conversations with both
Mexico and Venezuela rather than to go ahead on an arrangement with
Mexico and present Venezuela with a fait accompli.
The Venezuelans'
attitude might be better if they were given an advance indication
of the Committee's intentions.
Chairman Martin commented that the Committee today might
authorize the Special Manager to discuss possible swap arrangements
with both Mexico and Venezuela, looking toward their inclusion in
the network if they met the standards.
Mr. Hayes remarked that he had the impression from the staff
paper on Venezuela that that country might fail to meet standards
for membership in the network other than the technical one involving
Article VIII status.
He would be reluctant to move ahead in connec
tion with Venezuela without further discussion within the Committee.
Chairman Martin said he thought the major question was
whether Venezuela would attain Article VIII status.
As he had
indicated, he thought the Committee might simply authorize discussions
with Mexico and Venezuela concerning the swap network, on the
understanding that Mexico probably could now meet the standards for
inclusion in the network and that Venezuela would be informed as to
what the standards were.
He personally had talked at some length with
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the Venezuelans, and they were aware of the problems in their case.
The object of further conversations with them was to minimize their
sensitivity to a possible approval of a swap arrangement with Mexico
if the Committee should decide to take that action.
But he would
suggest that the Committee defer action until Mr. Coombs had held
exploratory talks and brought recommendations back to the Committee.
No objection was raised to the Chairman's suggestion.
Chairman Martin then invited Mr. Daane to report on develop
ments at the recent meeting of the Deputies of the Group of Ten.
Mr. Daane noted that the Deputies had met in The Hague on
March 30 and 31 and April 1.
The bulk of the discussion was
concentrated on two illustrative schemes that the Fund's staff had
developed--one on a new reserve unit basis and one on a drawing right
facility basis.
The technical discussion of the two schemes by the
Deputies had been quite useful and productive.
It was clear that at
least from a technical standpoint it was quite feasible to contemplate
an agreement on a contingency plan for new assets.
However, over
hanging the discussion was the political problem posed by the attitude
of the French.
The question was whether or not the French would go
along with a new asset and, if not, whether the other members of the
Common Market would be willing to go along without the French.
The
political question was likely to be resolved in the very near future;
the Monetary Commission of the European Economic Community was
4/4/67
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scheduled to meet on April 6, and the Ministers and Governors of
the Common Market would meet in mid-April.
In any event, Mr. Daane continued, the political problem
made it much more likely that some form of a drawing rights scheme
would emerge if the negotiations were successful.
The difficulty
was that there was a whole spectrum of types of drawing rights,
ranging all the way from some modest extension of existing drawing
rights to the other extreme of transferable drawing rights that
would be scarcely distinguishable from a new reserve unit.
The
French as well as the Belgians were clinging to the lower end of
the spectrum, but in his judgment the position they favored would
not solve the problem with which the Deputies had been strugglingnamely, the development of a new asset that would be a satisfactory
supplement to gold.
The U.S. position was that while on balance it
would still favor a new unit, it had never ruled out a drawing right;
indeed, the original U.S. proposal had included provision for both.
It was necessary to keep in mind, however, that there were differences
in types of drawing rights, and that there was a real risk of being
drawn into agreement on a compromise type of drawing right that would
not represent a meaningful solution to the problem.
Perhaps the most important point made at the meeting,
Mr. Daane said, was an observation by Chairman Emminger toward the
close of the session.
He noted that the Deputies faced a dilemma:
it
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was necessary, on one hand, to give reassurance to those who stressed
the desirability of changing existing monetary institutions in an
evolutionary way; and on the other hand it was necessary to convince
the financial markets that the problem of constructing an acceptable
supplement to gold was being dealt with effectively.
Mr. Hayes said he was not sure one had to assume that what
ever decision was reached in the first instance would necessarily
represent the final answer to the problem of the shortages of gold
that might develop over the years.
Perhaps agreement at this time
on a drawing right that was unlike a new unit could be considered a
constructive result, with the thought in mind that it would be
possible to approach more closely to a new unit by agreements reached
at some later date.
In reply, Mr. Daane noted that the current discussions had
been underway for some time.
If they concluded with agreement on
nothing more than a modest extension of existing drawing rights, it
would be highly unlikely, in his judgment, that one could expect
agreement within a reasonable time on a new unit that would meet the
need for secular growth in reserves.
It would be another matter, of
course, if agreement could be reached now on a series of sequential
moves.
But to take a small first step without agreement on succeeding
steps was not likely to lead to a solution.
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Mr. Brimmer asked whether different members of the U.S.
delegation had taken different positions in the discussions.
Mr. Daane replied in the negative, noting that the Treasury
representative acted as spokesman for the United States and set
forth the position of the Administration.
Chairman Martin then noted that the Committee had agreed at
its preceding meeting to continue the discussion today of its policy
with respect to publication of information on drawings under the
System swap network and on other System foreign currency operations.
Observing that Mr. Robertson had offered a proposed statement of
policy at the previous meeting, the Chairman invited him to comment.
Mr. Robertson said that it seemed to him incumbent upon the
Committee to have a definite policy in this regard and not to rely on
ad hoc decisions.
He had not received any comments thus far from
other Committee members or staff on the particular statement he had
proposed, and he was not certain in his own mind that that statement
represented the right policy.
Accordingly, he would suggest that the
staff be asked to prepare a memorandum for consideration at the next
meeting setting forth alternative proposals, so that the Committee
could have the advantage of different points of view.
Mr. Coombs commented that he had assumed the Committee did
have a policy on publication and that that policy had been carried
out.
It had been his understanding from the inception of foreign
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currency operations, over five years ago, that information on all
of the System's operations was to be reported within a reasonable
period.
At that time the magnitude of the risks that would be run
with such a policy was not clear, but in fact information on System
operations had been brought almost up to the minute in the published
reports of the Special Manager.
While he had assumed that it was the Committee's policy to
have the information on System operations brought up to date in his
reports, Mr. Coombs continued, he had also thought that emergencies
might arise which could make deviations from that policy desirable.
As distasteful as it might be to delay publication of certain
information, the possibility that a need to do so might arise in
an emergency argued against a definite commitment to publish
information concerning all System operations on a set schedule.
Fortunately, no such emergency had arisen to date.
As for the use of the swap lines by foreign partners,
Mr. Coombs said, he thought that on principle the Committee would
not want to publish information without their consent.
Furthermore,
he would be dubious about pressing them too hard to consent to
publication on any specific schedule.
To do so might weaken their
support of the swap network by seeming to open up a risk that
information on particular transactions would be released before
they were fully prepared for such release.
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Chairman Martin said he thought it would be desirable for
the staff to review the matter along the lines Mr. Robertson had
suggested, and for the Committee to plan on discussing it further
at its next meeting.
Mr. Mitchell suggested that the staff also be asked to
comment on the appropriateness of the form in which foreign currency
operations were reflected in the System's weekly statement--namely,
through changes in the items for "other assets" and "other liabilities."
Perhaps that form of reporting was satisfactory; on the other hand,
perhaps it could be charged that the System was inappropriately
concealing information.
For example, the British had been engaging
in window-dressing for some months, and the System had in effect
been acquiescing in that procedure, given the way it published its
figures.
He was not necessarily critical of the present form of
publication in the weekly statement, but he would feel more
comfortable if he had the staff's judgment about its adequacy.
If
sterling had in fact not recovered from its recent difficulties
many American businessmen might claim that they had been damaged
because of inadequacies in the information published by the System.
The question was whether such claims would be warranted.
Mr. Hayes commented that there was merit in Mr. Mitchell's
observation, but he thought the Committee had to weigh risks of that
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sort against whatever risks would be run by more complete current
reporting.
In the specific case of the British, there were many
moments last year when they were highly anxious about possible
market reactions to published information, and he would rather not
have been in the position of insisting on any particular publication
plan.
The fact that sterling had recovered perhaps could be taken
as evidence that the techniques used were successful.
Mr. Mitchell agreed that no harm had been done in that par
ticular case.
He was concerned about the possibility of a less
fortunate outcome.
Mr. Hayes rejoined that in his judgment the risk had been
well worth taking.
Mr. Daane said he would be reluctant to see the Committee
take an inflexible stance on the point; he thought that could prove
detrimental to the operations of the network.
Certainly, no one
wanted to conceal information, but as Mr. Hayes had noted it was
necessary to weigh different kinds of risks in the balance.
Mr. Brimmer observed that the Federal Reserve Bulletin
regularly included information on convertible foreign currencies
held by the Federal Reserve Banks, with detail by type of currency.
However, the data were shown with a substantial lag; for example,
the latest figures shown in the March 1967 Bulletin were for November
1966.
4/4/67
-22Mr. Mitchell said he was concerned primarily about the
timeliness of the published information.
The data shown in the
Bulletin were too old to be of value in current decisions by
businessmen.
It was understood that the staff would prepare a memorandum
along the lines suggested for discussion at the next meeting of the
Committee,
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 March 6 through March 29,
1967, and a supplemental report covering the period March 30 through
April 3, 1967.
Copies of both reports have been placed in the files
of the Committee.
In supplementation of the written reports, Mr. Holmes commented
as follows:
The easier money market conditions sought by this
Committee at its last meeting facilitated a large flow
of funds through financial markets over a period that
included the March corporate tax and dividend dates, a
Treasury cash offering of tax anticipation bills, and
a heavy calendar of corporate, municipal, and Federal
agency financing. Moreover, the easier atmosphere helped
produce a substantial decline in short-term interest
rates. Strong market expectations of an early reduction
in the discount rate were reinforced by signs of economic
weakness, by the cut in the commercial bank prime rate,
and by discount rate moves abroad. Together these factors
produced a buoyant atmosphere in the capital markets and
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long-term interest rates also moved lower, although the
weight of new offerings and aggressive pricing of some
new issues caused temporary setbacks. At the close of
the period there were some signs of developing congestionparticularly in the long-term municipal market. These
and other factors affecting financial markets, of course,
have been spelled out in some detail in the written re
ports to the Committee and in the blue book1/ and need
no extensive comment here.
Treasury bill rates moved steadily down from the
levels prevailing at the time of the last meeting until
the unusually strong auction of March 20. After some
backup, rates tended to stabilize at about 4.17 and 4.10
per cent, respectively, on three- and six-month bills as
bank and other demand slackened. Late last week, however,
a resurgence of demand and expectations of a discount
rate change pushed rates sharply lower. In yesterday's
auction average rates of about 3.98 and 3.99 per cent
were established for three- and six-month bills, about
35 basis points below rates established the day before
the Committee last met. There could be some reaction
in rates if expectations changed regarding the discount
rate and also if special stresses arise around the tax
date. Taking a longer look ahead to the second quarter,
however, it would appear that Treasury bill rates could
come under substantial downward pressures as the Treasury
pays off a total of $8.0 billion tax anticipation bills
in April and June in the face of seasonal demand from
State and local governments and the System. This suggests
that open market operations might prudently rely somewhat
more heavily on purchases of coupon issues than has been
the case in recent months.
The Federal funds rate was kept in a 4-1/2 - 4-3/4
per cent range generally during the period, but large
reserve injections were required to prevent the persistence
of an appreciable premium above the discount rate. The
persistent tendency for a premium--despite the recent
volume of free reserves in the banking system--reflects
the dependence of many of the larger banks around the
country on Federal funds purchases and other borrowing to
meet substantial basic reserve deficits, which in turn are
1/ The report, "Money Market and Reserve Relationships,"
prepared for the Committee by the Board's staff.
4/4/67
-24-
partly related to heavy dealer financing needs. Quite
naturally, such banks recognize that they cannot use the
discount window as a continuous source of funds, and a
few have been willing to bid up the funds rate instead
when their needs have been large. This is apt to be a
recurring phenomenon and we should not expect the old
relationship of the discount rate as a ceiling to the
funds rate to be readily restored--unless, of course,
we are prepared to be even more aggressive in supplying
reserves to the banks.
In the capital markets the pressure of new financing
may well have passed its peak, although the calendar is
heavy and could build up substantially if rates decline
significantly. Banks and finance companies are among the
more eligible candidates lurking in the wings, and a large
additional number of nonfinancial corporations may well
seek to fund some part of their outstanding indebtedness.
So far this year private placements have run far below
the level of earlier years, but as insurance companies
and other institutional investors rebuild liquidity some
of the pressure may again be taken off the public market.
The record March total of over $1.6 corporate bonds
offered publicly was two to three times the level of
offerings in March in recent years, and the first-quarter
total reflects the same pattern. The heavy flotations
appear the natural consequence of last year's squeeze on
corporate liquidity, and of this year's extraordinary
speedup in corporate tax payments to the Treasury.
As you know, the Treasury will announce the terms of
its May refunding on or about April 26, before the Com
mittee meets again. In addition to the $9.7 billion
Treasury notes maturing May 15, the Treasury may well
want to consider a prerefunding of June, August, and
possibly November maturities. Public holdings amount
to $2.9 billion of the May maturities, $1.3 billion of
the June, $4.8 billion of the August, and $2.6 billion
of the November maturities. A large prerefunding would
require an even keel posture for the System through
mid-May at least, and could add to downward pressure on
short-term rates if a substantial volume of short-dated
coupon issues are moved out into the 3-5 year maturity
range. I should also note that the Export-Import Bank
plans to offer $400 million or so participation certifi
cates within a few days. The Federal National Mortgage
Association has about $900 million PCs to offer before
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4/4/67
the end of the fiscal year in order to meet the budget
target.
As expected, the Treasury borrowed directly from the
System over the weekend of March 10. Earlier the Treasury
expected that a similar borrowing might be required in
mid-April, but most recent estimates indicate that this
will not be necessary.
As the written reports emphasize, aggregate reserve
and credit measures were exceptionally strong in March.
The bank credit proxy rose at a 15 per cent annual ratecompared with the 10 per cent estimated at the time of
the last meeting. The rapid rate of growth of various
reserve measures in recent months has, naturally,
permitted banks to restore liquidity lost in 1966, and
business loan expansion appears to have strengthened in
March. With the tax speedup, loan demands should be
strong in April, and the Board staff estimate of a 10-13
per cent rate of growth of bank credit for April does
not appear to be particularly disturbing. In fact, the
New York Bank projection is for a 16 per cent growth
rate. If the Committee should decide to include a two-way
proviso clause in the directive it would be helpful to
have the Committee's ideas on an appropriate range for
bank credit growth. Let me note also that although the
draft directives 1/ do not mention even keel considerations
such considerations might have to override implementation
of the proviso clause by late in the month.
Mr. Daane asked what market reactions might be expected to
reductions in the Federal Reserve discount rate of 1/2 and 1/4 per
cent, respectively.
Mr. Holmes said that a 1/2 per cent cut in the discount rate
probably would be taken by market participants as a confirmation
of their expectations that the System was moving to somewhat greater
1/ Alternative draft directives submitted by the staff for Committee
consideration are appended to these minutes as Attachment A.
4/4/67
ease.
-26
A 1/4 per cent reduction probably would be taken as a
cautionary signal, indicating that the market should not overestimate
the System's intentions to ease.
The latter action might cause some
temporary backup of short-term rates and it perhaps would have some
effect on longer-term rates as well.
Over the long run, however,
other factors were likely to lead to downward tendencies in short
term rates, as he had indicated in his statement.
Mr. Brimmer asked what consequences a discount rate cut
would have for rates paid by depositary institutions.
In reply, Mr. Holmes noted that yesterday one large New York
bank had lowered the rate it paid on certain consumer-type time
deposits.
A discount rate reduction probably would trigger similar
actions by other savings institutions.
Obviously the effect would
be greater if the discount rate was reduced by 1/2 per cent rather
than by 1/4 per cent.
Mr. Daane commented that in a conversation yesterday a
knowledgeable market participant had characterized the market for
securities with maturities beyond five years as a "nothing" market.
He asked whether that characterization was accurate.
Mr. Holmes replied that municipal dealers were finding it
very hard to place securities.
However, the corporate market was
handling a great volume of securities, and there was good demand
for longer-term Governments, mostly in the bank maturity area.
4/4/67
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Gov
ernment securities and bankers'
acceptances during the period March 7
through April 3, 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. Brill made the following statement on economic conditions:
The clues available to the Committee at the time of
the last meeting, foreshadowing further weakening in the
economy, have by and large been confirmed by data becoming
available since then.
Industrial production did decline
substantially further in February, with the drop broadening
out into many industrial sectors, and the odds are that
another decline will be reported for March. Retail sales
did fall off in February, and apparently showed little
improvement in March. And on the employment front, we've
seen reduced overtime followed by lay-offs--a classic
cyclical pattern. After the sharp February drop in the
workweek, the course of initial unemployment claims in
March suggests that the unemployment rate rose last month.
Before noting some of the other clouds on the horizon,
let me be sure to note a few silver linings. Stabilization
of prices of machinery and equipment and renewed weakening
in some basic materials prices give hope for a slowing in
wholesale prices of industrial commodities over-all. And
with food prices declining recently, at both wholesale
and retail, the consumer price index has been slowed to
a small upward drift. Even if the decline in food prices
has about run its course, the weakened demand situation
should keep increases in other commodity prices on the
moderate side in the months ahead. And, wonder of wonders,
even the pace of advance in service prices seems to be
slowing a bit. At least one source of upward pressure on
wages and costs may turn out more moderate this year than
feared earlier.
4/4/67
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Another bit of comfort comes from the news that a
start appears to have been made in reducing the overhang
of excessive stocks in the hands of producers and
distributors. Reports for February show a sharp drop
in the rate of inventory accumulation in manufacturing,
and although data for trade are not yet in, these may
show some net reduction in stocks. Certainly, one can
breathe a slight sigh of relief that an inventory adjust
ment is at last under way.
But one cannot get much satisfaction from the fact
that the adjustment is taking place through reductions in
output, employment, and incomes, rather than from a
rebound in sales. As one indication of the problem that
may still lie ahead, the slowing in manufacturing inventory
accumulation in February was more than offset by a drop
in shipments, leaving the stock-sales ratio higher than
before--indeed, as high as in the 1960-61 recession.
Failing a pronounced pickup in final sales, more produc
tion cuts must lie ahead before inventories and sales
get into a balance that businesses regard as viable.
What are the prospects that the inventory problem
will be eased by a revival in final sales this spring?
Taking it category by category, the only sure source of
expansion in the near-term appears to be in Government
spending. Federal spending for defense is running a
shade higher than in the budget estimates, and will
probably continue to do so--as best as one can speculate
on the course of military activity and needs. Indeed,
defense orders have been holding up the whole new orders
series. Federal spending for nondefense purposes is also
moving up faster than anticipated earlier, in part because
funds impounded at the height of inflationary worries
are now being released. And State and local spending
appears slated to continue to rise at least as rapidly
as in recent quarters. All in all, it seems most likely
that Government outlays will add from $5 to $6 billion
to GNP in the spring quarter.
Private spending for final product, however, doesn't
seem to be going anywhere, on balance. While the longer
run housing picture still seems bright, the near-term
picture is still uncertain. Funds are flowing into thrift
institutions at a rapid pace, but thrift institutions
are behaving thriftily, using their inflows in large
measure to reduce indebtedness rather than to expand
mortgage lending. It takes time to turn the housing
4/4/67
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industry around, and although the turn will undoubtedly
be more in evidence by summer and fall, the impact of
easier credit conditions on construction is not likely
to contribute significantly to a rise in GNP over the
next few months.
Nor is there much basis for expecting a significant
contribution to rising GNP from business fixed investment
over the near-term, even with easier credit conditions
and restoration of tax incentives. Declining sales,
profits, profit margins, and order backlogs, along with
rising excess capacity, are countervailing considerations.
We'd probably be doing well if investment spending just
held its own over the next quarter or so, with rising
construction spending offsetting a likely decline in
plant and equipment outlays.
It seems to me that if an orderly inventory adjust
ment is to continue without depressing levels of economic
activity too much further, consumers will have to begin
to spend more liberally, particularly for durable goods.
It is not enough to pin one's hopes on a decline in the
saving rate, which in any event usually occurs in reces
sions because income drops more rapidly than consumption
patterns can be adjusted. Spending a larger share of a
dwindling income can still mean declining markets for
goods. We need a bulge in sales in absolute terms.
Near-term resurgence in consumer spending for goods
can't be taken for granted, however, just because the
saving rate has already moved up to a relatively high
level. After three years of a saving rate fluctuating
between 5 and 6 per cent, we have tended to assume that
a 7 per cent rate is unsustainable, even for relatively
short periods. Yet it has held up before. For almost
three years, from early 1956 to late 1958, the saving
rate stayed in a 6-1/2 to 7-1/2 per cent range. Over
this period, while spending for nondurable goods about
kept pace with disposable income, outlays for durable
goods fell far behind. In fact, there was a decline in
the physical volume of durables purchased by consumers.
And through this period, manufacturing capacity utilization
rates fell, as the industrial plant planned and ordered
in the 1955 environment of booming consumer expenditures
came on stream at a time when consumer spending propen
sities were subdued.
I'm not forecasting as long a drought in consumer
spending ahead of us now. But I do emphasize that we
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4/4/67
cannot be certain that the drought will end this quarter
or next, no matter how much optimism the Survey Research
Center at the University of Michigan reads into its
surveys. Consumer attitudes are important, but the
problem is more than psychological. Lay-offs and shortened
workweeks bite into consumer capacity to undertake major
expenditures.
Further declines in retail sales may not be in prospect,
but the basis for a turn-up in sales soon is not clear,
either. To cite 1958 experience again, revival in con
sumer spending lagged the revival in incomes by roughly
two quarters. Currently, we're expecting deceleration,
rather than revival, in income growth this spring.
Resumption of faster rates of advance in disposable income
is not likely until expanding Government spending is
supplemented by incomes generated through rising private
spending. Even further and faster increases in construction
activity may not be enough to spark a broad and substantial
upturn in consumption without additional injections into
the income stream, perhaps through enlarged social security
benefits.
For the near-term, then, our work seems cut out for
us. We have to continue to make credit conditions even
more conducive for consumers--and business and governments,
also--to finance income generating expenditures, at least
until the forces of expansion are firmly embedded. Much
of our easing to date has been absorbed in restoring the
liquidity wrung out of both borrowers and lenders last
year, and this type of credit demand has kept the cost of
financing long-term expenditures relatively high. Rates
and terms on long-term debt have some way to go before
they will reach levels that actually rekindle spending
demands. It would appear premature, therefore, for the
System to moderate its easing efforts at this stage.
Mr. Ellis asked whether the staff had backed away from the
projections for the second half of 1967 that-it had presented to
the Committee in the course of the chart show given at the February
meeting.
Mr. Brill noted that the second-half projections included
in the chart show were those of the Council of Economic Advisers;
4/4/67
-31
the Board's staff had not given any projections of its own for that
period.
The staff was now reevaluating the Council's projections,
but was not yet ready to present its conclusions.
Much would depend
on the assessment of the outlook for the Federal budget, including
the Administration's proposals for increased social security benefits.
Mr. Hickman, after complimenting Mr. Brill on his presentation
today, noted that the staff of the Cleveland Reserve Bank thought
it could detect evidence of some leveling in durable goods sales in
the Fourth District during March.
He asked whether the Board's staff
had the same impression for the nation as a whole.
Mr. Brill replied that he had just received word that automo
bile sales did level off in March.
However, it appeared that sales
were not much different from production, which would suggest that
there was little further reduction in inventories.
Mr. Koch made the following statement concerning financial
developments:
Bank credit expansion and capital market flotations
have been very large in recent months, and a question
that has no doubt come to your minds is whether these
large financial flows suggest that the process of gradual
monetary easing begun last fall has gone far enough for
the time being. It is to this question that I shall
address most of my remarks this morning.
We had been expecting strong demands for credit and
capital this spring, but apparently the volume of financing
has been somewhat larger than projected. This may strike
one as odd in view of the fact that the nonfinancial
situation in the economy has been weaker than had been
contemplated.
4/4/67
-32-
Also, the decline in long-term interest rates has
been smaller than projected, even though time and savings
deposits have increased rapidly at both commercial banks
and at nonbank financial intermediaries and the narrowly
defined money stock has increased fairly sharply.
In the capital markets, the demand for financing
has been particularly strong in the case of business
corporations. Gross new corporate security flotations
in the first quarter approached $6 billion.
Businesses have been borrowing heavily in the
capital markets in part in order to regain a more
balanced maturity structure of their indebtedness and
in part in order to rebuild their liquid assets,
However, it is doubtful whether aggregate net corporate
liquidity has been built up much yet, despite a sharp
rise in corporate holdings of certificates of deposit.
The rise in liquid assets has been matched by a sharp
increase in accrued business tax liabilities.
Also, business borrowing from banks in the first
quarter was quite large, with demands concentrated in
January and March, months of the heaviest tax payments.
Borrowing will no doubt continue heavy this month--our
staff estimates that corporate tax payments may total
about $3-1/2 billion more than last year. Outstanding
business loans are likely to rise in April even though
a substantial amount of bank credit is expected to be
repaid out of the proceeds of bond financing. In May
and June taken together, though, corporate tax payments
may only approximate those of last year. Thus, the crush
of business financing demands on both the banks and the
capital markets may be on the wane.
Despite continuing large business demands for
credit, commercial banks have also been able to begin
to rebuild their liquidity by adding substantially to
their holdings of short-term securities and money market
loans. Reserves have been more readily supplied and
deposit inflows have been substantial, first of large
denomination and consumer-type CD's, and more recently
of demand deposits and, surprisingly, even savings
deposits.
Total bank time and savings deposits increased at
an annual rate of 18 per cent in the first quarter, a
rate that far exceeded the earlier projection, This
growth included a rapid runup of large-denomination
certificates of deposit to an outstanding volume of over
$19 billion, about $1/2 billion above the earlier August
peak.
4/4/67
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The narrowly defined money supply has grown at an
annual rate of 6 per cent in recent months. Much of this
growth occurred in late February and March. It may have
been due in part to increased corporate balances accu
mulated prior to tax payments and perhaps in part to
increased consumer caution and decreased consumer spending
on autos and other durable goods.
As a result of these more favorable deposit inflows,
on a daily-average proxy basis total bank credit rose at
over a 15 per cent annual rate in the first quarter, and
on an end-of-month basis at a little over a 12 per cent
rate.
The rise in business loans has occurred even though
banks have not yet aggressively sought loans and have
reduced their interest rates only with great reluctance
and hesitation. Despite sharp increases in short-term
security holdings in recent months, the loan-deposit
ratio of the weekly reporting banks is still about 69
per cent, as compared with the peak of 72 per cent
reached last fall. Many banks, like businesses, apparently
are not yet satisfied with their liquidity positions,
particularly in view of their apparent general acceptance
of the presumption that a brisk economic expansion will
develop before the end of the year.
The nonbank financial intermediaries, too, as
Mr. Brill has suggested, have experienced very satis
factory fund inflows thus far this year. Like commercial
banks, though, many of these institutions are also
rebuilding their liquidity before they actively begin
to beat the bushes for mortgage loans.
As for interest rate behavior in recent months,
the decline in short-term rates has been faster, and
that in longer-term rates more sluggish, than projected.
If, as an interim target, we are seeking to reattain
the financial conditions prevailing around late 1965,
we are already there in the case of, for example, the
3-month Treasury bill rate, but still have perhaps a
1/2 per cent to go in the case of the Aaa corporate
bond yield. And, although mortgage yields have declined
more promptly than in earlier periods of monetary easing,
the extent of the decline has been inhibited by high
and sticky rates on time deposits and savings and loan
shareholdings.
4/4/67
What does all this mean for current monetary policy?
I must confess that I began my preparation for today's
assignment with some trepidation about the size of recent
increases in such financial aggregates as total reserves,
bank credit, and the money supply. The more I reviewed
the situation, though, the more I began to realize not
only that these increases were only a little larger than
those we projected earlier, but also that they were
needed to rebuild the liquidity of the economy. The
liquidity positions of both business enterprises and
financial institutions had fallen to exceptionally
low levels last summer, and it is necessary to rebuild
them substantially and promptly if businesses are to
be encouraged to invest and institutions to lend.
Finally, I feel that the current situation calls
for a prompt reduction in the discount rate by 1/2 of
1 per cent. The market has already more than dis
counted a 1/4 per cent decline and probably largely a
1/2 per cent cut. If we do not go the whole 1/2 per
cent, expectations will be disappointed and it might
require large open market operations to keep another
February-type reversal of credit market developments
from occurring.
A 1/2 point decrease in the discount rate would
give the capital markets a needed shot in the arm. It
would likely mean lower corporate bond yields and, hope
fully, would help to unstick the high rates on time
deposits and shareholdings. As a result, it would
contribute to a further reduction in the cost of mortgage
credit, a development that is essential for a more
adequate rate of over-all economic growth later in the
year.
Action decreasing the discount rate by 1/2 per cent
would be most consistent with proposed alternative B of
the draft directives. As the blue book suggests, this
would no doubt mean some further easing through open
market operations, illustrated by an increase in free
reserves to, perhaps, the $300 - $400 million range.
Mr. Ellis asked whether, if the market had already fully
discounted a
1/2 per cent decrease in the discount rate, it would be
necessary to buttress such action with open market operations to
produce free reserves in the $300-$400 million area,
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4/4/67
Mr. Koch said he did not think the market had fully
discounted a 1/2 per cent decrease in the discount rate.
In any
case, the effect of a discount rate action was likely to be mainly
psychological, and that effect probably would have to be backed up
by open market operations to produce lasting easier conditions.
The
two actions need not be simultaneous, of course, since a discount
rate cut would in itself have a temporary easing effect.
He agreed
with Mr. Holmes that it would be appropriate to provide reserves
in part through operations in coupon issues.
Mr. Hickman said he concurred in the view that further
easing was necessary.
He wondered, however, whether a 1/2 per cent
cut in the discount rate might not trigger a flow of funds abroad.
Mr. Koch replied that he had been addressing himself
solely to domestic considerations.
However, he thought Mr. Coombs'
comments earlier today bore on the point in question.
Mr. Swan referred to Mr. Koch's observation that recent
high rates of bank credit growth were justified by the need to
rebuild the liquidity of the economy.
He asked how much longer such
growth rates might be necessary before the desire for liquidity was
satisfied, at least to some degree.
Mr. Koch said that while he thought there was still some
distance to go in meeting liquidity needs, he did not know how far
that distance was.
The growth rate of bank credit would have to be
4/4/67
-36-
watched, however, particularly if economic conditions improved and
the demand for credit strengthened over the next few months.
Mr. Reynolds then presented the following statement on the
balance of payments and related matters:
Large weekly deficits in March have made the over-all
payments figures for the first quarter--so far as we
know them--pretty gloomy. Through March 29, the liquidity
deficit for the quarter approached $1 billion, seasonally
adjusted, and the official reserve transactions deficit
for the quarter exceeded $1-1/2 billion. Both figures
are much larger than those published for the fourth
quarter, and much larger than the quarterly averages
that we have been expecting for the year 1967.
The first quarter numbers do not represent any
fundamental new deterioration from the fourth quarter.
The increase in the liquidity deficit is wholly ex
plained by three special types of transactions, none of
which is closely related to economic activity or monetary
conditions. First, we received no debt prepayments in
the first quarter, whereas we had received nearly $200
million of such payments in the fourth quarter of 1966.
Second, shifts of foreign official assets into nonliquid
forms (at least through March 29) were about $200 million
smaller than in the preceding quarter. Third, U.S. oil
companies paid nearly $300 million equivalent to Libya
for 1966 taxes in March of this year, whereas last year
the corresponding payments were not made until April.
(It may be that the seasonals--which are currently being
revised--should be somehow adjusted for this.) On all
other transactions than these, the deficit on the
liquidity basis was roughly the same in the first quarter
as in the fourth.
Similarly, on the official settlements basis, the
first and third of the special transactions mentioned,
plus repayment of Euro-dollars during the early weeks of
the year, in contrast to net inflows during the fourth
quarter, explain the change in the balance. Since we
argued last year that the Euro-dollar inflow should not
be taken as representing a fundamental or lasting improve
ment, it would not be helpful now to treat the
long-anticipated reversal of that flow as a fundamental
deterioration.
4/4/67
-37-
But one can take only limited comfort from the fact
that the bad first quarter was really no worse than the
bad preceding quarter. We need to reassess future
prospects in the light of these disappointing recent
figures, of longer-run developments, and of the changing
cyclical situation and associated changes in policy.
Government analysts have been meeting during the
past week to make such a reassessment. They incline
to the view, which I share, that--leaving aside for the
moment such special transactions as debt prepayments
and shifts of foreign official assets--the liquidity
deficit may come out between $2 billion and $2-1/2
billion this year, down a little from last year's $2.8
billion, reckoned on a comparable basis. If in addition,
as the Treasury staff now supposes, new special trans
actions can be arranged this year in about half of
last year's large volume, the published liquidity deficit
for the year might not differ much from last year's
$1.4 billion.
This is roughly the same projection that the Board's
staff has been giving you for several months. To cleave
to it, despite the much worse figures of the past two
quarters, is to project a considerable improvement in
the quarters ahead. This may sound adventurous. But it
is firmly rooted in the application of past relation
ships to recent and prospective economic developments.
The details of the projection are about as before.
A sharp drop in merchandise imports from recent levels,
coupled with some further modest expansion in exports,
seems likely to make the trade surplus and the surplus
on all goods and services about $2 billion better this
year than last. The import drop will reflect the lower
rates of GNP growth and inventory accumulation, and
especially--with some lag--the recent and prospective
decline in the capacity utilization rate in manufacturing.
Equations fitted to past experience suggest that the
import decline should have begun in the first quarter.
And indeed, imports did drop in February, although 2- and
3-month averages did not yet show a significant decline.
Partly offsetting the current account improvement,
there is still expected to be some deterioration on
capital account. Direct investment outflows are now
expected to increase by about 10 per cent year to year,
though not from the swollen fourth-quarter rate. U.S.
corporations plan some further increase in foreign
4/4/67
-38-
spending, and will probably not increase their foreign
borrowing.
Some reversal of bank credit flows, from reflow to
renewed outflow, is still anticipated. Through February,
this had not happened.
But Japanese borrowers will be
seeking funds here later in the year.
Finally, net outflow of Government grants and capital
will also be larger, as a result mainly of military and
civilian aircraft financing by the Export-Import Bank.
Two aspects of the recent projection discussions are
of particular interest to this Committee. First, it
appears that any shortfall of GNP this year below about
a
$775 billion figure would not yield much net additional
benefit to the current account. A deep recession would
cut U.S. imports so sharply that it would probably have
serious and early repercussions on activity abroad, and
hence on U.S. exports.
Secondly, the group did not feel it necessary to
specify its assumptions about U.S. monetary conditions
in detail in order to project capital flows. The feeling
seemed to be that interest rates in Europe and Canada
would continue to move generally parallel with U.S. rates,
and that the limitations on U.S. capital outflows imposed
by the IET and the voluntary programs would make outflows
of U.S. capital relatively insensitive to moderate
changes in rate differentials.
Thus, so long as U.S. monetary policy is seen to be
reasonably well suited to domestic requirements, so that
confidence is maintained, the way in which policy unfolds
in detail may not matter much for the balance of payments
this year. This country has been placed in the position
of taking the lead internationally in coping--or not
coping--with world-wide recessionary tendencies. Britain,
Canada, and probably other European countries (as
Mr. Coombs has already suggested), are likely to follow
that lead. Hence, although the payments position remains
unsatisfactory, there seems to be little that U.S.
monetary policy can do at this juncture either to help
*
it or to harm it.
This is the case, I think, even with respect to
Euro-dollar flows and the official settlements balance,
for which the group of Government analysts makes no
projections. Within wide limits, there may be little
that this Committee can do, even if it wished to, to
speed or retard a further reflow to Europe this year.
4/4/67
-39-
Clearly there will be a large official settlements
deficit this year. Our February guess of $3 billion or
more still seems valid, and more than a little disturbing.
But so long as Britain and Germany are on the other end
of it, we may not be confronted with large gold losses
or the necessity of making large IMF drawings. And in
a longer perspective, it will be right, I think, because
of the ebb and flow of Euro-dollars, to average out the
two years of 1966 and 1967 at a deficit of about $1-1/2
billion a year. That is no better than 1965, but also
no worse, despite the Vietnam war.
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:
Nearly all of the business statistics in recent
weeks have confirmed a further slackening of the
economic expansion. Bad weather doubtless played a
part, but it is not the whole story. The deterioration
has been a bit more than I had expected a few weeks
ago. I find the inventory situation disappointing,
with evidence that the needed inventory adjustment
is still in its early stages. A cautious attitude
on the part of consumers has clearly contributed to
the recent sluggish record.
Despite all this, I hold to the view that what we
are seeing is probably only a pause and that the economy
is likely to become much stronger later in the yearalthough the timing of this strengthening may have
been somewhat deferred. In general, confidence remains
high, and there are strong underlying forces in the
economy--forces which have been strengthened by the
further easing of fiscal and monetary policies in recent
weeks. I am impressed by the important stimulative role
being played by the Federal budget, particularly in
the second half of calendar 1967. This stimulus will
be substantial even with enactment of the proposed
surtax as of July 1--and without enactment of the surtax
at that time, which looks increasingly unlikely, the
fiscal stimulus will be of near-record proportions.
In fact I can see cause for concern over the possibility
that the budget will be highly stimulative at a time,
4/4/67
-40-
later in the year, when private demand is expanding
rapidly. These prospects underline the need for greater
flexibility in the timing of fiscal actions.
Meanwhile, although prices are now relatively stable
because of the slackening in demand, we still face a
serious threat of excessively generous wage settlements
and resulting cost-price pressures. The need to take
this threat seriously becomes all the clearer when we
analyze the balance of payments statistics for 1967 to
date. The liquidity and official settlements deficits
for February and most of March indicate sharp further
deterioration in our international accounts, despite
an improvement of the trade surplus in February. It
may well be that the worsening of our accounts reflects
precautionary transfers of corporate funds to foreign
affiliates in anticipation of new controls or taxes on
direct investment outflows. Such anticipatory transfers
apparently occurred already in substantial amounts in
the fourth quarter of 1966.
I would interpret the present state of the balance
of payments as clearly deteriorating. The liquidity
deficit in 1966 was $1.4 billion; in the fourth quarter
of that year it was at an annual rate of $2-1/4 billion;
and in the first quarter of 1967 it is estimated at an
annual rate of about $4 billion. The balance on the
official reserves transactions basis was in surplus in
1966 as a whole, but it was in deficit at an annual rate
of about $1 billion in the fourth quarter; and calcula
tions at the New York Reserve Bank suggest a first-quarter
deficit at a rate of about $7 billion. These figures are
decidedly disturbing and, as I will note later, I believe
a reference in the directive to the balance of payments
deterioration they reflect merits consideration.
As for bank credit, it now seems clear that all
three months of the first quarter showed a very rapid
rise in bank credit; and a similar performance seems in
the cards for April. Much of the expansion has been in
investments, so that loan-deposit ratios have dropped
substantially from their extraordinary peak. The money
supply in March showed the largest monthly advance in
the postwar period; and there have also been sizable
gains in commercial bank time and savings deposits, as
well as large savings inflows into the thrift institu
tions. These credit developments have been generally
gratifying, following the shortfall of bank credit of
4/4/67
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last autumn, and they appear appropriate in the light
of the current state of the economy. Business loan
growth in March seems to have been a good deal larger
than anticipated, although a minor portion of it reflects
the banks' endeavor to increase their liquidity by
acquiring acceptances.
Loan demand continues rather
strong, in part perhaps because of the unusually heavy
corporate tax payments due next month.
It seems to me that monetary policy has been doing
about all that could be expected of it, with open
market operations contributing importantly to easier
credit conditions over recent months, and with last
month's reduction in reserve requirements lending further
support to the policy of greater ease. In view of the
very rapid increases we are witnessing in most of the
monetary variables which we usually think of as "inter
mediate objectives," I think open market policy should
remain essentially unchanged over the next four weeks.
In view of the likelihood of a reduction in the discount
rate in the near future, I do not feel that money market
conditions should remain the principal policy criterion
but would suggest rather that we try to maintain about
the present degree of reserve availability. Free reserves
fluctuating in the $200 to $300 million range will
probably be consistent with the objective of keeping
about the present degree of ease. The Federal funds
rate should, of course, be expected to adjust to any new
discount rate level. We should avoid placing excessive
reliance on the Federal funds rate, since it is notice
ably affected by the prevailing spirit of reluctance
among commercial banks to borrow at the discount window.
Thus, reasonable fluctuations in the funds rate should
be permitted.
As for the directive, the first paragraph as drafted
by the staff appears to be generally acceptable. As I
mentioned earlier, however, a reference to the recent
deterioration in the balance of payments might be useful.
Accordingly, I would suggest replacing the sentence on
the balance of payments in the staff's draft with the
"The balance of payments has been
following sentence:
deteriorating despite some recent improvement in the
It seems to me that the second
foreign trade surplus."
paragraph should call for "maintaining about the present
degree of reserve availability."
With this modification,
I like alternative A and am glad to see inclusion of a
4/4/67
-42-
two-way proviso. This would give appropriate recognition
to the fact that bank credit expansion has recently been
running at what are historically very high rates. This
was fine on a temporary basis, but a long-run continua
tion of a growth rate of some 15 per cent would certainly
be excessive. For April, in view of the tax speed-up,
I would not be unduly concerned if the credit proxy were
to run somewhat above the current estimates, but I would
expect the proviso to become operative if this difference
were to become very wide.
This brings me to the question of a possible discount
rate reduction. There is much to be said for keeping all
of the major instruments of monetary policy more or less
in step when we have a significant change in business
and credit conditions and a consequent change in policy,
as has occurred over the past four or five months.
Market rates have been moving down significantly, and
some of them are of course well below the discount rate.
It would seem to me highly logical to bring the discount
rate now into better alignment, and, in so doing, minimize
one element of uncertainty as to the intent of official
credit policy. Since many of the Reserve Banks have
directors' meetings this week, the question of timing
presents no great difficulty. I find it a good deal more
puzzling to decide whether the reduction should be by
1/2 per cent or by 1/4 per cent.
In favor of the smaller reduction of 1/4 per cent,
one could point to the following arguments:
(1) Since such a move has been fully
discounted by the market, it would presumably
not lead to further reductions in market rates.
In fact, it might cause at least a temporary
backing-up of rates from current levels.
(2) The uncertainty in the business out
look might counsel a moderate move which could
be reinforced or reversed in the light of
further developments. It would leave us an
opportunity for a further cut if business
should turn out to be weaker than now seems
likely or if knots should develop in the
capital markets. At the same time it might
make it easier for policy to turn around should
this be necessary before the year is out.
(3) There is some risk now, especially
in view of the very large volume of corporate
4/4/67
-43-
bond offerings, that a larger reduction could
trigger wrong expectations and eventually lead
to serious congestion which could only be
eliminated by substantial further easing of
credit.
(4) There may also be something to be
said for accustoming the market to the use of
smaller and more frequent changes in the dis
count rate than has been customary.
I find at least as many arguments in favor of a 1/2
per cent reduction:
(1) The present rate of 4-1/2 per cent
is quite high historically. Perhaps a change
from such a level should not be too niggardly.
(2) Historically, 1/2 per cent is the
usual amount by which the discount rate has
been changed in recent years.
(3) A move by 1/2 per cent would avoid
the uncertainty that might be caused if the
market should remain poised in expectation of
another reduction.
(4) The larger cut would be more effective
in nudging mortgage rates downward with con
sequent advantages of speeding recovery in the
housing industry.
(5) A 1/2 per cent reduction would place
the System in a position to move more vigorously
on the up side should that become necessary.
(6) From an international standpoint,
the present is probably a good time in which
to make a decisive discount rate reduction if
we plan to do so at all in the coming months.
There have been a number of rate cuts abroad,
and others might be encouraged by a move on our
part, especially if it were a move of 1/2 per
cent. There is a good deal to be said for
staying "in phase" as much as possible with
our foreign counterparts if economic conditions
permit; and already there are some signs that
European economies might gain renewed vigor a
little later this year, and in such circum
stances occasions for foreign rate reductions
would probably vanish.
(7) In terms of our own balance of payments,
a reduction at this time of 1/2 per cent in our
4/4/67
-44-
rate would probably have little adverse effect.
For the time being, despite the disturbingly
large size of the deficit, dollars are being
accumulated largely in central banks, such
as those of England and Germany, where they
are not causing problems in terms of our gold
stock. Later on, our room for maneuver might
become much more limited if this geographical
pattern should change.
(8) A reduction of 1/2 per cent would be
a clear-cut, strong move and would not give
an appearance of uncertainty and hesitation in
System policy.
Last week I had an opportunity to discuss this whole
matter in a preliminary way with our directors. There
were divided views, with some of the directors reluctant
to make any rate reduction at this time because of their
belief that the economy would soon be expanding strongly
again. In general, I think I could summarize their
attitude as being one of caution. On balance, I would
favor a discount rate reduction of 1/2 per cent. I
believe, however, that such a move should be publicized
as confirming the recent shift in market rates and as
a means of bringing the discount rate into line with
our other policy instruments, rather than as a signif
icant move of further ease. An approach along these
lines might minimize excessive expectational effects
on market rates.
Naturally, I await with interest the views of the
others at today's meeting.
Mr. Ellis remarked that belatedly, and therefore fortunately,
the New England economy was exhibiting those recessionary signs
that had characterized the national economy for the last several
months.
The seasonally adjusted unemployment rate for February
remained unchanged at 3.3 per cent (the U.S. rate was 3.7 per cent)
but initial claims for unemployment compensation, as of March 18, had
for six weeks been exceeding such claims for the corresponding
4/4/67
-45
period of 1966., For the preceding five weeks they had trailed
year-ago levels.
District measures of factory output and average
weekly hours of manufacturing both turned down slightly between
January and February.
Mr. Ellis reported that the Boston Reserve Bank had been
watching the mortgage market closely to detect changes stemming from
the shifting flow of funds through savings banks and insurance com
panies.
A gradual decline had been recorded for January and February
in the number of banks charging 6 per cent or more for residential
mortgages.
Bankers reported that the trend continued in March.
It
was interesting to note, however, that the number of savings banks
offering higher rates on regular and special notice accounts was
still increasing.
Also, they were shifting to rates compounded and
credited on a monthly rather than a quarterly basis.
The Boston Reserve Bank's survey of the eight largest life
insurance companies in New England revealed that policy lending by
February had dropped more than half from its late fall peak rate,
Mr. Ellis noted, but it remained about double the 1965 "normal
level."
Their new commitments of funds for real estate mortgage
loans to business in February nearly matched the average monthly
level for 1965.
Their residential mortgage new commitments had
risen slightly but were less than half their average in 1965.
course, all those commitments were for 1968 projects.
no money to commit for this year.
Of
They had
4/4/67
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Turning to monetary policy, Mr. Ellis said that two types
of analysis--both present in the green book 1/ and staff commentsdefined a sort of Hobson's choice of monetary policy.
The evidence
was overwhelming that the economy was in a "recessionary" or "slow
growth"--and therefore unsatisfactory--posture.
Monetary
stimulation--designed to stimulate housing--was an obvious need that
the Committee had moved forcefully to provide.
Its success since
November was registered in the 6.8 per cent annual rate of increase
in the money supply, the 15 or 20 per cent rates of increase in
aggregate reserve measures, and the sharp increase in bank credit,
based on sharp growth in both demand and time deposits.
By the same token, Mr. Ellis continued, the evidence from
the same sources was persuasive that the economy might be expected
to be expanding quite acceptably in the last half of the year.
By
itself, that expectation would be quite reassuring were it not for
the knowledge that monetary policy works with a lag--even though
the extent of lag cannot be precisely defined.
To the extent that
the Committee was fighting short-run problems with long-run weapons,
it was storing up problems to be combatted later.
That was perhaps
an unnecessarily long way to emphasize that the longer the Committee
pursued a policy of continued easing the more carefully it should
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
4/4/67
-47
weigh prospective immediate gains against prospective future
problems.
His personal Hobson's choice arose when he tried to
apply such a dictum in the context of policy for the next four
weeks.
Mr. Ellis said that the trend and existing level of bill
yields, the widely reported market expectations, and the desirability
of using the discount rate instrument in harmony with other monetary
policy instruments all counseled reducing the discount rate prior
to the Treasury's refunding action later this month.
question was how much.
The only
As the Board members knew, a week ago the
directors of the Boston Bank chose a 1/4 per cent reduction.
In
his judgment, the question of how much to lower the discount rate
depended on the kind of signal the System wished to convey to the
market.
At present rate levels, a cut of 1/2 per cent would carry
the connotation that the System encouraged and intended to support
both lower rates and further reserve easing, as implied by the
discussion in the blue book of the probable effects of such a discount
rate action.
A cut of 1/4 per cent would be more passive; it would
reflect a desire to confirm continuation of monetary ease, but it
probably would have a neutral effect on market rates and expectations.
Equally important was the likelihood that such a change would avoid
possible interpretation that the System's concern had increased to
the point at which it was prepared to force monetary policy into
4/4/67
-48
a more aggressive posture.
A move of 1/4 per cent would fit the
established pattern of successive modest steps and avoid the "panic
button" accusation.
It would also minimize the exposure to flows
of funds abroad.
All of that, Mr. Ellis remarked, tied back to his earlier
observations about achieving present objectives while minimizing
further problems.
He believed the policy actions the Committee had
already taken might be expected to have substantial and extensive
impact in the next three months.
In particular, a slower rate of
new corporate issues should allow long-term rates to reflect more
of the movement that had occurred at the shorter end of the market.
He was prepared to postpone the further easing of net reserve posi
tions that might be associated with a discount rate reduction of
1/2 per cent.
Within the alternatives outlined in the blue book, Mr. Ellis
anticipated that a 1/4 per cent cut in the discount rate, supported
by continuation of present efforts to preserve an easy money market,
would continue but not accelerate the rapid growth in reserve
aggregates, bank credit, and the money supply.
In effect, he was
in agreement with the last sentence in the full paragraph on page 8
of the blue book, which said substantially that.
In fact, that
whole paragraph, with a change in title, outlined a course of policy
he believed appropriate.
The preceding paragraph was labeled
4/4/67
-49
"Further ease through open market operations alone."
The paragraph
on page 8 might be made parallel in concept and acceptable to him
by adding a new final word to the title, to read "Further ease with
discount rate cuts alone."1 /
Mr. Ellis concluded by observing that for the second paragraph
of the directive he would favor either alternative B, interpreted
in terms of the blue book language he had cited, or alternative A
amended in the manner suggested by Mr. Hayes.
Mr. Irons reported that in the Eleventh District the adjust
ment in economic conditions that had been under way for some time
was continuing, although it did not appear to be accelerating or to
be causing much disturbance.
The employment situation had changed
The paragraph to which Mr. Ellis referred reads as follows:
"Further ease with discount rate cuts. A 1/4 point
decline in the discount rate to 4-1/4 per cent would tend
essentially to do little more than confirm current levels of
security yields. It would become more likely that the Federal
funds rate would move below 4-1/2 per cent, assuming free reserves
in their recent range. It would also serve to lower dealer
lending rates somewhat, and thereby take some potential upward
pressure off bill rates in the longer run. Over the short-run,
though, the 3-month bill rate may rebound from its very recent
4 per cent level, and perhaps fluctuate in a 3.90 to 4.15 per
cent range over the next four weeks. If accomplished soon, a
small discount rate cut could also smooth market adjustments
around the mid-April tax date. The expansion in reserve and
monetary aggregates could very well remain within the ranges
earlier indicated for an unchanged monetary policy since
borrowers and banks have to a great extent already built in a
discount rate reduction of at least this size into their
decisions."
1/
4/4/67
-50
relatively little recently; in fact, employment in manufacturing had
shown the normal seasonal rise, and employment in services and govern
ment had increased more than seasonally.
Some increase in total
employment was expected during the current month.
Industrial production
was down, with decreases in various durable and some nondurable goods
industries offsetting gains in transportation equipment and aircraft.
Construction activity was perhaps showing some signs of increasing.
Retail trade, as reflected by department store sales, was running
about 7 per cent over a year ago, and cumulatively for the year to
date was about 3 per cent over a year ago.
The District had not
felt the impact of the decline in automobile sales quite so much as
the country as a whole.
Mr. Irons said that there recently had been relatively strong
demand for loans, reflected mostly in categories other than commercial
and industrial loans.
Banks had added to their investments as they
sought to improve their liquidity positions, and their loan-deposit
ratios were better than they had been a few months earlier.
Borrowing
from the Federal Reserve Bank continued to be negligible; in fact,
it was less than $1 million yesterday, as low as it had been for
some time.
Looking beyond the next few months, bankers in the
District generally were expecting a continuation of easy credit policy
until a turn in the economic situation appeared.
4/4/67
-51
At the national level, Mr. Irons continued, the course of
business activity continued to be characterized by adjustments that
were leading to a degree of weakness in various sectors of the economy,
as reflected in the green book.
the inventory area.
The most notable adjustments were in
It was true that stock-sales ratios had not
improved, but some encouragement was offered by the fact that in
ventories themselves were coming down.
sharp easing of bank reserve positions.
There had certainly been a
As indicated in the blue
book, the much easier credit policy was being reflected in marked
reductions in short-term rates.
There also had been some declines
in long-term rates although, as would be expected, they were not as
large as in the short-term area.
During the past several months the
System had injected a substantial volume of funds into the market
and, in general, had eased conditions significantly.
Those policy
actions had at least partly succeeded in accomplishing their
objectives; a large volume of reserves had been provided at low
cost, and certainly the severe strains evident a few months earlier
had been moderated.
At present, Mr. Irons said, he would recommend maintaining
about the same degree of ease as had characterized the money and
credit markets during the past month.
He did not think additional
ease was needed at this time from the standpoint of either rates or
availability.
Recent growth rates in financial aggregates such as
4/4/67
-52
the bank credit proxy, while suitable for the short run, probably
were excessive for a sustained period.
He would prefer alternative A
for the directive.
Mr. Irons added that he personally would like to see no
change in the discount rate at this time, although he knew that
arguments could be arrayed against that position.
He was concerned
that a discount rate reduction, no matter how its purposes were
described, would be taken as another clear and definite step in the
direction of further ease, and would lead to further sharp declines
in short-term rates and increases in the availability of funds at
banks.
However, if the rate were to be reduced, he would favor a
cut of 1/2 per cent rather than of 1/4 per cent.
Mr. Swan reported that the unemployment rate in the Twelfth
District was unchanged in February after recording a sharp drop in
January.
Manufacturing employment showed virtually no change but
total nonfarm employment edged up.
It appeared from limited figures
that average weekly hours of production workers in manufacturing in
California decreased by only 0.1 in February, compared with a
decline of 0.7 nationally.
That difference perhaps was related in
part to the smaller emphasis on production of automobiles and
appliances in California than in the rest of the country.
Credit extended by weekly reporting banks in the District
grew quite rapidly in the four weeks ending March 22, Mr. Swan
4/4/67
-53
continued, in contrast to a decline in the corresponding period of
last year.
The increase in securities holdings was very large, and
was about equally divided between municipals and Governments.
From
the first of the year through March 22, total credit rose more at
weekly reporting banks in the District than at such banks elsewhere.
Much of the rise was due to increases in loans to securities dealers,
while business and real estate loans declined.
There were indications
from some banks that inquiries regarding real estate loans had
increased substantially recently, but such interest was not yet
fully reflected in loans extended and in some cases not even in
commitments made.
The credit expansion had been quite consistently
supported, in part at least, by continued net purchases of Federal
funds by the larger District banks.
Borrowings from the Reserve Bank
were higher in February than in any month since September 1966.
Such borrowings declined in March, however, and in the week ending
March 29 they were zero.
Yesterday, Mr. Swan said, after a large New York bank reduced
the rate it paid on certificates of deposit of less than $100 thousand,
he had made a quick check with some of the District banks and learned
that they did not contemplate taking similar action for the time
being.
Apparently, California savings and loan associations did
not intend to lower their dividend rates at present, and the banks
planned to maintain their time deposit rates at levels competitive
with rates paid by the associations.
4/4/67
-54
In Mr. Swan's judgment, the Desk had carried out Committee
policy extremely well over the past month.
The developments that
had occurred--including the decline in bill rates, the fact that
the Federal funds rate was finally reduced below the 4-3/4 - 5 per
cent area, the increase in net free reserves, and the growth in
the bank credit proxy--were all quite satisfactory to him.
The
fact that the decline in longer-term rates was relatively limited
was explainable in terms of the heavy volume of offerings in the
bond market.
He was not sure that the problem of "unsticking"
long-term rates was a significant one at present; if there was
some reduction in the demands made on capital markets soon, those
rates would move down by themselves.
In thinking about policy for the period ahead, Mr. Swan
continued, like Mr. Koch he had started with the question of how
long it would be necessary to maintain the rather substantial rates
of increase achieved over the last several months in bank credit,
money supply, and the like, and whether still larger increases
would be desirable.
The latter seemed quite doubtful to him.
He
thought a discount rate reduction would be appropriate for the sake
of consistency with other recent policy actions of the System and
possibly to provide further confirmation of the System's present
policy posture.
As to the size of the cut, like Mr. Ellis, he found
the description on page 8 of the blue book of the probable results
-55
4/4/67
of a 1/4 per cent rate reduction quite satisfactory.
It was
difficult for him to believe that the discount rate could be
reduced by 1/2 per cent without having that action interpreted
as a significant further move toward greater ease.
In general,
he would question the desirability of the System's taking that
kind of step at this point, whether by a discount rate change or
otherwise.
Consequently, he had been thinking in terms of a
reduction of 1/4 per cent, with the thought in mind that, if
economic conditions weakened to a greater extent than he considered
likely, the System would not hesitate to make another reduction
promptly.
There were only two arguments that he could see on the other
side, Mr. Swan continued.
The first was Mr. Coombs' observation
that a 1/4 per cent reduction in the Federal Reserve discount rate
might lead to less widespread and smaller reductions by other central
banks than a 1/2 per cent cut would.
While he was not in a position
to assess fully the effects on other countries, he suspected that
some discount rate action by the System, even if not a 1/2 per cent
reduction, would be sufficient to encourage rate reductions abroad.
The other point that concerned him was that of timing of the second
1/4 per cent reduction if it should prove necessary.
Presumably the
System would be precluded from acting in May by the Treasury financing,
and action in June also might not be possible if there was another
-56
4/4/67
Treasury financing at that time.
If further discount rate action
was to be foreclosed for three months, there might be some question
about the appropriate size of the initial action.
he favored a 1/4 per cent reduction at this point.
On balance, however,
He had not had
an opportunity to discuss the question with the full board of directors
of his Bank, but the matter had been raised at a meeting of the
executive committee, where mixed feelings had been expressed.
Mr. Swan said he would have some difficulty in accepting
alternative A for the directive, in light of the expected discount
rate action.
He could accept alternative B if it were interpreted
to call for maintaining the slight further easing in money market
conditions that would probably follow a 1/4 per cent discount rate
reduction.
It should be explicitly recognized that the Desk should
try to offset any backup in interest rates that might result from
market disappointment with the size of the reduction.
Mr. Galusha reported that the Minnesota legislature had passed
the par clearance bill yesterday, and that that might stimulate the
South Dakota legislature to take similar action.
Hopefully, within
18 months non-par clearance would be a thing of the past in the Ninth
District.
Perhaps the most interesting bit of financial information
gained in his usual pre-FOMC meeting queries, Mr. Galusha said, was
the speedup reported in the time schedule of previous long-term
4/4/67
-57
commitments.
In one instance a borrower was being urged to draw
down immediately funds previously programmed for late 1968.
In
visiting with business leaders of the Twin Cities, he found a basic
confidence in the ability of the economy to respond as the year wore
on.
Skilled labor continued in extremely short supply.
Agricultural credit, though, was responding slowly, Mr. Galusha
observed.
In the Reserve Bank's latest survey of agricultural credit
conditions, it received virtually no responses indicating an easing
of loan rates, short- or long-term.
Apparently there had been a modest
increase in the number of country banks seeking new farm loans, though,
so perhaps some reduction in rates would come along soon.
According to the Reserve Bank survey, Mr. Galusha said, there
was considerable pessimism among country bankers about farm incomes.
A frequent opinion was that reports should be expected of more and
more farmers who were unable to repay their loans on schedule and of
further declines in spending by farmers on producer and consumer
durables.
Nor was there any indication that farmers generally would
be availing themselves in any substantial measure of the opportunity
to increase plantings.
The U.S. Department of Agriculture would have
to place their bets on the benevolence of God and the weather instead
of the farmer for increased production this year.
ture seemed rather dark.
The mood of agricul
With holding actions and farmer boycotts,
the midwest was hardly waking joyously to spring.
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4/4/67
Turning to monetary policy, Mr. Galusha said he continued to
be a crepe-hanger.
He had to report growing concern among city bankers
about their being, as they put it, returned to the circumstances of
November 1965 and before.
In those areas, like the Twin Cities, where
the competition for consumer CD's was intense among all financial
institutions, the first to move might be severely penalized.
The move
yesterday by a New York bank to lower the rate paid on consumer-type
CD's might be infectious but he was afraid it might be something less
than contagious.
The president of one of the District's large banks
had argued that the Board would have to change Regulation Q to correct
the increasing imbalance between bank lending and borrowing rates.
He (Mr. Galusha) found it distasteful even to contemplate the Board
taking on the task of assuring a profitable spread between those
rates.
But, at the same time, he did believe that District banks were
going to go through agonies in getting their consumer deposit rates
down and, in that connection, that a half-point reduction in the
discount rate would be quite helpful.
It might even be that, if
Reserve Banks generally and the Board decided on a discount rate
reduction, in announcing the change the Board should indicate an
expectation that lower consumer deposit rates would follow.
Were there to be a discount rate change soon, Mr. Galusha said,
he would favor holding free reserves within a $250-$300 million range.
4/4/67
-59-
But, again, he would suggest that whatever the free reserve target,
it should be qualified by an insistence that money market rates not
rise--except perhaps in slight, brief flurries.
Mr. Galusha said that the proviso clause in alternative A of
the draft directives would seem to give the Desk sufficient latitude
to cope with whatever conditions might arise from a discount rate
change.
However, he had no preference between the two alternatives.
Mr. Scanlon said that in the interest of time he would
summarize the remarks he had prepared and submit the full statement
for the record.
He then summarized the following statement:
With March and a period of relatively favorable weather
behind us, we see no evidence in the Seventh District of
renewed strength in business activity. Increasingly, the
situation resembles the latter portion of 1957 when produc
tion of both producer and consumer durable goods was
declining.
Retail sales have remained sluggish, judging by trends
in bank debits, savings, consumer credit, and trade reports.
Periodic reductions have been made in forecasts of
near-term output for steel, autos, trucks, furniture, and
appliances.
The effort to reduce inventories is widespread. Many
bankers find that the need of customers to carry larger
than expected inventories is playing a significant role in
recent strong loan demand. Virtually all types of materials
and components that were in short supply during most of
1966 now are readily available. Lead times on aluminum and
brass products have shortened dramatically and prices have
softened. Forgers and most types of foundries now are
actively seeking new business.
All District States reported new claims for unemployment
compensation to be substantially above a year ago in the
first three weeks of March. For Wisconsin and Michigan
4/4/67
these claims are the highest for any comparable period since
1961. For Illinois, Iowa, and Indiana, claims, although
above the year-ago levels, are still low in comparison with
the early 1960's.
While mortgage terms have eased somewhat, scattered
evidence shows building permits issued in January and February
to be at very low levels. Sales of existing homes are said
to be improving. The preponderant view in our area continues
to be that no substantial gain in residential construction
will occur until after midyear, with new apartments likely
to be especially slow. The need to arrange financing, prepare
sites, and assemble work staffs will take time.
The banking figures for March continue to reflect
relatively weak credit demands by consumers. The growth
in loans to business at District banks, on the other hand,
was even more rapid than for the U.S. and exceeded the pace
set in any of the past three years. For the first quarter
through mid-March, business loans of District weekly reporting
banks, excluding acceptances, were up 4 per cent, compared with
a 2 per cent nationwide gain. However, there are reasons for
attributing a considerable portion of the demand for bank
credit to temporary factors such as tax payment needs, as well
as the financing of exceptionally large inventories. Much of
the rise during March was attributable to manufacturing industries.
While the Chicago banks' needs for funds prior to April 1
were of about the usual magnitude, they were able to cover these
needs without much difficulty and with relatively little resort
to the discount window. These banks have acquired more than
$180 million of funds in the CD market in the past month
compared with a decline in March 1966.
The money supply--the only aggregate monetary series which
did not increase sharply in January and February--rose rapidly
in March. In large measure the failure of the money supply
to rise concurrently with reserves in the earlier months may
be attributed to the strong demand for CD's as market rates
of interest declined sufficiently to permit banks to again
market CD's successfully. The acceleration in the growth of
money supply in March may reflect satisfaction, at current rates
of interest, of the pent-up demand for CD's by business firms
If this is the case the money supply
and for CD funds by banks.
could be expected to increase more nearly in line with the rate
of growth of total reserves in coming weeks, except as offset
by changes in Treasury deposits.
4/4/67
The failure of interest rates to decline as sharply
since their peaks of last Autumn as in either 1958 or 1960
in light of strongly expansionary policy probably reflects
both a strong desire of business and consumers to rebuild
liquid assets and the very moderate softening of business
activity thus far.
In considering the proper stance of monetary policy,
one's judgment of the magnitude of the current adjustment
in the economy is critical. If we expect only a slight
weakening, then the very stimulative measures recently
taken may be setting the stage for excessively strong rise
of demand several months hence. On the other hand, if
economic activity is expected to decline or move sideways
for a considerable period, continuation of the current
expansionary policy would seem appropriate.
It appears to our staff that the current adjustment
probably will be moderate, largely because of expansionary
monetary and fiscal actions already taken. It appears
also that recent rates of expansion of reserves, money,
and credit are excessive from any long-term point of view.
Since it seems that monetary policy affects employment,
production, and income with considerable lag, it is
possible that large and extended swings in reserve growth
may have an unstabilizing effect on activity. Nevertheless,
because of the possibility that the current active demand
for credit reflects largely needs associated with past
rather than future activity, I would favor continued rapid
expansion of total reserves and/or money supply until we
see some additional readings on business indicators.
Mr. Scanlon added that it was difficult for him to look upon
a discount rate change as being urgent at a time when the monetary
indicators were expanding as rapidly as they had been recently.
However, he joined those who favored the approach on page 8 of the
blue book involving a 1/4 per cent reduction in the discount rate.
Believing that a 1/4 point decline would be a confirmation of what
the market had already discounted, he would not oppose such a move.
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He would regard the action as just getting the discount rate more
in line with other rates, possibly to be followed soon by another
change of 1/4 point if needed.
That would emphasize rate flexibility
on the downside, hopefully paving the way for flexibility on the
upside when appropriate.
Mr. Scanlon noted that he had had some difficulty in deciding
which alternative he would prefer for the directive.
Since the
explanatory material characterized alternative A as being consistent
with no discount rate change, however, he favored alternative B, as
interpreted by Mr. Ellis.
Mr. Tow reported that moisture conditions were below normal
in most of the Tenth District, and a severe drought continued in a
substantial part of the winter wheat belt.
Over the last five days
considerable rain had fallen along the eastern part of the District,
with variable amounts ranging up to five inches at Kansas City.
that region also was dry, those rains were beneficial.
As
The real
drought area, which involved central and southwestern Kansas, western
Oklahoma including all of the Panhandle, northern New Mexico, and
southern and southeastern Colorado, was not included in the area
of rainfall.
Much of the wheat in the drought area could not be
saved now even by rain, but moisture would be helpful to some of the
wheat and also for pasture and feed crops.
Because of the lack of
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moisture and the lower level of agricultural prices this year, farm
income in the Tenth District probably would be distinctly lower in
1967 than in 1966.
Turning to the national economy, Mr. Tow said that both
current and prospective economic developments called for a continuation
of an expansive monetary policy.
Most of the evidence concerning the
private sector of the economy pointed in that direction.
As was frequently
the case, the appropriate degree of such monetary easing was not equally
clear.
Evidence had to be given to the market that pursuit of such a
policy remained a System objective, Mr. Tow continued.
That did not
mean that any dramatic action was required, but it did mean that there
should not be any reasonable basis for assuming at this juncture that
the System had ceased to pursue that course.
The main objective should
be to encourage a further but moderate easing of interest rates,
particularly with a view to encouraging lower long-term rates.
In
the process of carrying out such a policy, member bank credit expansion
probably would continue in line with that of recent months.
Mr. Tow thought that the instruments used should be both the
Federal Reserve discount rate and open market operations.
Although
some persuasive arguments had been made today for a 1/2 per cent
reduction in the discount rate, he still felt--as he had before today's
meeting--that the reduction should be 1/4 per cent, so that it would
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be a confirming rather than a leading action.
In his opinion, despite
the levels to which Treasury bill rates had declined, a reduction of
1/2 per cent would definitely be a leading action.
Open
market operations
should be the instrument used to assure a moderate degree of further
easing of interest rates.
The aim would be to go somewhat beyond the
confirming action as suggested by the 1/4 per cent discount rate
reduction, but to stop considerably short of the degree of ease, as
described in the blue book, that would be associated with a 1/2 per
cent discount rate reduction.
It did not seem to him that that would
involve an acceleration in the rate of expansion of reserves and bank
credit; it would probably result in expansion rates essentially in
line with those of the recent past.
Alternative B of the draft
directives would be consistent with the policy course he favored.
Mr. Wayne reported that business activity in the Fifth District
continued to weaken.
A special survey of the Richmond Reserve Bank's
regular business panel showed that finished inventories had increased
in the past three months and were above desired levels, especially in the
textile and furniture industries.
Collections on accounts receivable
were also slower than six months ago.
Some marginal textile plants
had been closed and it was reported that more might follow if present
softness continued.
The Reserve Bank's regular survey showed continuing
declines in new and unfilled orders, hours worked, and prices received
for finished goods.
Nonagricultural employment increased slightly in
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February, but factory employment declined.
were down significantly.
Factory payrolls also
Except for West Virginia, insured unemploy
ment rose in all District States in February, but remained below the
national average.
The only bright spot in the District economy was
a slight rise in the construction index in February.
In agriculture,
the entire District peach crop was seriously damaged by frost, but
1967 planting intentions for principal crops were above those of a
year ago.
At the national level, it was clear to Mr. Wayne that the
economy was in the middle of a significant adjustment.
not that was a "recession",
Whether or
it seemed clear to him that the present
trends of the economy would produce a substantial amount of idle
resources in the near future.
Policy over the past three months had
recognized that fact and in that period reserves had been pumped into
the banking system at a rate that was impressive by any standards.
Free reserves showed a $350 million swing for the period, from minus
$100 million to plus $250 million, and projections of total reserves
through March indicated a quarterly increase larger than in any other
quarter in the past ten years.
In addition, over $800 million of
reserves had been made available by the reduction of reserve requirements.
As for policy, Mr. Wayne felt that in the past three months the
Committee had supplied reserves at a rate which could be justified only
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on grounds of a transitory effort to change market sentiments.
As
he viewed the market today, the Committee's lavish provision of
reserves lately had been only partially successful in producing the
desired result.
The heavy buildup in the calendar of corporate and
municipal offerings had held up the long end of the rate structure
and had prevented the ease that had been generated in some parts of
the market from reaching that end.
Yet it seemed to him that it was
precisely in the long end of the market that more ease was needed.
Rate reductions there, coupled with the prospective reinstatement of
tax incentives, were the best hope for cushioning the weakness in
business capital investment and for speeding up recovery in mortgage
markets and in housing.
It seemed to Mr. Wayne that over the next few weeks credit
policy could make a further contribution only to the extent that it
could break the log jam in the long end of the market.
For that
reason he would like to see open market purchases shifted, whenever
feasible, to the coupon area or to agency issues.
To the same end,
he would like to encourage some shifting of capital market borrowing
to the banking system.
The recent reduction in the prime rate was a
welcome move in that direction but his own feeling was that that rate
should come down further.
CD rates in the past week.
He was encouraged also by the declines in
It seemed to him highly desirable to
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maintain downward pressure in those areas, but without increasing
the rate of reserve creation.
In any event, a reduction in the
discount rate struck him as an especially appropriate step to take
at the present juncture.
Such a move would consolidate the System's
recent easing action and at the same time it would promote desirable
adjustments in the rate structure.
Mr. Wayne found himself in general agreement with Mr. Hayes
and, on balance, favored a reduction of 1/2 per cent in the discount
rate.
However, he would prefer, until the next meeting of the
Committee, the open market posture suggested by alternative A of
the draft directives, especially with the double-proviso clause.
Despite comment to the contrary, he did not find those two proposals
inconsistent.
Mr. Shepardson remarked that at this meeting of the Committee,
probably the last that he would attend, he would note that his service
with the System had been a most challenging and rewarding experience.
He was grateful for the opportunity to serve on the Board and the
Committee, and he wanted to express to everyone present his appreciation
for the friendships held out to him.
As to policy, Mr. Shepardson's views were similar to those of
Mr. Wayne.
Certainly the System had been providing reserves at a
very ample rate.
The recent rates of expansion in both bank credit
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and the money supply, while desirable in a transition period, were
too high to be sustained for long.
As Mr. Ellis had suggested, by
pushing too far toward ease now the Committee very likely would be
building up problems for the future.
Accordingly, he favored alter
native A of the draft directives, modified as Mr. Hayes had suggested
to call for maintaining the present degree of reserve availability.
Such a course would make it less likely that open market operations
would push the expansion in money and credit to rates higher than
those recently prevailing.
With respect to the discount rate, Mr. Shepardson said that
he would be averse to taking any action that might be considered a
leading action.
He thought, however, that a reduction of 1/2 per cent
would be desirable at this time in view of the levels to which some
rates--particularly bill rates--had fallen in recent days, and in view
of the stickiness of other rates, which perhaps reflected psychological
factors more than credit availability.
A reduction of 1/2 per cent
now also would make it more feasible to raise the discount rate later
in the year if that became necessary.
Mr. Mitchell said he also favored a 1/2 per cent decrease in
the discount rate.
As Mr. Hayes had suggested, that action should be
accompanied with no fanfare.
With respect to the financial aggregates,
he wondered whether the satisfaction some had expressed this morning
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regarding what had been achieved in the recent transition period
was wholly warranted.
GNP in the first quarter of 1967, as
projected by the staff, was 6 per cent higher than a year earlier,
but in February the money supply was only 1.4 per cent above
February 1966.
Money supply expansion accelerated in March, but
growth in the twelve months ending then was still only 2 per cent.
It was clear that there still was some catching up to be done, and
he saw no reason to be alarmed about the pace at which the money
supply and bank credit had been growing recently.
Mr. Mitchell then referred to Mr. Hayes' proposed replacement
for the statement on the balance of payments in the first paragraph
of the draft directive.
He (Mr. Mitchell) had understood Mr. Reynolds
to say that there had not actually been any significant change in the
over-all payments position, at least relative to the fourth quarter,
and that real improvement was occurring in the trade balance.
In
view of Mr. Reynolds' analysis, he would not favor the language
Mr. Hayes had proposed.
Mr. Mitchell concluded by noting that he preferred alter
native B for the second paragraph of the directive.
Mr. Daane commented that economic conditions certainly
warranted the System's continuing an ease policy and continuing to
make that policy clear, but how much ease should be sought was to
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him a much more difficult question.
One problem he had with the
blue book analysis--and with the comments of a number of speakers
today--was that, in a sense, too sharp a separation was made among
the System's instruments.
Thus, the blue book first discussed
seeking further ease through open market operations alone, and
translated that into a free reserve target range of $300-$350
million.
It said little about open market operations in discussing
the implications of a 1/4 per cent reduction in the discount rate.
It then indicated that a 1/2 per cent discount rate cut "would
probably require a follow through over the weeks ahead in the form
of somewhat larger free reserve positions," which might be taken
to imply the $300-$350 million range mentioned earlier as consistent
with further ease in the absence of a discount rate change.
He
would approach the problem from the other direction, by saying he
favored somewhat greater reserve availability; that, to him was
the key.
He agreed with the view that it was necessary to go
somewhat further in providing liquidity to the economy.
It was less easy to say by how much the discount rate should
be reduced, Mr. Daane continued.
A week ago he had thought that a
1/4 per cent cut would be consistent with somewhat greater reserve
availability and would confirm to the market the viability of current
interest rate levels.
But as he sensed more recent developments in
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-71
the market, that was no longer true.
His present view, based partly
on conversations with several market participants, was that a 1/4
per cent cut would be interpreted more as a cautionary signal than
as a stimulative one.
As one market participant had put it, market
expectations had already placed the System in the position of having
to make a 1/2 per cent change if it were to take a meaningful action.
He was a little unhappy about being led by the market in that manner;
he would have much preferred a 1/4 per cent reduction now, to be
followed at a later point by a similar reduction if it was decided
that continued easing was desirable.
He was not sure that the course
Mr. Hayes advocated--of reducing the discount rate by 1/2 per cent
and standing pat on reserve availability--was a consistent one.
A
1/2 point reduction in the discount rate was likely to generate
market expectations that would outrun the reserve availability
conditions the Committee would be seeking if it adopted alternative A
with the amendment suggested by Mr. Hayes.
In sum, Mr. Daane said, he would favor somewhat greater
reserve availability and whatever discount rate change would be
consistent with that goal.
He felt that a 1/2 per cent cut was more
likely to be consistent, but he would not be averse to 1/4 per cent
cut if it would not produce undesirable reactions.
He was inclined
toward alternative B for the directive, but would amend it to call
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-72
for operations "with a view to attaining somewhat greater reserve
availability."
Mr. Maisel said he would discuss two separate questions
today.
First, he would urge that more operations take place in
the longer end of the coupon market; and, secondly, he would comment
about open market operations and the proper level of the discount
rate.
Mr. Maisel thought the Desk was to be congratulated for its
greater recent activity in coupon issues.
It would be useful over
the next two months to concentrate still more of the Committee's
efforts in coupon issues, preferably with maturities of over five
years.
Interest rates on longer-term bonds and mortgages--the
areas in which monetary policy was expected to do the most good
in the coming year--had lagged abnormally behind short-term rates.
Concentrating more purchases in the longer area might aid in cutting
that lag.
Mr. Maisel said he was not suggesting an "operation twist."
In order to avoid any assumption that the Committee was attempting
to hold short-term rates up, coupon issues should not be bought
when it was necessary to sell bills.
In the past year, except for
its most recent operations, the Committee had been relatively
inactive in the coupon market.
Considerably larger transactions
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-73
could be undertaken without causing the Committee to move outside
the pattern of previous years.
The System's portfolio also showed a
considerable scope for coupon purchases in terms of past traditions.
In addition to narrowing the lag between current Committee policy
and the desired monetary objectives, action in the coupon area might
aid in maintaining expectations and thus might slow somewhat the
rush to get into the long-term market.
With respect to current policy and the discount rate,
Mr. Maisel believed the alternative directives offered were not
achievable in terms of their stated objectives.
Alternative A,
with its related discount prescription, could not "maintain
prevailing easier conditions."
Assuming it were tied to a "no-change"
policy for the discount rate, it would mean that in the attempt to
maintain current, ease, far more total reserves and marginal reserves
would have to be furnished than under alternative B; and, even then,
interest rates would back up a good deal.
In the past four months, Mr. Maisel continued, the amount
of ease in the market with respect to rates, and also with respect
to bank credit expansion, had occurred only partly through the
Committee's own action.
Much more of existing market conditions
had been brought about by the expectational forces in the market.
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Mr. Maisel reported that last week he spent three days
talking to over 50 officers of about 10 bank and nonbank dealers.
While their statements clearly were partly self-serving, their
general views of the market and their conclusions seemed to make
sense and to agree with the logic of the current situation.
All
agreed that current market rates and activity assumed that the
discount rate would be changed.
All agreed that there would be
a sharp reaction in expectations and rates if the discount rate
were not changed prior to the announcement of the next Treasury
operation.
In the midst of such a reaction, any attempt to
maintain "prevailing easier conditions," as directed by alternative A,
would require an exceedingly large injection of reserves.
The people with whom he had talked, Mr. Maisel continued,
also agreed virtually unanimously that a 1/4 per cent change in the
discount rate would be construed as indicating that the System
believed that it might have to reverse monetary policy sharply in
the near future and thus was reluctant to go to 4 per cent.
As a
result, more than half felt that a 1/4 per cent change in the
discount rate would also cause a downward shift in expectations.
It was too late to think the System could make two separate 1/4 per
cent rate changes.
Again, far more reserves would have to be furnished
in order to maintain the current amount of ease and the current interest
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rate pattern.
Banks could not be expected to continue to buy
securities with their reserves if they felt the System was
uncertain about the near future.
They also indicated that a
1/2 per cent change would be interpreted as reflecting a System
desire for further ease, but the reaction might not be great
because expectations had already been at work.
Mr. Maisel concluded that only a 4 per cent discount rate
would enable the System to maintain prevailing easier conditions
without a massive infusion of reserves.
Either no change in the
rate or the smaller change would mean that the System would have
to furnish reserves both to take the place of the forces arising
from current expectations and to offset the effect of a sharp
reversal in expectations.
Either alternative A or B for the
directive might well require much larger reserves than indicated
unless the discount rate were reduced by 1/2 per cent.
As a result, Mr. Maisel said, he supported alternative B
and a full 1/2 per cent decline in the discount rate.
With such
a combination, he thought slightly lower short-term rates would
result, although developments in the last day or two clearly
indicated that even the 1/2 per cent decrease had been almost
fully discounted by the market.
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With the discount change and more operations in coupon
issues, Mr. Maisel observed, greater impact on long-term rates
also could be expected.
That might be possible without any
near-term increase in the marginal reserve measures compared to
the present.
That policy would probably give a rate of expansion
in bank credit and the money supply close to recent rates and
that, too, he would find acceptable.
Because of his feelings, Mr. Maisel concluded, he would
prefer to see alternative B reduced one degree in wording, by
changing the phrase "attaining somewhat easier conditions" to
read "maintaining the prevailing easier conditions"; and by
changing the proviso clause to call for "attaining somewhat
easier conditions" if bank credit was expanding less than expected,
rather than calling for "still easier conditions" in that eventuality.
Mr. Brimmer said he would urge the Reserve Banks to consider
reducing the discount rate by 1/2 per cent.
He thought that somewhat
greater reserve provision would be required in conjunction with that
action if the Committee was to achieve the objectives the members
had in mind.
Accordingly, he preferred alternative B for the
directive, perhaps with changes along the lines suggested by Mr. Maisel.
Mr. Brimmer noted that he favored a 1/2 per cent cut in the
discount rate partly because he would like to avoid a need for the
Board to change Regulation Q at this time to force deposit interest
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rates down, in the manner Mr. Galusha had indicated one banker
recently suggested.
The way in which Regulation Q had been used
in 1966 was not, in his judgment, the most desirable; while deposit
rates tended to be sticky, the System should not put itself in the
position of manipulating Regulation Q ceilings as an alternative
to relying on the workings of market forces.
A discount rate
reduction of 1/2 per cent would be helpful in persuading depositary
institutions to lower the rates they paid.
It also would be helpful
in encouraging European central banks to take similar action.
Even
if the System had a second opportunity to lower its discount rate
later in the year, he would hope that it would not plan now on two
1/4 per cent reductions, since the second action might have little
effect on foreign central bank actions.
Mr. Brimmer also favored encouraging the Manager to take
advantage of opportunities to buy coupon issues, in order to help
overcome stickiness in long-term rates.
At the same time, he was
not recommending an "operation twist"; he was not disturbed by the
fact that short-term rates had been going down.
Mr. Brimmer said he shared Mr. Mitchell's concern about
the appropriateness of the statement on the balance of payments
that Mr. Hayes had proposed for the directive.
The statement would
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imply that the improvement in the trade surplus had been more than
offset by deterioration on capital account, and he questioned
whether that could be demonstrated.
Mr. Hayes commented that his purpose had been to make a
broad statement on the balance of payments situation, without
pinpointing particular figures, such as those for the liquidity or
official settlements deficits before or after seasonal adjustments.
While the official settlements balance in particular had worsened
drastically, considering the various measures together it seemed
to him that the over-all picture was clearly one of deterioration.
Chairman Martin noted that Mr.
suggestion, which read:
Solomon had an alternative
"The balance of payments remains a serious
problem despite some recent improvement in
the foreign trade surplus."
Mr. Daane said he would not favor that language because it
conveyed some implication of an improvement in the payments balance.
Certainly there had been no improvement; it would be more accurate,
in his judgment, to convey the sense of some deterioration.
Mr. Brimmer said he was giving special weight to Mr. Reynolds'
comments about the new projections by Government analysts.
He
recalled that Mr. Reynolds had said that, leaving aside the various
special transactions, it appeared as if the liquidity deficit would
be somewhat smaller in 1967 than in 1966; and if one assumed that the
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special transactions would have a favorable effect this year about
half as great as they had last year, the published liquidity deficit,
including such transactions, would be about unchanged.
On the other
hand, the balance on the official reserve transactions basis probably
would deteriorate this year, primarily because of the reflow of
funds from U.S. banks to their foreign branches.
Accordingly, the
language suggested by Mr. Solomon might be better than that in the
staff draft.
Mr. Hayes referred to Mr. Brimmer's comment that he was
giving special weight to the projections that Mr. Reynolds had
mentioned.
In his (Mr. Hayes') judgment, those projections con
tained a large element of hope.
The Committee traditionally had
based the statements in the first paragraph of the directive on
developments actually observed rather than on hopes or expectations,
and he thought it should continue to do so.
Mr. Brimmer agreed with Mr. Hayes' comment on the directive,
but added that it was his impression that the projections took into
consideration all of the available evidence, including the latest
figures.
Mr. Hayes then noted that he would not favor Mr. Solomon's
proposed language since the only detail mentioned was the improve
ment in the foreign trade surplus.
If there had been any change in
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the over-all situation it had been for the worse rather than for
the better.
Mr. Hickman observed that the economy apparently continued
to slide in March, so far as could be determined from available
data.
As the Committee knew, it was sometimes possible to detect
early changes in direction from the statistics for the Fourth
District because of the dominant role of durable goods manufacturing
in that District.
While it was necessary to guard against being
too bearish, the latest signals provided little indication of a
turnaround.
Latest District data on manufacturing employment and
payrolls, as well as steel production, nonresidential construction,
and car sales, all showed significant declines.
Insured unemploy
ment increased in March in ten of the fourteen major labor market
areas of the District, and the over-all increase was sharper than
in the nation.
The regular quarterly meeting of Fourth District business
economists was held at the Cleveland Reserve Bank in mid-March,
Mr. Hickman noted.
The group's latest forecasts of industrial
production and of GNP were almost uniformly lower than they had
been three months earlier.
Three months ago, the median forecast
for industrial production showed quarterly increases throughout
1967 for an over-all gain of about 3 per cent; at the latest meeting,
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the group expected no change from the reduced first-quarter level
until the fourth quarter, and then a slight rise, for an over-all
gain of about 1-1/2 per cent.
The general tone of the discussion
at the meeting was even gloomier than the numbers would indicate,
as evidenced by frequent reports of declining orders and an end to
increasing backlogs.
Softness was indicated in orders for trucks,
electrical machinery, aluminum, and flat-rolled steel products.
His staff was even more bearish than the Fourth District economists;
the staff expected a further decline in production in the second
quarter, along with rising unemployment.
Mr. Hickman felt that the System had accomplished much since
the last meeting of the Committee, and the Manager was to be con
gratulated for his skillful execution.
needed.
More of the same was clearly
Some of the things he would like to see the System accomplish
in April were:
(1) a continuation of the recent rate of expansion
of money and credit; (2) a 91-day bill rate around 4 per cent, and
a Federal funds rate below the discount rate; (3) continued downward
pressure on intermediate- and long-term rates to encourage an
enlarged flow of funds to the mortgage market; and (4) net free
reserves about $300 million.
That list was consistent with the staff's alternative B,
Mr. Hickman said.
In addition, he thought the time was now ripe for
a discount rate reduction--the stage had been set internationally,
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domestic money market participants expected it, and the economy
needed it.
His directors were ready to act on a recommendation,
either this Thursday or next.
or 1/2 per cent?
Should the reduction be 1/4 per cent
Before today's meeting he personally had favored
the smaller move, to conserve ammunition.
But, after hearing the
discussion around the table today, he was inclined toward a
reduction of 1/2 per cent.
In any event, he would like to move
as soon as possible in view of the impending Treasury refunding.
The important thing was to move as closely together as possible.
Mr. Hickman thought the System should seek at all costs
to prevent the type of backup in interest rates and bond yields
that occurred in February, since that might interrupt the smooth
flow of funds through financial markets.
The Manager should move
promptly through open market operations to prevent any signs of
congestion from developing in the bond market, even if free
reserves might rise temporarily to very high levels.
The present
situation in the bond market contained elements of instability
caused by the buildup of the Blue List, the continued heavy
corporate calendar, and the possible reversal of some long positions
by free riders and speculators.
Mr. Bopp remarked that the debate about whether the economy
was in a recession still went on at the Philadelphia Reserve Bank,
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4/4/67
just as it did elsewhere.
There was agreement, however, that the
economy was continuing to slow down and that gloomy expectations
were spreading.
That was apparent from an informal survey of Third District
businessmen the Reserve Bank had just completed, Mr. Bopp continued.
The canvass was a resurvey of a group with whom the Bank had been
in touch about two months ago in an effort to get an up-to-date
picture of the inventory situation.
At that time many of the
businessmen had felt that inventories were relatively high, but
they expected that an upturn in sales would help them adjust
inventories without significant cuts in production or employment.
Now, however, half of those companies reported that the expected
sales had failed to materialize and that they had cut production.
A number planned further cuts.
Some of those who planned no
immediate change said they would need signs of renewed strength
soon to justify the current level of operations.
felt conditions would improve before summer.
None of them
However, none
expected an actual downturn in business this year, and most looked
for new strength by the fourth quarter.
Mr. Bopp found confirming developments in Third District
banking.
Tax borrowing in March was very light and prepayments
had been picking up, although some of that reflected funding through
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capital market financing.
Faced with waning loan demand, a
majority of the large banks were revising their growth projections
downward.
Sentiment was becoming weaker and more uncertain, Mr. Bopp
continued, but there still was an underlying confidence in the
economy.
There was a question of how much more monetary policy
could do to keep that confidence alive.
Nevertheless, at this
critical phase, policy might help to determine whether there was
mainly an inventory adjustment or a cumulative downturn.
The
impact of the adjustment on employment and incomes already had
become apparent, and the adjustment still had a way to go.
It
was desirable to continue to minimize those adverse secondary
effects on employment and income.
Given those developments, Mr. Bopp said, it would be well
for the Federal Reserve to confirm its intention to continue ease.
The easiest way to accomplish that was by an early reduction of
1/2 per cent in the discount rate.
A smaller reduction might have
little easing effect because the market had already discounted
some reduction.
In fact, because in recent history rate changes
had usually been in 1/2 per cent steps, a smaller reduction could
have an adverse effect on business sentiment.
The recent increases in money and credit had been all to
the good and should be continued, Mr. Bopp thought, particularly
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since some rates had been sticky.
Net free reserves running at
$300 million or above would seem appropriate in order to accomplish
that and to bring about a further decline in rates.
He favored
alternative B of the staff draft directives, although in light of
the discussion today he did not feel strongly on the point.
Mr. Patterson said that since recent economic developments
in the Sixth District were generally similar to those for the
country as a whole that had already been reported, he would not
take the time to review them.
Looking at the national banking
figures, he came to the conclusion that credit was readily
available.
Banks evidently had accumulated enough securities by
now to satisfy even an upsurge in loan demand, although he would
concede that many were still rebuilding their liquidity.
Therefore,
he wondered if the point had not come to take a hard look before
inundating the economy with reserves.
If a recession were around
the corner, that would be the correct path to follow.
But, as of
now, he still saw too many inconsistencies in the economic indicators,
such as rising incomes, on the one hand, and sluggish retail spending,
on the other.
It used to be said that monetary policy was determined by
what was going on currently and never by prospects for the future,
Mr. Patterson observed.
The Committee had come a long way from that,
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as the use of the green book testified, and he might add that it
was a good thing it had.
Personally, however, he found that future
developments in two of the most important sectors in the economyinventories and defense--were extremely unclear.
Because of that
poor visibility, it seemed to him that right now the best policy
to follow was to wait until the Committee was more certain of the
future before easing further.
For those reasons, he believed that
the Committee should not try to push rates down further at this
time.
On the other hand, Mr. Patterson said, this was hardly a
time at which a rise in interest rates was wanted.
Perhaps one of
the best ways to avoid such a rise would be to lower the discount
rate.
Otherwise, there might be a risk of misleading the market
regarding the System's policy posture and seeing a possible
repetition of the interest rate reversal of early February.
It
was largely with those considerations in mind that the executive
committee of his Bank's board of directors, with his endorsement,
voted in favor of a 4-1/4 per cent discount rate last week.
In
his opinion, such a modest move would give the necessary flexibility
for whatever discount rate action the System might want to undertake
in the future.
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4/4/67
Mr. Patterson favored alternative A for the second paragraph
of the directive, with one amendment.
Following the opening phrase
reading "To implement this policy," he would insert the phrase
"against the background of a small cut in the discount rate."
Mr. Francis commented that it had been adequately pointed
out this morning that spending and production growth rates had
slowed in recent months.
To date, however, data did not indicate
a serious economic contraction but rather the kind of adjustment
that the Committee sought last spring and summer.
Despite the
softening in demand, employment and personal incomes had continued
to rise at high rates.
At the same time, upward pressures on
prices had desirably lessened; goods were more readily available,
and bottlenecks had been reduced.
In general, the economy was
probably healthier than it was last summer.
There were, to be sure, some disconcerting developments
in the economy which could lead to an undesirable economic con
traction, Mr. Francis said.
The high inventory-to-sales situation,
the underemployment of workers at some firms, and the relatively
high burden of consumer debt repayments were examples of those
drags.
However, economic conditions were being stimulated by
Government stabilization actions which could more than offset the
dampening forces.
According to commonly used measures, the budget
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had been very stimulative, and indications were that it would
become more expansionary in the quarter just commencing.
In the
last two or three months, monetary actions shifted markedly from
restraint to ease.
Mr. Francis thought that recent monetary expansion had been
desirable in view of current economic conditions and outlook.
From
what was known about the lags with which monetary expansion affected
the economy, that expansion should have a desirable stimulative
effect late this spring and in the summer.
What was done in the
immediate future might have most of its effect in late summer and
early fall.
Mr. Francis believed the Committee should continue to assure
monetary expansion.
Since the imperfections of data were so great
and the knowledge of linkages and lags was so limited, it was very
difficult to judge whether the rate of monetary expansion in the
last two or three months had been too great, too limited, or about
right.
At the last meeting of the Committee it was apparent that
monetary expansion had occurred.
Yet, past experience with those
data left room for doubt as to whether adequate expansion would be
sustained.
Now, however, it seemed to him that there was little
doubt that monetary expansion had been achieved at a very rapid
rate.
Over the past three months total reserves had gone up at a
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17 per cent annual rate, bank credit at a 15 per cent rate, and
money supply at a 5 per cent rate.
In considerable measure, Mr. Francis continued, the
expansion of bank credit had reflected reintermediation and
further intermediation by the commercial banking system.
That
aspect of recent bank credit growth and its accompanying expansion
of total reserves probably had a neutral effect on the economy.
Therefore, he thought the 15 per cent rate of increase of total
bank credit and the 17 per cent rate of increase of reserves
overstated the degree of monetary stimulus.
However, quite aside
from the bank intermediation factor, bank reserves had been
expanded sufficiently to allow the money supply to increase at
a 5 per cent annual rate in the last three months.
That was a
very high rate, historically, and suggested that the Committee
should consider the possibility of excessive expansion as well
as the possibility of inadequate expansion, as provided in
alternative A of the staff draft directives.
Overreacting to
the monetary contraction of last summer and fall would create
future problems.
To that end, Mr. Francis suggested that the Committee
provide for maintaining the same money market conditions as those
of the past two weeks and include a double-edged proviso clause;
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namely, if the pertinent intermediate objective appeared to be
expanding inordinately, the money market be permitted to tighten;
if the intermediate measure appeared to be expanding too slowly,
market conditions be eased.
If the Committee selected the rate of increase of member
bank deposits as its operating guide and used the staff's projected
pattern of data for April and May, Mr. Francis would suggest a
target growth range of 10 to 13 per cent per annum from March to
April compared with the 15 per cent rate since December.
Assuming
that time deposit growth slowed to about a 12 per cent rate from
the 18 per cent rate of the past three months and that other
factors moved as expected, there might be no increase of the money
supply from March to April.
That would be appropriate in view of
the anticipated extraordinary transfer of funds to the Treasury in
April and a return flow in May.
That would give the Committee
about a 5 per cent rate of increase of money for the February-May
period as a whole.
As to the discount rate, Mr. Francis preferred to leave it
unchanged for a while longer, partly because of difficulties the
System might face if it had to raise it later.
Open market operations
could inject an adequate supply of bank reserves, and there did not
appear to be any need to give the market a psychological jolt at this
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time.
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Also, it was not yet clear that market interest rates
would continue to decline more than a month or two.
Thereafter,
if spending and demands for credit accelerated, as he envisaged,
market interest rates were apt to rise again.
Hence, a discount
rate decrease now might have to be quickly followed by an increase.
In Mr. Francis' opinion the System's decision about the
discount rate should not be affected by the market's expectations.
The System should fix the discount rate on its own merit.
Last
summer the System operated for a time with the discount rate far
below the bill rate yet was able to limit monetary expansion.
Now
he thought monetary expansion could be adequately stimulated even
though the bill rate was below the discount rate.
Combining that
procedure with the experience of last summer, possibly the System
could get away from using the discount rate as a necessary indicator
or confirmation of monetary policy and action.
If the discount rate
was to be changed at this time, however, he would prefer a 1/2 per
cent reduction to one of a 1/4 per cent.
Mr. Francis favored alternative A of the draft directives.
Mr. Robertson presented the following statement:
The evidence before us indicates that the economy
is in the midst of a necessary transition, and that what
is called for on our part is the provision of an accommo
dative credit atmosphere to insure that the economic
adjustment is both brief and constructive.
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As I read the financial figures, it seems clear that
we have made very substantial progress in this direction.
Certainly the data bearing on flows of funds suggest that
credit supplies are becoming ample. At commercial banks,
both time and demand deposits are climbing about as
briskly as in the most stimulative periods in the years
1961-1965. And this is not a case of "robbing Peter to
pay Paul"--banks are not simply taking these funds away
from other lenders. On the contrary, reports suggest
large inflows of funds are also accruing to other savings
intermediaries and even to the long-term bond markets
directly.
Some observers have been unhappy at how little in the
way of interest rate declines, in the longer-term area, has
accompanied this resurgence of flows. I, myself, am more
concerned with flows than with rates, but I recognize that
there can be times and places when a sticky interest rate
structure is indicative of a problem of restricted flows
that the System ought to be taking into account. What
might be appropriate System action in such circumstances,
however, is open to debate.
Suggestions have been made that we should revive an
"Operation Twist" for this purpose, which moves me to say
a few words on that subject.
Quite aside from whether any real economic advantage
flowed from Operation Twist, which is questionable, the
part actually played in the Operation by Federal Reserve
purchases of longer-term securities in the open market
has been grossly exaggerated. On the record, it is
greatly overshadowed by such influences as sharply
increased commercial bank intermediation, under the
liberalized Regulation Q ceilings that were provided.
Furthermore, a considerable portion of official purchases
of coupon issues, by the Federal Reserve as well as the
Treasury, served essentially to mop up the overhang of
securities in the market that resulted from aggressive
Federal debt-lengthening activities on the part of both
the Treasury and its underwriters.
Any use of this twisting path will jeopardize, and
continued use will extinguish, the traditional "independence"
of the System, which I, for one, would like to avoid. If
the impact of Federal debt lengthening needs to be moderated,
I would prefer doing it by means of a judicious tailoring of
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debt management operations themselves, rather than using
the Federal Reserve to pick up the pieces. (I am aware,
of course, that this has not been a problem recently, but
I also am aware that before this Committee meets again
the Treasury will have faced a major quarterly refunding
decision that may make these comments timely once again.)
Most important from a longer-run point of view,
however, is what Federal Reserve purchases aimed at a
particular objective can do to the effective functioning
of the private market mechanism. I remain persuaded that
such System operations can easily lure private market
participants into depending upon System buying power and
quickly conforming their pricing to System rate goals,
without ever giving the kind of "feedback" signals of the
changing intensity of private market supplies and demands
that are so essential to effective dealer operations, and
also to good and timely monetary policy formulation. I,
for one, therefore, am opposed to Federal Reserve inter
vention in the market for longer-term securities at this
juncture as part of a new application of Operation Twist.
If this is one of those times when longer-term bond,
mortgage, and deposit rates are proving so sticky as to
inhibit free and accommodative credit flows, then I favor
dealing with the problem by increased reliance on those
instruments of monetary policy that tend to exert more
downward pressure upon interest rates per dollar of
reserves released than typically results from an analogous
sized open market operation. I refer to changes in discount
rates and reserve requirements. Either one of these instru
ments can exert an interest rate influence quickly and with
less debilitating effects upon private market mechanisms
than outright open market purchases of long Governments.
We used a reserve requirement cut very effectively in
early March to achieve both timely reserve injection and a
rally in market rates. I think we can use a discount rate
cut now with equal effectiveness. And because I would
prefer to see Federal Reserve downward rate pressure on
some of the sticky loan and deposit rates applied through
this indirect means, I would favor a full 1/2 point cut in
the discount rate as soon as it can be done. (A 1/4 point
change might seem equivocal to the markets, and I would like
for us to be in an unequivocal position. Money market rates
have now declined enough so that a 1/2 point cut would not
appear extreme, and I believe credit conditions generally
would be benefited by such a step.)
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With these thoughts in mind about the uses of other
policy instruments, I would favor directing the Manager
to conduct open market operations in such a way as to
bolster and sustain the easier money market conditions
that might be expected to emerge with a discount rate cut.
Specifically, I would vote in favor of alternative B as
drafted by the staff. I could accept some of the changes
that have been suggested, but so many changes have been
proposed that it might be best to stay with the staff
language. I must say that I would still prefer the kind
of proviso clause construction that I advocated at the
last meeting, namely, two-way proviso language but with
the understanding that deviations of bank credit on the
upside would have to be a good deal larger to be inter
preted as "significant" than would deviations on the
downside. I still think it represents good economics,
in a period when we have more cause to be worried about
economic contraction than about exuberance.
Chairman Martin said he did not think the members of the
Committee were as far apart in their thinking today as might appear
from some of the comments that had been made.
At the same time, it
seemed to him that the spectrum of views presented in the go-around
was particularly helpful in contributing to constructive thinking
about the problems currently facing the System.
Before today's meeting, the Chairman continued, he had thought
that he could accept either a 1/4 or 1/2 per cent reduction in the
discount rate.
However, certain comments in the go-around had
convinced him that a 1/2 per cent reduction would be the right action
now.
If there was any likelihood that a 1/4 per cent cut would be
followed by another similar reduction soon, to establish a 4-1/4 per
cent discount rate would be confusing to the market in a period just
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before a Treasury financing.
That struck him as a highly persuasive
argument for a 4 per cent discount rate.
Chairman Martin favored alternative B for the directive,
although he thought the Committee might want to consider the amend
ments to the staff draft that Mr. Maisel had proposed.
He doubted
that a two-way proviso clause was necessary or desirable at this
time.
Mr. Koch observed that it seemed clear from what Mr. Holmes
and others had said that there would be some easing in money market
conditions, viewed broadly, if the discount rate was reduced by 1/2
per cent.
That raised a question of consistency if, as Mr. Maisel
had proposed, the directive called for "maintaining the prevailing
easier conditions in the money market."
He would suggest using the
language of the staff's alternative B, calling for "attaining
somewhat easier conditions," on the understanding that the easing
envisaged was expected to be brought about by the discount rate
action rather than through open market operations.
Mr. Maisel commented that the understanding Mr. Koch had
mentioned was what he had had in mind in making his suggestions for
the directive.
Mr. Holmes remarked that while there might be some problem
in finding the appropriate language for the directive, he thought the
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Committee's intent was quite clear:
if discount rate action tended
to produce easier market conditions, that tendency should not be
offset by open market operations.
On the other hand, easier conditions
should not be actively sought by open market operations independently
of the effects of the discount rate change.
Mr. Hayes said he thought Mr. Koch's point was well taken.
As he understood the Committee's intent, the discount rate change
should be the main source of easing.
Open market operations would be
used to back up the effects of the discount rate action, but would
not be employed in themselves to achieve further ease.
Chairman Martin said he was agreeable to accepting the language
of the staff's alternative B on that basis.
Several other members
expressed agreement with the Chairman's statement.
Mr. Hayes asked whether the Committee would be averse to
employing a two-way proviso in alternative B, to be interpreted in
the manner Mr. Robertson had suggested.
result in a much better directive.
In his judgment that would
While he doubted that the upper
side of the proviso would be called into play in the coming period,
to include it would indicate that the Committee was aware of the
possible problem of excessive bank credit growth.
Chairman Martin said he thought it would be clear that the
Committee was aware of that problem in any case.
4/4/67
-97Mr. Swan remarked that a two-way proviso, even if interpreted
as Mr. Robertson had suggested, would seem to him to change the whole
tone of the directive.
He would much prefer the language of the
staff's draft.
Mr. Daane observed that while in general he was sympathetic
with the use of a two-way proviso, he did not think one was needed
at this particular juncture.
Mr. Hickman concurred, noting that if bank credit appeared
to be rising excessively the Committee could hold a special meeting
to consider a possible change in its instructions.
Chairman Martin then referred to the earlier discussion of
the balance of payments sentence in the first paragraph of the
directive, and indicated that Mr. Reynolds now suggested the following
language:
"The balance of payments deficit increased in the first
quarter despite some improvement in the foreign trade surplus."
There was general agreement on the language Mr. Reynolds
had proposed.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of New York
was authorized and directed, until
otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the following
current economic policy directive:
The economic and financial developments reviewed at
this meeting support earlier indications of a marked
slowing of expansion in over-all economic activity. Retail
4/4/67
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sales have continued sluggish and curtailment in the rate
of business inventory accumulation is in process. Average
commodity prices have changed little recently, but unit
labor costs in manufacturing have risen further. Bank
credit expansion has remained vigorous, short-term
interest rates have declined markedly further, and long
term rates have moved down somewhat despite very heavy
securities market flotations. The balance of payments
deficit increased in the first quarter despite some
improvement in the foreign trade surplus. In several
important countries abroad, monetary and fiscal policies
have eased further in response to slackened economic
activity. 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, 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 said that he would like to add a few
words on the subject of the discount rate.
He thought it should be
recognized that responsibility for initiating discount rate actions
lay with the Federal Reserve Banks.
If the directors of any Bank
felt strongly that the rate should be established at 4-1/4 per cent,
he personally would not be inclined to vote to disapprove such a
rate.
He saw no harm in having a discount rate of 4 per cent at
some Banks and 4-1/4 per cent at others, at least temporarily.
Mr. Brimmer noted that while several Reserve Bank Presidents
had expressed a preference for a 4-1/4 per cent discount rate in the
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course of today's discussion, he had not detected much evidence
that they felt strongly.
On the other hand, at least one President
had indicated that he had favored a 4-1/4 per cent rate earlier but
now preferred a 4 per cent rate.
He personally would hope that the
Reserve Banks would think carefully about the possible disadvantages
of announcing a split discount rate in the existing environment.
Messrs. Mitchell and Hickman indicated that they also
thought it was important to have a uniform discount rate.
Chairman Martin agreed that it might be best if all Reserve
Banks moved to a 4 per cent rate.
But to make that statement was
not the same thing as insisting on uniformity, which he was not
inclined to do,,
Mr. Ellis said that he would prefer to have the Board defer
action with respect to the 4-1/4 per cent rate established last
week by the directors of the Boston Reserve Bank until the directors
could meet again and consider the matter further.
In response to a question by Mr. Wayne, Chairman Martin said
that he would not consider it necessary for all Banks to move
together.
The Board's present thinking on timing was that if three,
four, or five Banks had established new discount rates by Thursday
of this week it would approve those changes, and plan on acting
promptly with respect to new rates established subsequently by other
Banks.
In any case, the Board would not take any action on discount
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rates before Thursday.
In that connection, it was important that
the discussion of discount rates at today's meeting be held in
confidence until the action was announced.
Mr. Robertson then reported that the "eligible paper" bill,
which would permit member banks to borrow from the Reserve Banks
on any sound asset without paying a penalty rate of interest,
probably would be passed by the Senate shortly and then would be
taken up by the House of Representatives.
One of the first ques
tions likely to be raised in the House was whether the System was
prepared to deal with the wide range of collateral that would be
eligible under the bill; it had been suggested that System personnel
might be relatively inexperienced in appraising mortgages, municipal
securities, and the like.
Consequently, it seemed desirable for
the System to launch a program to provide any necessary training
for its personnel.
He would suggest setting up an ad hoc committee
with Reserve Bank and Board representation to assess existing train
ing needs and to develop a program for dealing with them.
If the
Reserve Bank Presidents and Board members thought such a course
would be worthwhile, initiating actions could be taken immediately.
Mr. Hayes noted that the Presidents' Conference Committee
on Discounts and Credits had an interest in this area and would be
glad to work on implementing a program such as Mr. Robertson had
suggested.
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No objection was raised to instituting a program of the
type Mr. Robertson had proposed.
Chairman Martin then noted that the Committee had planned
to continue its discussion today of the implications of the "Freedom
of Information Act" for the Committee's procedures.
In that
connection, memoranda from the General Counsel and the Secretariat,
making certain recommendations, had been distributed on March 29,
1967.1/ In view of the lateness of the hour, however, he suggested
that the planned discussion be postponed until the next meeting.
There was no disagreement with the Chairman's suggestion.
It was agreed the next meeting of the Federal Open Market
Committee would be held on Tuesday, May 2, 1967, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
1/ Copies of these memoranda have been placed in
the Committee's files.
ATTACHMENT A
CONFIDENTIAL (FR)
April 3, 1967
Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on April 4,
1967
FIRST PARAGRAPH
The economic and financial developments reviewed at this
meeting support earlier indications of a marked slowing of expansion
in over-all economic activity. Retail sales have continued sluggish
and curtailment in the rate of business inventory accumulation is in
process. Average commodity prices have changed little recently, but
unit labor costs in manufacturing have risen further. Bank credit
expansion has remained vigorous, short-term interest rates have
declined markedly further, and long-term rates have moved down some
what despite very heavy securities market flotations. Recently there
has been some improvement in the foreign trade surplus but none in
the over-all balance of payments. In several important countries
abroad, monetary and fiscal policies have eased further in response
to slackened economic activity. 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.
SECOND PARAGRAPH
Alternative A
To implement this policy, System open market operations
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, 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, April 3). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19670404
@misc{wtfs_fomc_minutes_19670404,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1967},
month = {Apr},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19670404},
note = {Retrieved via When the Fed Speaks corpus}
}