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, May 2, 1967, at 9:30 a.m.
Martin, Chairman
Brimmer
Daane
Francis
Maisel
Mitchell
Robertson
Scanlon
Sherrill
Swan
Ellis, Alternate for Mr. Wayne
Treiber, Alternate for Mr. Hayes
Messrs. Hickman and Galusha, Alternate Members
of the Federal Open Market Committee
Messrs. Bopp and Clay, Presidents of the Federal
Reserve Banks of Philadelphia and Kansas City,
respectively
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Molony, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Baughman, Craven, Garvy, Hersey, Jones,
Koch, Partee, Ratchford, 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. O'Connell, Assistant General Counsel, Legal
Division, Board of Governors
5/2/67
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
Mr. Bernard, Economist, Government Finance Section,
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. Kimbrel and Coldwell, First Vice
Presidents of the Federal Reserve Banks of
Atlanta and Dallas, respectively
Messrs. Eisenmenger, Eastburn, Mann, Taylor, Tow,
and Green, Vice Presidents of the Federal
Reserve Banks of Boston, Philadelphia, Cleveland,
Atlanta, Kansas City, and Dallas, respectively
Mr. Deming, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank of
Minneapolis
Chairman Martin welcomed Mr. William W. Sherrill, recently
appointed to the Board of Governors, to his first meeting of the
Federal Open Market Committee.
The Chairman noted that Mr. Sherrill
had executed his oath of office as a member of the Committee prior
to today's meeting.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on April 4, 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
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for the period April 4 through April 26, 1967, and a supplemental
report for April 27 through May 1, 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 would remain unchanged again
this week.
Since the Stabilization Fund had more than $100 million
of gold on hand, he would assume that no reduction in the gold
stock would be required for at least several weeks to come.
Mr. Coombs commented that the London gold market had been
very badly shaken by the publicity given to recent statements on
U.S. gold policy contained in a publication of the Chase Manhattan
Bank and in a speech by the president of the Bank of America.
It
was likely that those statements had brought about a permanent
change in market thinking, and they had probably lifted the underly
ing demand for gold to a new high level.
As a result of the
statements, the gold pool lost about $25 million during April.
Since the pool might well have been in surplus during April if the
statements had not been made, their true cost probably was closer
to $50 million, and that was likely to represent only the first
instalment.
The one factor that had kept the market from a major
crisis had been the continued abnormally high flow of South African
gold; the running down of South African gold reserves had increased
the flow by nearly 40 per cent above normal in recent months.
As
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soon as South Africa halted the present reserve drain and sought
to rebuild its gold reserves, as it had after each previous period
of drain, the supply of gold reaching London would drop sharply
below current levels, perhaps by more than 50 per cent, and the
gold pool would be exposed to the full brunt of speculative buying.
As of the moment the pool's resources were only $85 million.
The
prospective deterioration in the U.S. balance of payments during
1967, together with the escalation of the war in Vietnam, seemed
likely to aggravate the gold market situation still further, and
it was entirely possible that before the summer was out there could
be a major crisis in the London market.
On the foreign exchange markets, Mr. Coombs continued,
sterling had had another good month during April.
He expected
that the British Government announcement, to be made this morning,
would indicate that their reserve increase had been in excess of
$100 million.
At least part of the inflow to the U.K. probably
reflected the comparative advantage which the British were contin
uing to maintain by keeping credit conditions in London relatively
tight and rates relatively high compared to other centers.
If the
Bank of England had followed the discount rate cuts by the Federal
Reserve and the German Federal Bank, it was likely that that would
have triggered off sympathetic moves by central banks of the
Netherlands, Belgium, and Sweden.
The main justification for
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Britain's holding back in that way was that they had been most anxious
to pull in enough money during April and early May to finance, as far
as possible, a very large prepayment--roughly $400 million--to the
International Monetary Fund, and a payment to Switzerland, both of
which they hoped to make around the middle of May.
They had made good
progress in getting the money together, and that might open the way for
an early reduction in the Bank rate.
Mr. Coombs said that the dollar had weakened appreciably on the
continental markets, and the continental central banks were again
taking in dollars.
As his written report indicated, the System had
found it necessary last Friday to use $15 million equivalent of the
fully-drawn portion of the swap line with the National Bank of Belgium
to absorb some of that Bank's dollar purchases.
In the case of the
Swiss franc, the spring months were normally a period of weakness and
in earlier years the System or the Treasury had been able to pick up as
much as $150 million of Swiss francs during that period.
It had not
been possible to acquire Swiss francs this year; the same apprehension
that was affectng the gold market, together with a liquidity squeeze
in Zurich, was frustrating the normal pattern.
The Swiss franc had
moved close to its ceiling and there would probably be heavy flows of
funds to Switzerland during the summer months.
In fact, nearly all of
the continental currencies might strengthen further over coming months,
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and it seemed quite possible the System might have to make very heavy
drawings on its swap lines between now and next fall.
Mr. Robertson asked whether Mr. Coombs knew of any basis for
assessing the accuracy of recent reports to the effect that the
production of gold in Russia had been accelerated.
Mr. Coombs replied that the Central Intelligence Agency, which
followed the Russian gold situation reasonably closely, had published
a report a few years ago which tended to discount stories about
important new gold discoveries in Russia.
He did not know whether that
agency had prepared a more up-to-date version of its report, which had
suggested that Russia was producing no more than $150 to $200 million
of gold per year.
Mr. Brimmer inquired about the extent to which continental
central banks might have benefited from the recent reflow of funds to
the Euro-dollar market through foreign branches of U.S.
banks.
Mr. Coombs said he thought that the main beneficiary thus far
had been the Bank of England, but clearly some of the funds had gone to
the continent.
More generally, there had been a tendency for dollars
to shift from private to foreign official hands--an important and
dangerous development which was likely to have implications for the
System's use of its swap arrangements.
In part, perhaps, that develop
ment was a consequence of the continued relative tightness of the
continental money markets, but in part it was attributable to the
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alarms of recent months about the outlook for the international mone
tary system.
By unanimous vote, the System
open market transactions in foreign
currencies during the period April 4
through May 1, 1967, were approved,
ratified, and confirmed.
Mr. Coombs noted that the System's standby swap arrangement
with the Bank of England in the amount of $1,350 million would reach
the end of its twelve-month term on May 31, 1967.
He recommended its
renewal for another full year.
By unanimous vote, renewal for a
further period of twelve months of the
$1,350 million standby swap arrangement
with the Bank of England, scheduled to
mature on May 31, 1967, was approved.
Mr. Coombs then reported that he had had discussions with the
Governor and Deputy Governor of the Bank of Mexico regarding a possible
standby swap arrangement with that Bank, and they had indicated that
they would be prepared to join in an arrangement in the amount of $130
million.
They had apparently chosen that figure to round out to an
even $500 million the total of their swap line with the System, their
$100 million swap line with the Treasury, and their International
Monetary Fund quota of $270 million.
Although $130 million was an
unusual figure for a swap arrangement he did not think it raised any
substantive question and would recommend its acceptance.
From his
conversations with the Mexicans it seemed quite clear that they understood
5/2/67
the rules of the game as they had been developed in connection with the
swap network and could be relied upon to adhere to them.
He understood
that the Bank of Mexico had accomplished all of the necessary clearance
within their Government and that they would be prepared to make the
agreement final within the coming week.
Mr. Lang of the New York
Reserve Bank staff would be going to Venezuela this week in order to
discuss the swap network with the Governor of the Bank of Venezuela and
to brief him on the progress of the negotiations with Mexico.
The Bank
of Mexico had been advised that the Venezuelans would be kept informed.
Mr. Coombs noted that he had also been in touch with officials
of the National Bank of Denmark.
They told him that Denmark had
qualified for Article VIII status in the International Monetary Fund
yesterday and that they would be prepared to join in a swap agreement
with the System, in the amount of $100 million, at almost any time.
They still felt, however, that it would be useful for the announcement
of a swap arrangement between their Bank and the System to be timed to
coincide with an announcement of a similar arrangement between the Bank
of Norway and the System.
There was a problem in this connection,
however, since the Norwegians were still negotiating with the IMF about
one remaining technical obstacle to their qualification for Article VIII
status.
Even after they reached agreement in substance with the Fund,
it might take a little while for all of the formalities to be cleared
up.
He could see some possible advantage in anticipating the completion
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of such formalities by proceeding with the swap arrangement with the
Bank of Norway once they had reached agreement in principle with the
Fund.
In his judgment there would be advantages in announcing all of
the new agreements simultaneously rather than sequentially; the latter
procedure might lead to some speculation as to how far the System might
be intending to go in broadening the network to include other countries.
Mr. Coombs said he would, therefore, recommend Committee
approval of new standby swap arrangements in the amount of $130 million
with the Bank of Mexico and $100 million with the National Bank of
Denmark.
He would also recommend approval of a $100 million arrange
ment with the Bank of Norway,
contingent on their indicating that they
had reached an agreement in principle with the International Monetary
Fund which would enable them to qualify for Article VIII status as
soon as the necessary papers were executed.
He believed that all three
central banks would be prepared to join in standby swap arrangements
with a maturity of a full year.
Mr. Mitchell commented that the System would be placing
Venezuela in a difficult position if it declined to make a swap
arrangement with them because they had not attained Article VIII status,
and at the same time entered into an arrangement with Norway before
that country had met the requirements of Article VIII.
He thought it
would be preferable to give Venezuela the same opportunity that
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Mr. Coombs was suggesting should be given Norway; if they could achieve
Article VIII status, it would be appropriate to include a swap line
with them in the package.
Mr. Coombs said he suspected that Venezuela's qualifying under
Article VIII would involve a rather lengthy process.
In the case of
Norway, on the other hand, only a few weeks were likely to be required
to complete the negotiations and to process the necessary papers.
Mr. Mitchell replied that he still believed the Venezuelans
would be put at a disadvantage in the Carribean if they were not given
a chance to achieve Article VIII status before the System announced new
swap arrangements with Mexico and the two European countries.
He
thought it would be better to defer action on the other arrangements
until discussions were held with the Venezuelans.
If Mr. Coombs
was correct in his judgment that they could not achieve Article VIII
status relatively soon, they would at least be informed for the present,
and a swap arrangement with them could be made at some future date.
It
was important to avoid any suggestion of discriminatory action.
Mr. Brimmer recalled that at its previous meeting the Committee
had agreed on the desirability of holding informal discussions with the
Venezuelans.
Mr. Coombs noted that he had been authorized to negotiate with
Mexico with respect to a possible swap arrangement, and to keep the
Venezuelans informed.
It was not until yesterday that the Mexicans had
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advised him that they were prepared to join in the arrangement.
The
Venezuelans would be informed about the discussions with Mexico in the
course of Mr. Lang's forthcoming visit.
Mr. Solomon commented that when this matter was discussed at
the previous meeting the judgment of the Committee had been that it
was rather unlikely that Venezuela would attain Article VIII status
soon enough to be included in the present package, but that it was
important that they be informed of the standards for admission to the
network before an arrangement with Mexico was announced.
Mr. Robertson said that he could see the justification for
announcing the new swap arrangements with Mexico, Denmark, and Norway
simultaneously but he did not understand the need for moving ahead on
them before Norway had attained Article VIII status.
Mr. Coombs replied there was a potential reason for acting
within ten days or so, which was related to the forthcoming maturity
of the System's swap line with the Bank of France.
He had intended
to raise that subject next.
Mr. Robertson suggested that the Committee defer action on the
three proposed swap arrangements until after Mr. Coombs had discussed
the situation with respect to the Bank of France.
Mr. Coombs remarked that he had some rather unpleasant develop
ments to report.
It appeared that some of the System's swap network
partners in the European Economic Community were trying to subject the
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network to a new dimension of surveillance by arranging to have the
swap lines with the central banks of Common Market countries mature on
the same date.
He felt that they were planning eventually to go even
further to seek also some sort of Common Market control over the actual
drawings under the lines.1/
The 2/
official primarily concerned originally
had been one of the strongest supporters of the swap network,
Mr. Coombs continued, and it was not entirely clear why he was now
engaged in an effort of this kind.
Part of the explanation, perhaps,
was that he had become increasingly pessimistic about the U.S. balance
of payments problem and about the damage he thought the United States
had done by "exporting inflation" to Europe in the process of running
persistent payments deficits.
Secondly, his views had shifted from an
acceptance of the kind of exchange guarantee involved in the swap
drawings to a preference for a gold guarantee.
2/
Third, he and others
had been consistently pessimistic with respect to
sterling and had strenuously opposed some of the sterling rescue
operations of the past three years.
The fact that those rescue
1/Two sentences have been deleted at this point for one of the reasons
cited in the preface. The deleted material reported comments by Mr. Coombs
about the attitudes of individual central banks.
2/ A phrase has been deleted at this point for one of the reasons cited in
the preface. The phrase indicated the nationality of the official referred to.
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operations had been successful had not lessened his opposition, but had
served only to increase his disaffection.
That disaffection had been particularly whetted by the increases
in the swap lines negotiated last September, Mr. Coombs said.
1/
reaction of the-
The first
official at that time had been to try
to persuade all the Common Market countries to treat such increases as
2/
temporary and separate from the previous swap lines.2/
Having failed in that effort, he had shifted
his objective to that of achieving a common maturity date for the
various Federal Reserve swap lines--with all lines maturing at the end
of each quarter--so as to facilitate surveillance by the Common Market
central banks at renewal dates.
Those efforts to subject the Federal Reserve network to special
surveillance, Mr. Coombs observed, had been pursued through private
conversations with other Common Market central bankers.
Although some
of the latter had suggested open discussions with Federal Reserve
representatives, thus far no direct approach had been made to the
System.
1/ A phrase has been deleted at this point for one of the reasons
cited in the preface. The phrase indicated the nationality of the
official referred to.
2/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence reported a comment by Mr. Coombs
about the reactions of certain Common Market countries to the proposal
cited in the preceding sentence.
3/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence referred to certain conversations
relating to the subject under discussion.
5/2/67
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Mr. Coombs noted that the Italians had attempted a compromise
by suggesting that their swap line with the System, which was already
on an annual basis, might be scheduled to mature at the end of each
year.
He thought that had been a constructive suggestion,
The swap
line with the German Federal Bank was on a six-month basis, and when
it had approached maturity in February the Germans had agreed to its
renewal for another six months, through August.
The swap lines with
the National Bank of Belgium and the Netherlands Bank had been
scheduled to mature around the middle of March, and ten days in advance
a telex had been sent to both banks proposing renewal for another three
months.
The Dutch had not replied at all.
The Belgians' reply
indicated that they were agreeable to renewal, but would like to place
the next maturity date at June 30 rather than at the normal maturity
date of June 13.
In reply they had been told that unless they had a
strong preference for June 30 the Federal Reserve would prefer to employ
the normal date, and if they did have a strong preference for June 30
the System would like to know the reason.
to that message.
There had been no response
At the Basle meeting held a few days later, he had
approached the Belgians directly with a request for an explanation of
their preference for a June 30 maturity date.
They had replied that
that preference was based on "purely internal reasons."
He had then
agreed to a June 30 maturity date, and the renewal was executed on that
basis.
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He had also approached the Dutch at the Basle meeting,
Mr. Coombs continued, but their only response was that they wanted to
hold further discussions within their own group.
There was no word
from them until the day before the arrangement matured, when they
called the New York Bank and proposed June 30 as the new maturity date.
He had been in Copenhagen at the time, and had instructed the New York
Bank staff to inquire about the significance of the June 30 date.
The
response from the Netherlands Bank was that it was suggested "to
facilitate consultation."
At that late hour it was impossible to get
in touch with the Committee.
Accordingly, he had told the Trading Desk
to agree to that date for purposes of the present renewal, but to
indicate that the Federal Reserve would want to discuss the matter of
future maturity dates before the June 30 maturity was reached.
The following weekend, Mr. Coombs said, he had met with a
representative of the Netherlands Bank and had received the impression
that the consultations contemplated by the latter might involve no more
than the central banks of Belgium and the Netherlands.
If that was the
case, such consultations were likely to be relatively harmless; but the
question remained as to whether they might be broadened to include all
Common Market countries.
As he had indicated, the German Federal Bank
had not gone along with the approach in February and the Bank of Italy
was removed from the issue by the fact that their swap line with the
System had a one-year term.
The key to future developments was the
5/2/67
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attitude of the French, whose swap line with the System would mature
on May 10.
Recently, Mr. Coombs said, he had been approached by a
representative of the Bank of France who said he simply wanted to give
advance notice that if a three-month renewal was requested the French
would be unable to agree; they were prepared to renew only to June 30.
He (Mr. Coombs) had indicated in reply that such a proposal would
raise significant questions of principle.
Subsequently, Mr. Hayes and
he had talked with officials of the Bank of France, and had urged them
not to press for a June 30 maturity date.
Mr. Hayes also had been in
touch with the German Federal Bank and would be visiting that Bank
again on Friday.
And, of course, there would be discussions at the
Basle meeting next weekend.
Superficially, Mr. Coombs observed, the question of coordinated
maturity dates for swap lines with Common Market countries might not
be considered a matter of great concern to the Committee.
The under
lying danger, however, was that the proposal reflected an intention of
ultimately subjecting the System's network of swap arrangements with
the Common Market countries to tight control by those countries
acting in concert.1/
In general, Mr, Coombs said, the events he had reported had a
number of unfortunate aspects.
First was the failure of the countries
1/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence reported a comment by Mr. Coombs
about a possible consequence of the proposal under discussion.
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involved to consult the Federal Reserve directly.
More importantly,
the approach seemed to reflect an unwarranted attitude of distrust of
U.S. motives and actions.
The only justification that he could see
for the intended consultations was the risk of some abuse of the swap
network, while in fact there had been no abuse.
The nature of the
whole approach to the matter of uniform maturity dates suggested that
it was a testing operation.
His own strong inclination would be to
have the issue thrashed out now, when the swap lines were virtually
clear, rather than to let matters drift on and possibly come to a head
during the summer months when there might well be heavy drawings
outstanding under the swap lines.
At the previous meeting, Mr. Coombs noted, the Committee had
approved his recommendation that the swap line with the Bank of France
be renewed for three months when it matured on May 10.
The French had
now advised that they would not accept a renewal for three months, but
1/
only one through June 30.
His own view was that
the System should not acquiesce.
He would recommend that the French
be told that the Committee would let the arrangement lapse if they
were willing to renew it only until June 30.
In the weekend dis
cussions at Basle Mr. Hayes and he would be talking with the Germans
and Italians on the matter, and it would be helpful to have the views
of the Committee in this respect.
1/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence reported a further comment by
Mr. Coombs on the subject under discussion.
5/2/67
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In response to the Chairman's request for comment, Mr. Daane
said that he had mixed feelings.
To a large extent he shared
Mr. Coombs' views; in his judgment the effort to coordinate maturity
dates of swap lines ran counter to the spirit of international
cooperation that was reflected in past practice of undertaking bilateral
arrangements to deal with disruptive swings in payments flows between
countries.
But while he sympathized with Mr. Coombs' view he found
the underlying issue a difficult one to resolve.
Mr. Daane noted that he had discussed the matter with Under
Secretary Deming who, like Mr. Coombs and himself, was disturbed about
the implications of the recent developments in light of the purpose of
the swap arrangements.
Mr. Deming had suggested making a maximum effort
at Basle this weekend to persuade the French to renew their swap line
on the customary three-month basis.
Whatever the French reaction,
Mr. Deming would favor having the usual telex sent out, proposing a
three-month renewal; and if the French rejected that proposal he would
favor letting the arrangement lapse.
Mr. Daane said there was much merit in the case Mr. Coombs had
made for following such a course, but he was not sure that he could go
along with it. There had been considerable pressure recently to extend
the degree of multilateral surveillance a step further.
He did not
know whether this was the point at which the Federal Reserve should try
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to resist that pressure, and he did not know whether System efforts at
resistance would be successful.
Mr. Daane's own recommendation would be to postpone any
decision with respect to the French swap line until it was learned
what course the Germans and Italians were likely to follow.
If they
were willing to retain the present maturity dates he was not sure that
it would make a great deal of difference whether or not the arrangement
with the French was permitted to lapse.
On the other hand, if it was
clear that the Germans and Italians were going to join in the move
ment to common maturity dates he did not think there was anything to
be gained by dropping the French swap line.
In short, he thought the
Committee needed more information before it could reach an appropriate
decision.
He favored one more effort this weekend to persuade the
French to stay with the 90-day maturity date, and he thought Mr. Coombs
should be authorized to report that it was the Committee's view that the
arrangement should be renewed, and for 90 days.
He would also favor
talks on the subject with the Germans and Italians this weekend.
If
they were prepared to join with the French he was not sure the
Committee could stave off a common maturity date.
If they were not, it
would be very useful to have their counsel.
Mr. Coombs observed that the attitude of the Italians posed no
problem, since they had already indicated they were fully prepared to
retain a one-year period for their swap line, with maturity at the end
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of the year.
The Germans at the moment were not on a quarterly basis;
as he had indicated, they had agreed in February to a six-month
renewal, and their swap line would mature on August 9.
He was hopeful
that they could be persuaded to renew the line for another six-month
period at that time.
However, if the System agreed to a June 30
maturity for the line with the Bank of France, the Germans would be
put under very heavy pressure.
Perhaps the best hope was to try to
persuade the French to defer the question, if only to extend to the
System the courtesy of having an opportunity for thorough discussion.
Central bank relations were based on a spirit of mutual trust and
confidence, and unilateral actions were contrary to that spirit.
Mr. Coombs added that the costs of permitting the swap line
with the Bank of France to lapse could easily be exaggerated.
That
line had been useless for some time, and market participants were aware
of that fact.1/
Mr. Daane said he had two additional comments.
First, he
thought further consideration had to be given to the question of
whether agreement on coordinated renewal dates for the swap lines with
Common Market countries would necessarily mean that those countries
subsequently would move toward control of the conditions of use of the
1/ A sentence has been deleted at this point for one of the reasons
cited in the preface. The sentence reported a further comment by
Mr. Coombs on the subject under discussion.
5/2/67
lines.
-21
Secondly, an official of the Bank for International Settlements
had suggested that part of the present ferment about the swap lines
might reflect the enlargements that had been made last fall.
Accord
ingly, while the enlargements had been useful and necessary at that
time, he (Mr. Daane) wondered whether it might not be helpful in the
present situation to suggest some over-all cutback in the sizes of the
swap lines.
Mr. Coombs replied that if the Dutch or Belgians were to
suggest a cutback in the size of their lines he would propose simply
to repeat what he had said in the past--namely, that the System wanted
no reluctant partners in the network, and if any partner thought a line
of the present size was not to its benefit the System would agree to
reduce it.
On the other hand, a general scaling down of the network
was likely to have unfortunate effects on market confidence.
Mr. Brimmer said that he would favor following the course
Mr. Coombs had recommended with respect to the swap line with the
Bank of France.
To agree to a renewal only for the period until
June 30 would appear to him as going a long way toward accepting
multilateral surveillance by the Common Market.
The Committee had
resisted such surveillance in the past and he thought it should continue
to do so.
Chairman Martin commented that he thought Mr. Coombs had taken
the right approach in his negotiations on maturity dates.
He agreed
5/2/67
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that it would make little difference from the point of view of monetary
affairs whether or not the swap line with the Bank of France was
renewed, since it had not been used for several years.
However, that
decision might have important international political implications,
affecting the foreign relations of the United States.
He would be
reluctant to see the Federal Reserve take any action that could be
construed--whatever the facts of the matter--as a System initiative to
discontinue the swap line with the French.
Accordingly, he would favor
deferring a decision until after the System's associates in the net
work could be consulted at the Basle meeting this weekend.
Mr. Brimmer asked whether it was the Chairman's feeling that
the Committee should run the risk of having its swap arrangements
brought under the surveillance of the Common Market.
The Chairman
replied that it was not yet clear to him how serious that risk was,
since much depended on the attitudes of the Germans and Italians.
Mr. Mitchell agreed that Mr. Coombs had taken the right
approach in his discussions about renewal dates with the Belgians and
Dutch, as well as with the French.
He also agreed that the swap line
with the Bank of France had been of no value for a number of years.
However, there were likely to be political repercussions to any
announcement that that line had been discontinued.
He did not know
what the political consequences of that step would be, and he questioned
whether the Committee was in a position to assess them accurately.
tell the French that it was unlikely that the Committee would agree to
renew their swap line only until June 30.
Mr. Treiber noted that both Mr. Coombs and Mr. Hayes would be
in Basle this weekend and would be holding full discussions with the
French, Germans, and Italians.
It would be helpful to them if the
Committee today reaffirmed the action it had taken at the previous
meeting of authorizing an extension for three months in the swap line
with the Bank of France.
If the French proved to be adamant, there
would still be time before May 10 for the Committee to hold a telephone
conference meeting for the purpose of reviewing the developments at
Basle and considering the best course of action.
Mr. Daane concurred in Mr. Trieber's suggestion.
Mr. Maisel commented that before reaching a final decision it
would be desirable to consult with the Treasury and the State
Departments on the political implications of various courses of action.
Chairman Martin agreed that the Committee should reaffirm the
action it had already taken with regard to the French swap line if that
was likely to be helpful to Messrs. Hayes and Coombs in their discus
sions at Basle.
But he would not cross the bridge of deciding to
discontinue that swap line until there was a better opportunity to
assess all of the implications of that action.
It would be unfortunate,
5/2/67
-24
he thought, if the French were in a position to say that they had
been prepared to renew the line but the Federal Reserve had refused
to go along.
Mr. Coombs commented that he also had been concerned about
political effects.
He had assumed that the current international
liquidity discussions were one important area of possible repercus
sion.
He gathered from Mr. Daane's remarks, however, that the
Treasury would have no objection to discontinuing the line if the
French insisted on the June 30 maturity date.
Mr. Daane said he understood it was the Treasury's impres
sion that France's position in the liquidity discussions would not
be affected by actions with respect to their swap line with the
System.
On the other hand, that was an initial reaction, and he
was not sure that the Treasury had fully reviewed all of the
political implications of the situation.
It probably would be
desirable for them, as well as for the System, to give further
thought to possible consequences not only for the liquidity
discussions but on a wider basis.
Mr. Coombs said it would be helpful if the Committee
reaffirmed its action approving a three-month renewal of the
French swap line.
It would also be helpful if Mr. Hayes and he
were able to report that it was the sense of the Committee that
5/2/67
-25
the proposals under discussion were contrary to the spirit of
cooperation underlying the swap network.
Mr. Daane remarked that he thought it would be appropriate
for Messrs. Hayes and Coombs to point out that the proposals were
viewed by the System and the Treasury as inimical to the spirit
of the network.
Mr. Hickman said that in his judgment the approach
Mr. Coombs had suggested was exactly right.
However, in view of
the fact that the Committee had been working to extend the network
and to increase its usefulness, he was concerned about the
possibility that some other present members might follow if the
French dropped out.
Accordingly, he hoped it would be possible
to continue the swap line with the French.
Mr. Mitchell remarked that if a special meeting was found
to be needed the Committee might consider convening in Washington
rather than holding a telephone conference, which was a rather
unsatisfactory way to conduct a discussion.
In his judgment the
French were not likely to yield on the matter at issue.
Mr. Robertson said he thought the procedures that had been
outlined were good.
If the French proved to be adamant he would
not favor having the System back down.
Mr. Brimmer commented that he assumed the Committee would
not only reaffirm its previous decision regarding a three-month
5/2/67
-26
renewal of the French swap line today, but that it would also
authorize Mr. Coombs to indicate that it was disturbed by the
recent developments.
Chariman Martin agreed.
As he had indicated, however,
he thought that the Committee should not reach a decision today
regarding the French swap line if the Bank of France was not
agreeable to a three-month renewal.
Such a decision should be
held in abeyance until more information was available.
No disagreement was expressed with the Chairman's statement.
By unanimous vote, the Committee
reaffirmed its action of April 4, 1967,
approving renewal of the $100 million
standby swap arrangement with the Bank
of France for a further period of three
months.
Mr. Coombs then noted that he had requested Committee
approval of new standby swap arrangements with the Banks of
Denmark and Mexico, in the amounts of $100 million and $130 mil
lion, respectively, with terms preferably up to a full year.
He
had also requested approval of a $100 million arrangement with
Norway, preferably for one year, if they indicated that they had
reached agreement in principle with the Fund as to their achiev
ing Article VIII status within the very near future, and that
only final arrangements remained to be completed.
It would be
his hope that all three new arrangements could be announced at
the same time.
5/2/67
-27
Mr. Robertson asked whether it might not be better to
wait until Norway had actually achieved Article VIII status before
acting on any of the new swap arrangements.
Mr. Coombs replied that if the swap line with the Bank of
France were to be discontinued there would be some advantage in
announcing all four actions simultaneously.
He would not expect
any particular market effects from dropping the French swap line,
but a simultaneous announcement of three new lines would lessen
whatever effects might occur.
Mr. Solomon suggested that the Committee might want to
weigh two other considerations.
First was the general question
of the desirability of admitting a country to the swap network
before it had achieved Article VIII status.
Secondly, the three
central banks with whom the new arrangements were to be made might
have questions about the System's motives in making a simultaneous
announcement of all four actions.
That consideration might out
weigh the advantages of a simultaneous announcement since, as
Mr. Coombs had indicated, the market effects of dropping the swap
line with the Bank of France were not likely to be great in any
case.
Mr. Swan concurred in Mr. Solomon's comments.
Mr. Treiber remarked that if the French agreed to a three
month renewal, there would not be any important reason for approving
5/2/67
-28
the swap line with Norway before they achieved Article VIII status.
On the other hand, if the French did not agree, the Committee
planned to hold a special meeting in the course of which it could
reach a decision on Norway.
Accordingly,
he thought no action
with respect to the Norwegian swap line was necessary today.
Chairman Martin then suggested that the Committee defer
action with respect to the proposed new swap arrangements with
the central banks of Norway, Denmark, and Mexico until May 23, or
until the special meeting of the Committee if one was held before
that date.
There was no disagreement with the Chairman's suggestion.
Chairman Martin then invited Mr. Daane to report on the
recent joint meeting of the Deputies of the Group of Ten and the
Executive Directors of the IMF.
Mr. Daane noted that the Deputies had met with the Executive
Directors of the Fund on April 24 and 25, and for part of the day
on April 26.
At a press conference held on April 26, Mr. Schweitzer
had summarized the developments in the following words:
"I think
that once more these meetings have proved very useful and very
successful and I think we can state with confidence that great
progress is being made.
I think it is now unanimously agreed that
we should proceed with work toward the establishment of a plan for
the deliberate creation of supplementary reserves.
I think also
5/2/67
-29
that everybody is willing to make the maximum effort to make it
possible that at the Rio de Janeiro meeting, where our Governors
will convene in September, they will already have before them,
let's say, the broad outlines of a plan."
What lay behind Mr. Schweitzer's words, Mr. Daane contin
ued, were two and a half days of discussion of the need for new
reserves and of the illustrative schemes for reserve asset creation
prepared by the Fund staff.
In the course of that discussion the
U.S. representatives had made a forthright and persuasive case
for the proposition that the need for new reserves might be closer
rather than further away.
As Chairman Emminger himself had said,
it appeared that the time for activating a contingency plan was
nearer than had been thought a year ago.
On the basis of the
discussion at the meeting, and at the Munich meeting of the Common
Market Finance Ministers on April 17-18, it appeared that there
was now unanimous agreement on going forward with respect to a
plan; the French had moved that much.
The French also had moved
to the extent of accepting an unconditional reserve asset in the
form of drawing rights without specific credit-like repayment
provisions.
There was considerable discussion of the alternatives
of reserve units and drawing rights.
The representatives of the
U.S. and other non-EEC countries had insisted that the new asset
5/2/67
-30
be money-like rather than credit-like, in order to be a true
supplement to gold and dollars.
On the technical side, Mr. Daane continued, the issues
still remained of whether, whatever the label, the new asset
should be transferable directly or indirectly; whether it should
involve pooled resources within the Fund, or separate resources
in the Fund or in a Fund affiliate; and whether or not repayment
provisions should be attached to the asset.
The most important
unresolved issue, however, was that of decision-making.
The
Common Market countries wanted a requirement for a majority of
85 per cent of votes in the Fund, plus a majority of creditor
countries.
Such requirements would give veto power to the Common
Market, and were strongly resisted by other countries, including
the United States.
Probably that major issue could not be decided
at the technical level by the Deputies and Directors, but would
have to go to the Ministers and Governors.
Mr. Daane noted that the Deputies would meet again on
May 18-19, and that a final joint meeting with the IMF Directors
would be held shortly after mid-June.
He thought it was fair to
say that solutions could be found to the technical issues, and
that the elements of a plan, if not a full-blown plan itself,
could be available by the time of the meeting in Rio in September.
5/2/67
-31Before 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
April 4 through April 26, 1967, and a supplemental report cover
ing the period April 27 through May 1, 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:
Since the Committee last met, short-term interest
rates have moved sharply lower, but, despite the
reduction of the discount rate, long-term rates have
moved significantly higher. The reasons for these
disparate developments are not hard to find. Short
term rates have of course been influenced by the
comfortable money market and by seasonal demands for
Treasury bills from corporations and public funds as
well as from net System purchases. Long-term interest
rates on the other hand have been under sustained
upward pressure from the heavy weight of corporate
and municipal demand for capital. In addition there
has been a sharp turnaround from pessimism to optimism
in the market's expectations about the future performance
of the economy, and, more recently, an adjustment for
the current Treasury refunding. Changed market
expectations about the economic outlook have also
led to the belief that not much more in the way of
ease can be expected from monetary policy. With the
refunding, market participants have begun to focus
on the heavy cash needs of the Treasury and of Government
agencies in the second half of the year. The current
$12 billion estimated Treasury cash need is generally
regarded by the market as a minimal estimate. Against
the backdrop of the 1966 experience these recent and
prospective economic and financial developments have
5/2/67
-32-
combined to produce growing uneasiness in long-term
markets. Late last week this heaviness spilled over
into the intermediate- and short-term market as well.
As the blue book 1/ states, the outlook for yields
in the capital markets is quite uncertain. The
fundamental question is how strong the economy is
going to get and how soon. Given the recent rise in
yields--as much as 35 basis points for intermediate
Government securities and about 20 to 40 basis points
on long-term corporate and municipal securities--there
are a number of market participants who feel that the
pendulum has swung a bit too far and that present
yields could provide a trading range for some time
to come. The technical position of the Government
bond market, where dealers had worked down their
holdings of coupon issues substantially before the
refunding announcement, is relatively good, and a
moderate price rally could be in the cards. The posi
tion of the corporate and municipal market, on the
other hand, is not so good and little relief seems
in sight from the demand side until mid-year at least.
Underwriters are quite disheartened by the state of
demand and by the rapidity with which inventory profits
have turned into losses. All of this, of course, is a
commentary on the recent volatile state of expectations.
Yield developments may rest heavily on the strength
of private demands for bank loans. If they are relatively
weak over the next few weeks--a distinct possibility in
the light of the volume of long-term funds being raisedbanks might be tempted to stretch out their average
maturities of municipals and Governments. Bank demand
for liquidity is still strong, but the rate developments
of the past few weeks now exact a significant penalty
for staying short. Looking further ahead, there are
some who anticipate a slackening of private demand for
capital in the second half of the year. But there are
others who see strong private demand continuing, and
in light of the heavy Government demand, including
participation certificate sales, a few are going so
far as to wonder whether August will be early or late
this year.
1/ The report, "Money Market and Reserve Relationships,"
prepared for the Committee by the Board's staff.
5/2/67
-33-
As far as short-term rates are concerned, the
outlook is still for some further downward drift in
the weeks ahead unless expectations of a booming
economy and an end to easy money are such as to
outweigh the normal demand-supply factors. In yes
terday's Treasury bill auction, issuing rates of
3.77 per cent and 3.91 per cent were set respectively
for 3- and 6-month bills, 21 and 9 basis points below
the levels established in the auction preceding the
last Committee meeting.
System operations supplied a fairly large volume
of reserves on a day-to-day basis since the last
meeting, as the written reports have spelled out. We
bought some coupon issues early in the period, purchased
Treasury bills outright on several occasions when the
over-hanging market supply seemed rather heavy, and
made temporary reserve injections through repurchase
agreements. We encountered no real problems in keeping
the money market comfortable although, as the written
reports note, there were unusually wide fluctuations in
free reserves from week to week. The bank credit proxy
came out about as expected in April, and as the blue
book notes a sharp slowdown is expected in May. It
would be helpful in interpreting the proviso clause of
the directive 1/ if the Committee members would comment
on the general acceptability of such a slowdown.
As you know, the books will be open through tomor
row on the Treasury refunding of May maturities and the
prerefunding of June and August maturities. Initially,
market participants considered both issues attractively
priced. Prices of the refunding issues have held up
fairly well in the generally soggy market atmosphere
since Friday, although many investors have tended to
become cautious. There was some recovery in the
intermediate area of the market yesterday after a weak
opening, but the market's performance today and tomorrow
will have an important bearing on the outcome. There
seems to be a very good interest in the shorter of the
two options on the part of large commercial banks. Banks
outside the money centers hold a substantial part of the
rights issues and may find the 4-3/4 per cent coupon on
the five-year note attractive, but it is still too early
for the market to have even a fair idea of what the
1/ A draft directive submitted by the staff for Committee
consideration is appended to these minutes as Attachment A.
5/2/67
-34-
ultimate exchange will be. Expectations are for a less
than average interest from holders of August rights,
but even a modest exchange of about 20 per cent would
reduce the Treasury's August refunding job by about
$1 billion and would give some additional debt extension.
There seems to be little danger that dealers will wind
up with an overextended position in the new issues.
The System holds close to $6.4 billion or about
two-thirds of the maturing May 4-1/4 per cent Treasury
notes and I would plan, unless the Committee has other
views, to place $2 billion of that amount in the new
5-year note, with the remainder going into the 15-month
note. This would seem a reasonable distribution in the
light of the very ample short-term holdings in our port
folio and the fact that the average maturity of our
holdings has been shortening over time.
The System also holds about $107 million of the
2-1/2 per cent Treasury bonds maturing June 15, and
I would plan to place this amount also in the new
five-year note. In view of the uncertainties of the
past few days the market has been singularly unwilling
to estimate the likely size of the two new issues. As
a wild guess we could end up with about half of the
longer issue and a somewhat higher percentage of the
shorter issue. I would not plan to prerefund any of
our holdings of August maturities.
By unanimous vote, the open
market transactions in Government
securities and bankers' acceptances
during the period April 4 through
May 1, 1967, were approved, ratified,
and confirmed.
Chairman Martin then called for the staff economic and
financial reports, supplementing the written reports that had
been distributed prior to the meeting, copies of which have been
placed in the files of the Committee.
Mr. Partee made the following statement on economic
conditions:
5/2/67
-35-
One of the editorials in the Washington press
last weekend was entitled "Spring is for Optimists."
That is certainly true so far as views on the business
outlook are concerned. As everyone in this room is
well aware, there has been a very marked improvement
in expectations for the economy since the Committee's
last meeting. The stock market has reacted buoyantly,
rising in virtually all trading sessions--and on
substantial volume--over the past three weeks. And
bond markets have been correspondingly weak, reflecting
both the change in investor sentiment and the continuing
heavy volume of new offerings. Most people are now
looking through the current period of flatness to
renewed vigorous economic expansion later in the year
and extending into 1968.
To be sure, the aggregate business measures cur
rently are not a great deal better than was anticipated
a month or two ago. The preliminary estimate for
first-quarter GNP shows a rise of only $5 billion in
current dollars and no net gain in real terms. And the
staff projection in the green book,.1/ with which I am
in general agreement, forecasts a second quarter rise
of only $8 billion in current dollars and less than
2 per cent, annual rate, in real terms--well below the
economy's growth potential.
Moreover, there may well be some less favorable
economic news items in coming weeks--perhaps enough
even to shake the current ebullient sentiment. The
substantial rise in insured unemployment over the past
two months, for example, suggests weakness in some labor
markets; unemployment could rise further, particularly
in manufacturing, though we have just learned confiden
tially that there was very little rise in the over-all
unemployment rate in April. Housing starts over the next
month or two may not be able to keep up with the very
large increases assumed on seasonal grounds alone. The
exceptional strength in retail trade indicated in the
March advance report may have been exaggerated, though
I should note that the weekly figures through the third
week of April continued favorable. New car sales,
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
5/2/67
-36-
though improved, are not so strong as the year-to-year
changes suggest, since the comparison is with a declin
ing trend last spring. With the widely varying timing
impacts of sales contests, a bad 10-day report or two
is always possible. And the possibility of disruptive
strikes and labor difficulties in coming weeks and months
of collective bargaining is of course very real.
Nevertheless, it seems to me that the confidence in
the underlying strength of the economy is well founded.
Within the aggregates, final demands have been considerably
stronger--and the reduction in inventory accumulation
correspondingly larger--than we had anticipated a month
or two ago. Even if revised figures should reduce the
dimensions of this shift in the mix of demand, the
underlying increase in final demand still seems certain
to remain substantial. Stock-sales ratios are still very
high, and we think that the inventory adjustment still
has some distance to go. Further progress has to be
made in cutting back inventories in those areas where
they seemed clearly excessive, such as consumer durables
and industrial materials. But if the strengthening in
final demand persists, as seems likely, this means that
needed inventory adjustments will be smaller and can
probably be accomplished with only moderate further
output curtailments.
Another aspect of the underlying strength of the
economy is the failure of recessionary forces to spread
and intensify. Thus, the declines to date in employment
and hours have been confined mainly to the more volatile
manufacturing sector, which in itself has been shrinking
secularly relative to the total economy. Aggregate per
sonal incomes have continued to show good--though somewhat
diminished--gains, which supports the expectation of
further expansion in consumption outlays. The counterpart
of a larger rise in personal incomes than in GNP, of course,
must be a shrinkage in net business incomes and/or an
increased Governmental deficit. Corporate profits are
down, but judging from our weighted compilation of first
quarter earnings reports, the year-to-year decline was
surprisingly small--5 per cent or a little more. The
more important adjustment, quantitatively, was an apparent
sharp increase in the Federal deficit (on a national
income basis), which reflected both a rise in expenditures
5/2/67
-37-
and an indicated shortfall in tax accruals. This shift
has done much to blunt what otherwise might have been
a potentially serious inventory recession.
A third factor of strength in the economy is that
several of the major areas of spending that are less
dependent on current income flow--construction, business
equipment, and military outlays--look somewhat stronger
than seemed probable a month or two ago. The most
recent McGraw-Hill survey of business capital spending
plans showed no tendency toward downward revision
compared with earlier surveys; with improved business
confidence and greater credit availability, and assuming
reinstatement of the investment tax credit as proposed,
it now seems to me quite possible that there will be
little or no decline in capital spending as the year
progresses. In the construction area, where credit
availability is also very important, a substantial
expansion looks increasingly likely. Not only have
savings flows to the specialized mortgage lending
institutions been larger than expected, but sizable
amounts of Federal funds impounded earlier have been
released for public works projects. Finally, defense
expenditures appear to be running moderately above the
January Budget projections, and the recent news seems
increasingly to point toward further near-term escala
tion of the military effort in Vietnam.
On the whole, therefore, there are good grounds
supporting the expectation of significant strengthening
in the economy. Our initial third-quarter projection
calls for a sizable increase in GNP, and the implication
is that there will be a still bigger increase when the
inventory adjustment is largely completed--probably by
the fourth quarter.
Meanwhile, we have been enjoying some welcome
relief on the price front; substantial recent declines
in agricultural and sensitive industrial materials
prices, and a leveling off in industrial product prices,
have pushed average wholesale prices down and moderated
the rise in the consumer price index. But inflationary
pressures may be building for the future. Unit labor
costs in manufacturing have increased markedly--4-1/2
per cent since last summer--as productivity has ceased
to grow with the leveling off and decline in output,
and wages have continued to rise rapidly. Given this
development, the associated squeeze on profit margins,
5/2/67
-38-
and the larger increases in wage rates anticipated from
labor contract negotiations, it seems clear that the
pressures will be intensifying for price increases
whenever market conditions permit. Thus, resumption
of rapid economic expansion could be followed rather
quickly by renewed inflationary problems.
Under these circumstances, I would not advise the
Committee to push toward further monetary ease. Such
a course would seem to offer little benefit in terms
of short-run stimulation for the still lagging economy,
and could risk contributing to a possible overheating
later on. But neither do I feel that excessively rapid
expansion is sufficiently certain, or the development
of possible overheating sufficiently near, to warrant
any move toward increased restraint as of now. There
fore, my policy recommendation would be for "even keel"
in terms of market rates, flows, and conditions, even
in the absence of the Treasury financing constraint.
Mr. Brill made the following statement concerning financial
developments:
Treasury financings, and the even-keel constraints
they impose, often come at awkward times for the
implementation of monetary policy. This is not the
case today. Indeed, we should be grateful for the
breather the current financing affords, for we need the
opportunity to sit back a bit and assess how the
economy has responded to what we've done since last
fall, and what this implies for the course of policy
once even-keel constraints are lifted.
I certainly concur with Mr. Partee that economic
prospects for the balance of the year have brightened
considerably. We're not entirely out of the woods yet,
and the near-term situation will continue to bear some
marks of the recent economic slowdown. But the rapidity
of the inventory adjustment and the strengthening in
private final sales, along with the apparent likelihood
of continued large defense spending, lend credence to
projections of more rapid economic growth this summer
and further acceleration in the fall. Given these
improved economic prospects, the critical question to
ponder between today and the end of even-keel restrictions
is whether we've done all the economy requires or, indeed,
5/2/67
-39-
whether it would be appropriate soon to begin backing-off
from aggressive easing.
One test is whether we've restored the liquidity
wrung out of the economy during 1966. Concepts and
measures of liquidity are slippery; the traditional loan
deposit ratio cited as a measure of banking liquidity,
for example, fails to capture significant shifts in the
forms in which banks may decide to hold liquidity.
According to this traditional measure, banks have improved
their liquidity positions somewhat since December, but are
still less liquid than before the beginning of monetary
restraint, particularly so at New York and Chicago banks.
It is more revealing, however, to examine each side
of the banking balance sheet separately. Thus, we estimate
that bank holdings of short- and intermediate-term securities
have rebounded substantially as a percentage of total earning
assets. For all banks combined, this ratio has been restored
to mid-1965 levels, and at New York City banks it is almost
back to these levels.
On the liability side of bank balance sheets, there
has been some restructuring of the maturity profile of time
deposits. Large negotiable CD's came back strongly after
monetary easing developed; between November and early March,
banks restored the volume outstanding to the peak levels of
1966. And average maturity of CD's, which had worked down
significantly over the summer of 1966 as banks fought to
retain CD funds, jumped early this year to pre-restraint
levels. But since the early bulge, the volume of CD's has
drifted up further only slowly, while average maturities
have stayed about at January levels. Rather than continue
to seek large CD money aggressively, banks more recently
have been content to enjoy an accelerated rise in consumer
type CD's.
They have reduced offering rates on large CD's
sharply in all maturities, but have made only scattered
efforts to reduce the rates paid for consumer funds, which
proved less volatile last year than corporate money. As a
result, time deposits other than large CD's now bulk larger
among bank liabilities. Thus, in addition to increasing
the liquidity of their portfolios, banks have restored some
liquidity to the deposit side of the balance sheet, and
over-all, appear more liquid than a comparison of loan
deposit ratios alone would suggest.
5/2/67
-40-
The green book details the improvement in liquidity
of nonbank institutions, particularly S&L's, and I won't
dwell on it here other than to note that S&L's also have
improved the liquidity of both sides of their balance
sheets, by increasing their holdings of liquid assets
and also by rebuilding their credit lines at the Home
Loan Bank System.
Liquidity developments among nonfinancial sectors
are more difficult to trace, particularly because the
information available is scattered and late. Preliminary
Flow-of-Funds estimates for the first quarter indicate a
marked shift in consumer portfolio behavior, back to saving
through intermediaries instead of direct acquisition of
market securities, while consumer borrowing for both short
term credit and mortgage money remained low.
Corporations, too, appear to have restored liquid
asset holdings, early in the year in CD's but more recently
in open market paper, The most important improvement in
corporate liquidity, however, has been the stretch-out of
debt maturities; growth in long-term security debt has
been much larger than the increase in indebtedness to banks.
To date, there is little evidence that corporations have
actually funded much shorter-term bank debt--the proceeds
of recent capital market financing appeared to have been
used in large measure to meet heavy April tax payments--but
the continuing large volume of long-term financing in the
face of reduced financing requirements suggests that bank
loan repayment may accelerate in the months ahead.
While monetary policy thus appears to have encouraged
a substantial rebuilding of liquidity among the major
lending and spending sectors of the economy, it hasn't
been quite so successful in restoring pre-1966 interest
rate levels, at least not at the long end of the market.
Short rates are down almost 2 percentage points from
last fall's peak, and are back to mid-1965 levels. However,
long rates--particularly on private debt--are still substan
tially above pre-restraint levels.
Smaller cyclical movement in long than in short rates
is to be expected, but it is disturbing that the recent
declines still leave long rates historically high. Such
cyclical ratcheting in the cost of capital does not bode
well for maintenance of longer-term growth. Moreover, the
financial system now seems poised to respond to the first
evidence of a shift in policy by pushing up long rates
even further. Memories of 1966 are still fresh; both
5/2/67
-41-
corporate investors and banks are wary of an imminent
return to restraint, and particularly wary of playing
the CD game. Banks are not bidding aggressively for
short-term funds, nor are they channeling funds to
long-term markets. Rather, they are looking principally
to more stable savings flows and investing primarily in
short- and intermediate-term assets. Borrowers, meanwhile,
are anxious to fund short-term liabilities into long-term
debts, and are apparently more interested in holding
short-term market securities than bank deposits.
Perhaps this is the price of success for having--in
rapid order and brief compass of time--cut short an
inflation and then aborted a recession. Perhaps, also,
it's a price we have to pay for having used ceiling rates
so effectively as a tool of monetary restraint. Markets
learn from painful experience, and the next time around
we may have to fight on different battlegrounds and with
different tactics.
But it's not yet the time to start this fight.
Despite the improved economic outlook, it would seem
premature now to enhance or justify market fears of a
return to restraint. The recovery in housing is still
too fragile to permit a diversion of funds away from
intermediaries. And it's much too early to abandon hope
of help from fiscal restraint. Our projections indicate
some subsidence in bank credit demands this month, and
the reserves to meet these reduced demands should be
provided generously.
But it would not seem advisable, either, to flood
the banks with reserves in an attempt to bring down long
rates, or to concentrate reserve injections on pulling
long rates down. For one, it's not likely that we could
accomplish much, given the buoyancy of economic expecta
tions. Nor is it at all clear that we want to stimulate
a faster rate of investment than is now projected for
six or nine months hence. Therefore, like Mr. Partee,
I come out today for even-keeling, not only because of
the Treasury financing, but also because it seems appro
priate to the economic situation and prospects.
Mr. Solomon then presented the following statement on the
balance of payments and related matters:
There is little to add this morning to the green
book analysis of balance of payments developments. The
payments balance was in substantial deficit in the first
5/2/67
-42-
quarter, and this has apparently continued in April.
We are not yet in a position fully to explain the
over-all first quarter outcome. The components we
do know about--merchandise trade and bank loans
abroad--improved in the first quarter. What we
don't know yet is what went the other way.
I thought the Committee might find it useful to
have some commentary today about the hullabaloo over
U.S. gold policy that was stimulated by the statements
last month from the Chase Manhattan Bank and Mr. Rudolph
Peterson of the Bank of America. Mr. Coombs has reported
on the market effects of those statements.
As you know, an article in Chase Manhattan's
bi-monthly bulletin, "Business in Brief," published at
the beginning of April, suggested that the United States
should decide--and make the decision known now--that in
the event of a gold crisis this country would terminate
its practice of selling gold freely to foreign central
banks. Just two days after the first press reports of
the Chase Manhattan article, Rudolph Peterson made a
similar proposal regarding the action to be taken by
this country if a gold drain of crisis proportions were
to develop. Many people immediately assumed a connection
between the two statements and Secretary Fowler's Pebble
Beach speech of mid-March. You will remember that that
speech had hinted that unless other countries accept a
larger share of the task of adjusting payments imbalances,
the United States may be forced to take undesirable
actions, of an unspecified nature.
What were the two bank statements saying to the
They were saying that if the United States were
world?
to stop selling gold, foreign central banks would be
Countries in surplus,
faced with a "disagreeable choice."
which almost invariably realize those surpluses in the
form of acquisitions of dollars through their exchange
markets, would have the choice of holding these additional
dollars or, if they refuse to acquire and hold them,
seeing their exchange rates appreciate in relation to the
dollar--that is, seeing the dollar depreciate in relation
to their currencies. In other words, foreign countries
would either have to accept dollars freely or allow their
competitive positions to deteriorate in relation to the
United States.
5/2/67
-43-
Although both the Chase and the Peterson statements
proposed that such a cessation of gold sales would be
appropriate only in the event of a crisis, what seems to
have motivated these statements is a deep concern that
the United States will attempt to correct its balance of
payments problem by strengthening and extending restraints
on private capital outflows. This concern is expressed
quite explicitly in both statements. The two banks seem
to be saying that the United States should refrain from
tightening restraints on private capital outflows. If
this means a continued U.S. deficit, if European surplus
countries do not take measures to reduce their surpluses,
and if they continue to convert their surpluses into gold,
we should in due course stop selling gold and confront
them with the disagreeable choice.
This proposition raises a number of questions. The
first question is, how would foreign countries react to
a cessation of U.S. gold sales?
The "either-or" choice
envisaged by the Chase-Peterson statements is, in my view,
a great oversimplification. It seems highly unlikely that
European countries would simply accumulate dollars freely
if they did not wish to see their currencies appreciate
in relation to the dollar. Their desire to avoid an
appreciation of their currencies stems from a wish to
protect their trade balances--to avoid seeing their exports
suffer or their imports increase markedly. But, insofar
as capital transactions are concerned, they would have no
wish to prevent an appreciation of their currencies and
a depreciation of the dollar. Thus, European governments
would very likely place restrictions on purchases of
dollars that come to them as a result of capital inflows.
In other words, they would establish at least two categories
of dollars and in this way would restrict the inflow of
U.S. capital. It is ironical that while the Chase-Peterson
prescription is designed to prevent U.S. Government restric
tions on capital outflows, it would result in European
restrictions on these same flows. Meanwhile, the interna
tional monetary system would have been thrown into turmoil,
with a highly unpredictable outcome. It seems likely that
the world might very well end up dividing itself into
currency blocs reminiscent of the 1930's.
We may also ask what effect this hullabaloo over gold
has had. Has it had any beneficial effects? What harm
does it do?
5/2/67
-44-
Perhaps one useful result is that the world is
being reminded that an increase in the official price of
gold is not an inevitable outcome of an international
monetary crisis. Other options are available to the
United States, and we are not completely at the mercy
of the gold hoarders. While this is not news to
responsible foreign officials, it may not have been
clear to private gold buyers.
A second useful aspect of this affair is that it
may serve to emphasize that the restoration of balance
of payments equilibrium requires action by surplus
countries too.
Now, I turn to the harmful effects of these
statements. First, the United States is a bank to
the rest of the world and it is unwise for a bank to
threaten to close its doors unless it wants to go out
of business. If a bank threatens to close its doors,
and if the threat is taken seriously, the bank must
expect depositors to withdraw in anticipation of such
a closing. In our case, this means anticipatory gold
purchases.
The major disadvantage of the Chase-Peterson thesis
lies in the impression it gives of U.S. attitudes. In
its rawest form, this thesis proclaims that the rest of
the world is on a dollar standard and it has to accept
that fact. The rest of the world does indeed use the
dollar as a transaction currency and as a reserve
currency. What the rest of the world, and Europe in
particular, is not prepared to accept is the idea that
this gives the United States full freedom to spend and
invest abroad and, in the process to create foreign
dollar reserves in whatever amounts its balance of
payments happens to provide. One need not be a defender
of short-sighted European policies to believe that the
threatening nature of the two statements is bound to be
distasteful to other countries and they are bound to
react adversely.
If the gold hullabaloo had sharpened awareness of
the need for creating an effective new reserve asset as
a supplement to gold, that would have been helpful. But
instead of focusing on the gold shortage, the statements
appeared to wish to perpetuate the U.S. balance of payments
deficit and thereby hardly helped to further the international
liquidity negotiations.
I leave to the Committee a weighing of these advantages
and disadvantages of the gold hullabaloo.
5/2/67
-45
Mr. Treiber asked whether Mr. Coombs had had any direct
contacts with foreign central bankers regarding the subject
Mr. Solomon had discussed.
Mr. Coombs replied that he had had such contacts with a
few central bankers, and had found them very much upset.
Their
concern was not allayed by the subsequent Treasury statement
indicating that U.S. gold policy had not changed.
Mr. Coombs added that he doubted that the course Chase
Manhattan had proposed was an alternative to an increase in the
price of gold, as Mr. Solomon had suggested.
If the United
States were to stop selling gold the price on the London market
would rise sharply, and the European central banks undoubtedly
would immediately enter into a defensive arrangement, establishing
a new official price for transactions among themselves.
In due
course the U.S. would have to settle deficits in its payments
to those countries by sales of gold, and it presumably would
accept the price they had established.
events in the 1930's.
That was the course of
Accordingly, he thought that a cessation
of gold sales by the U.S. would lead directly to an increase in
the price of gold.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Treiber, who made the following statement:
5/2/67
-46-
In the period since the last meeting of the Committee,
economic indicators have strengthened significantly, and
business sentiment has turned from apprehension to confi
dence. Retail sales have risen sharply according to
preliminary estimates, and a good start has been made
toward reduction of the inventory overhang. Housing
indicators have continued to be quite strong, and capital
spending appears to be on a high, and probably rising,
plateau. Defense spending now seems likely to exceed
earlier projections by a wide margin. The fiscal stimulus
in the second half of 1967 appears to be headed for a
record level, and cost-push pressures are apparent. The
tentative nature of some of the figures and the fact that
the figures cover only a short period counsel caution.
But it does seem probable that there will be renewed
economic growth at a fast and potentially inflationary
rate as the year progresses.
The international balance of payments situation is
highly unfavorable. The position of the dollar in the
exchange markets is weaker, and the London gold market
is more active at higher prices.
In the first quarter of 1967 the liquidity deficit,
before adjustment for special transactions, was almost
$5 billion on a seasonally adjusted annual rate. But a
number of special transactions arranged by the Treasury
have reduced the deficit to about a $2 billion rate.
Bank-reported capital movements and the merchandise
account improved, but there was deterioration with
respect to U.S. resident transactions involving both
new and outstanding foreign securities. There are
indications that U.S. corporations may be hoarding
balances abroad in anticipation of tighter investment
controls. And military expenditures abroad appear to be
increasing.
There have been substantial shifts of dollars from
foreign private holders to official holders, and a
reduction in our monetary reserves. In the first quarter
the official reserve transactions deficit appears to have
risen to about $6-1/2 billion on a seasonally adjusted
annual rate compared with $1 billion in the fourth quarter
of 1966, and a surplus for the year 1966.
Bank credit, money supply, and related liquidity
indicators have been very strong in 1967, reflecting the
expansive Federal Reserve policy and the efforts of most
sectors of the economy to bolster their liquidity positions.
5/2/67
-47-
A longer perspective including the second half of 1966
seems more appropriate. On this basis the rates of bank
credit expansion and nonbank liquid asset growth appear
more moderate and are somewhat below the growth rates
of the 1961-64 period. While preliminary projections
indicate little growth in bank credit in May, such a
development should not be disturbing in view of the
sizable expansion over the last nine or ten months and
the large corporate tax payments due in June which should
stimulate bank credit growth at that time. Nor should it
be disturbing if there is a somewhat greater expansion in
May than now appears indicated.
It seems to us that economic and financial developments
counsel maintenance of about the prevailing conditions in
the money market. This conclusion is reinforced by the
need for an even keel in the light of the Treasury's current
financing operation, which should last throughout most of
the period until our next meeting.
The latter part of the second sentence of the draft
directive contains the words "and industrial output reduced
moderately."
In view of the small increase in the industrial
production index reported for March, and the inability to
make a precise estimate at this time of industrial production
in April, it seems to me that it would be preferable to
replace those words with the words "and apparently little
change in industrial production." With this modest change,
I think the draft is satisfactory.
The following comments are offered in response to the
Secretary's telegram of last week.1/
The volume of small consumer-type certificates of
deposit has continued to grow rapidly in the Second Federal
Reserve District, and the banks are finding the money they
obtain this way to be very expensive. Three New York City
banks have recently reduced their rates on consumer CD's:
two from 5 per cent to 4-3/4 per cent, and one from 5 per
cent to 4.8 per cent. Some banks have lessened the
attractiveness of their certificates by shortening available
1/ On April 27 Mr. Holland had sent the following telegram to
Reserve Bank Presidents:
"Board members indicate they would
appreciate any comments the Presidents might make at the FOMC
meeting May 2 concerning recent and prospective changes in rates
on consumer CD's and savings deposits within their respective
Districts."
5/2/67
-48-
maturities, reducing maximum amounts, and restricting
eligible purchasers. A number of banks have cut down
their advertising efforts. It is likely that other
banks will reduce their rates before long. The rates
could easily go below 4-3/4 per cent if the mutual
savings banks cut their rates on savings deposits.
The mutual savings banks have generally been
paying 5 per cent on savings deposits since mid-1966
when rates were generally increased by 1/2 of a
percentage point. Savings bankers appear eager to
lower their rates but are worried about deposit losses
should the move to lower rates not be universal. To
date only one savings bank, a small one in upstate
New York, has reduced its rate from 5 per cent to
4-1/2 per cent, effective May 1. Some savings banks
seem to be looking to the regulatory agencies to impose
a lower maximum rate. Others are anxious to avoid
such a development. In any event, it seems likely that
the savings banks will wait as long as they can prior
to midyear before taking action. If there is no change
in the regulatory ceiling, it is possible, but by no
means certain, that one of the large savings banks
will announce a cut to 4-1/2 per cent beginning July 1.
Presumably other savings banks will follow the leader
with great relief.
Mr. Francis remarked that in response to Mr. Holland's
telegram fifteen bankers scattered throughout the St. Louis
District had been contacted with respect to recent and prospec
tive changes in rates on consumer CD's and savings deposits.
Those bankers, in turn, were able to report on recent activities
of at least seventy other banks in their immediate areas.
Generally,
rates had not been changed in the past two or three months, and
most bankers expected no change in the next month or two.
Rates on savings deposits were generally in the 3 to 4
per cent range, Mr. Francis said.
No changes in those rates had
-49
5/2/67
occurred in the past two or three months, and none were con
templated for the near future.
Banks in Memphis began compounding
savings accounts daily about a month ago, increasing somewhat the
effective rate.
Interest rates on consumer CD's were generally
in the 4 to 5 per cent range.
About 90 per cent of the banks had
not changed rates recently, and none of those banks said that it
was expecting to change rates in the near future.
A few banks
which paid relatively high rates on small CD's stated that they
had recently reduced their advertising for them.
At least six
suburban banks in the St. Louis metropolitan area reduced their
rates on small CD's from 5 per cent to either 4-3/4 per cent or
4-1/2 per cent recently.
Also, several rural banks in northern
Missouri had reduced rates on CD's from 5 per cent to 4-1/2 per
cent.
Mr. Francis commented that the pause in spending and pro
duction last fall and winter was of moderate proportions and was
probably a healthy development in view of the inflationary
pressures and other excesses of last year.
signs of ending.
The pause now showed
Businessmen in the Eighth District with whom
he had talked recently were generally optimistic about the sales
outlook for their products.
The most recent national data--though
they had to be used with caution--showed gains in retail sales,
personal incomes, industrial production, and construction, and an
5/2/67
-50
improvement in the inventory situation.
The large corporate and
municipal financing of the past two months indicated that invest
ment spending was likely to rise.
Such spending was consistent
with management's desire to offset increasing labor costs by
accelerating the introduction of labor saving devices.
The staff's
projections of total spending, contained in the green book, had
been revised upward, and the Administration remained firm in the
belief that a tax increase would be needed to avoid excessive
demands for goods and services later this year.
remained near capacity.
Economic activity
The weakening seemed to have been halted
and might already have been reversed.
Mr. Francis thought the marked shift in monetary develop
ments from contraction last summer and fall to rapid expansion in
the early months of this year had probably been a major factor in
the reversal of economic trends.
Since monetary developments were
generally believed to have their chief impact on spending after
some time lag,
significant growth of total demand might reasonably
be expected over the next few months as a result of recent monetary
expansion.
Despite the hesitation of recent months in total demand,
Mr. Francis remarked, industrial prices continued under pressure
from rising unit labor costs.
A rapid increase in spending,
combined with the cost-push pressures that were expected as major
5/2/67
-51
labor contracts were settled, could quickly cause an acceleration
of inflation.
Although short-term interest rates had declined in recent
months, Mr. Francis continued, long-term rates remained relatively
high, and some believed they were a restraining force on business
decisions.
The reverse reasoning might be nearer the truth-
namely, that the strength in business was bolstering rates.
Relatively high rates in the face of rapid expansion of bank
reserves, bank credit, and money generally indicated that credit
demands were vigorous.
Net borrowing by the Federal Government
had been a strong upward force on rates, but private demands for
credit had also been sizable.
The yield curve had shifted markedly as short-term rates
had declined and long-term rates had stabilized or increased,
Mr. Francis observed.
There were at least two explanations of
why such a yield curve shift might indicate forthcoming strength
in the economy.
First, a large volume of long-term financing
frequently preceded a rise in investment, raising long-term rates
and lowering short-term rates as funds were temporarily invested.
Secondly, a rise in long-term rates relative to short rates
indicated that both lenders and borrowers expected a general rate
increase.
That was probably because of expected increased economic
activity and demands for credit.
5/2/67
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As to policy for the next several months, Mr. Francis
preferred to see a more moderate rate of expansion of bank
reserves, bank credit, and money than had been achieved over
the past three months.
The major thrust of actions taken now
would probably not strike until late summer or early fall, given
the usual lags of effect.
Continuing the recent rapid monetary
expansion might add to an inflation that had not yet been brought
fully under control.
On the other hand, contracting the monetary
aggregates might foster recession.
Mr. Francis believed that for the next few weeks continua
tion of current money market conditions was probably the Committee's
best proximate objective and might be desirable during the Treasury's
refunding.
However, as insurance against undesired movements in
proximate measures of monetary action between meetings, he
suggested that a double-edged proviso clause be used in the
Committee's instructions to the Desk.
For example, if money rose
at a faster than 10 per cent annual rate from April to May, the
money market should be permitted to tighten; if money did not
expand at as much as a 6 per cent rate, market conditions should
be eased.
Those relatively high rates were in recognition of an
expected more-than-seasonal decline in Government demand deposits,
as pointed out in the blue book, and should be consistent with a
growth of money at about a 3 per cent rate over a three-month
5/2/67
period.
-53
Money seemed preferable to bank credit in the proviso
clause because much of bank credit was intermediated funds.
However, if the Committee decided to use bank credit expansion
as an objective, a range of 1 to 4 per cent rate as projected in
the blue book might be appropriate from April to May.
That range
appeared consistent with a growth in bank credit at a 7 to 10 per
cent rate over a three-month period.
Mr. Kimbrel reported that credit availability was improv
ing at both banks and nonbanking financial institutions in the
Sixth District.
District banks, like banks elsewhere, had been
enjoying substantial gains in deposits, especially in time deposits
of the nonpassbook variety.
In mid-April, total time deposits
were up 25 per cent at an annual rate from the first of the year.
Flows into the savings and loan associations had been substantial.
Florida associations saw an all-time record net savings inflow
during the first quarter.
A spot check made last week of the
principal farm lenders also revealed a larger supply of loanable
funds than a year ago.
Although the District's banks had used the inflow of funds
chiefly to build up their liquidity, Mr. Kimbrel continued, recently
a greater share had been going into loans.
In March, loans at the
District's member banks rose at a seasonally adjusted annual rate
of 8.4 per cent.
In the four-week period ending April 19, business
5/2/67
-54
loans at the District's large banks apparently rose more than
seasonally, and gains were well distributed among most types of
industrial borrowers.
Although the demand for mortgages apparently
was not strong, mortgage lenders were making more loans, and
construction loans at the large banks were up in April.
Extensions
of consumer credit rose sharply in March.
An easing of rates was slowly developing, Mr. Kimbrel
noted.
Most District banks, after the lowering of the prime rate
by the money market banks, went along with the reduction in their
prime rates.
In Atlanta, savings and loan associations were
making mortgage loans at 6-1/2 to 6-3/4 per cent, with more being
made at 6-L/2 per cent than a few months ago.
Mortgage bankers
were discounting 6 per cent FHA's between 1-1/2 to 2 points with
a few prime loans at 1 per cent, compared with discounts of 7
points not so long ago.
Mr. Kimbrel said that District commercial bankers were
increasingly concerned about the rates they were paying on their
time certificates, especially those that had issued a large
volume with the guaranteed feature.
Right now, however, reductions
seemed to be more in the state of wishful thinking than in actuality,
presumably because of a fear of a run-off to competitive savings
institutions.
There had been isolated reductions such as that in
one Florida city where the rate on one-year certificates of deposit
5/2/67
-55
was cut from 5 to 4-1/2 per cent.
In Birmingham one large bank
cut its rate on CD's of over a year to 4-3/4 per cent, while
another withdrew its 5 per cent CD and now offered only a 5-year
4-1/2 per cent savings certificate.
In other areas of the
District some banks were de-emphasizing advertising for small
CD's.
Mr. Kimbrel observed that the quicker lending activity
seemed to be paralleled by a little more vigor in the District
economy generally.
Retail sales had picked up in March, and
there was a sharp upsurge in residential construction contract
awards.
However, although total nonfarm employment expanded in
March, there were further declines in manufacturing employment
and the average length of the workweek.
Nevertheless, the
unemployment rate continued at 3.5 per cent.
Perhaps more slowly than one might like, but rather
surely, Mr. Kimbrel said, the easier policy the System had been
following seemed to be taking effect, judging from the somewhat
limited observation of what was happening in the Sixth District.
A lack of time rather than any stringency in reserve availability
seemed to be the limiting factor.
Much the same developments
seemed to be occurring throughout the country.
Consequently, he
believed it would be on the side of prudence to wait a little
before making a decision toward increasing reserve availability
5/2/67
-56
even further.
On the other hand, the Committee should not allow
conditions to tighten merely because it had observed some improve
ment.
As a matter of fact, the System might be limited as to
what it could do by the Treasury refunding program.
Mr. Bopp reported that a telephone survey of 17 Third
District bankers revealed virtually no changes in rates on consumer
time and savings deposits in the recent past.
Furthermore, there
was little or no prospect for any changes in the near future.
As
one banker put it, the situation might turn around so fast that a
banker might regret lowering rates a small fraction at the present
time.
Philadelphia banks had been the only group to lower consumer
CD rates in the recent past, roughly one month ago.
Still, their
rates were at the upper end of the structure in the Third District.
No prospect for change in the near future appeared.
More noticeable had been a de-emphasis in promoting consumer
CD's, Mr. Bopp said.
Those that had promoted such CD's rather
aggressively in the past noted a marked slowdown in external promotion
at the present time.
About half the bankers surveyed indicated that
CD's continued to grow at past rates; another half noted a leveling
off.
Perhaps significantly, those who had slowed down promotion
and those who did not advertise had not experienced any more leveling
off than those who continued to promote such certificates actively.
It appeared, as he had already noted, that uncertainty over interest
5/2/67
-57
rates in the near future was responsible for the hesitation to
drop rates from their peak levels.
Mr. Bopp commented that it was tempting to seize on the
rash of relatively good news as a sign that the economic adjustment
was already over.
On the other hand, there was danger in dismissing
it too easily on the ground that one swallow did not make a summer.
His interpretation of national indicators was that something
different was happening.
He had seen more than one swallow.
at the local level confirmed that.
Surveys
But neither national nor local
developments suggested that the Committee's concern about the state
of the domestic economy should in any way be relaxed.
The Committee
could feel more confident that a serious recession did not lie ahead,
but the pace of expansion seemed likely to be rather slow.
Retailers in the Philadelphia area expected no significant
improvement in sales in the next couple of months, Mr. Bopp said,
but they looked for a pickup later in the year.
seemed cautiously optimistic.
Automobile dealers
So far in the second quarter, sales
apparently were experiencing a normal seasonal upturn.
He was
unable to detect concern about the fact that car inventories were
at a high level.
A survey of housing and mortgage conditions con
firmed the finding of over a month ago that housing was picking up
slowly. Although traffic through sample houses was heavier, there
was little evidence of brisk sales activity.
Potential buyers were
5/2/67
-58
deterred by a shortage of listings, higher prices of houses, anddespite significant change in recent months--persistently rather
tight mortgage terms.
Having restored their liquidity, Mr. Bopp continued, lenders
were now gearing up to extend credit.
High rates for savings
prevented them from cutting rates on mortgages.
Although a few banks
in large cities had cut their rates on consumer CD's and had
reduced advertising for savings, their CD rates remained generally
high and bankers expected them to continue high.
elements of a vicious circle here.
There were some
Demand for houses was picking
up, but until there was an increased volume of new houses available,
many families would hold off from selling; they now had no place to
move.
Demand for mortgage credit was heavier, but until institutions
could cut their savings rates, they were unlikely to cut their
mortgage rates.
Time would solve both of those problems, but time
would delay the favorable impact on the economy.
Probably the most encouraging development of all, Mr. Bopp
said, was that employment had not been affected more drastically
by the adjustment in production.
If, as the staff suggested in the
green book, the unemployment rate rose in the next several months
to 4 per cent or above, the more optimistic observers might change
their tunes.
But to the extent that the increase came about
because new entrants to the labor force were unable to find jobs,
5/2/67
-59
rather than because of layoffs, the real impact on psychology,
incomes, and spending might not be so great.
So far as the real part of the economy was concerned, there
fore, evidence suggested to Mr. Bopp that the "even keel" posture
required by Treasury operations would be appropriate.
His only
concern was for the possible movement of interest rates, given the
expected continued heavy borrowing in capital markets.
He would
be inclined to focus a no-change policy primarily on rates, with a
particularly sharp eye on longer-term rates.
If it was necessary
to increase free reserves to the upper end of the range projected
by the staff in order to hold rates where they were, he would urge
that that be done.
Mr. Hickman felt that it was more difficult than usual at
this time to make a correct policy decision, even with the best
information available in the green book and in documents prepared
by his staff.
Almost all of the information on key sectors of
the economy seemed woefully incomplete, inaccurate, or untimely.
The GNP data for the first quarter would evidently be subject to
considerable revision, and there was almost no information beyond
March.
Moreover, February-March changes were suspect because of
special factors such as weather, labor stoppages, and the Easter
holiday.
He was convinced that the Federal Government simply did
not spend enough money to obtain appropriate informational guides
for policymaking.
5/2/67
-60
Serious structural imbalances apparently remained in the
economy, Mr. Hickman continued, although the danger of a cumulative
decline had perhaps been eliminated, if one could take the data
seriously.
The ratio of inventories to sales was apparently still
rising, and order backlogs were declining.
The inventory adjustment
was probably not over, although it would not be known what had
happened in that area for many weeks.
InEormation available for April indicated that the rate of
insured unemployment was unchanged in the nation and in the Fourth
District in the four weeks through April 22, Mr. Hickman said.
In
the District, only one major market area had a rate of insured
unemployment below a year earlier, with rates in many areas con
siderably higher, due mainly to layoffs in autos and steel.
Steel
output declined generally in April, and to a greater extent in the
Fourth District than in the nation.
Currently, expectations were
that steel output would rise slightly in May, on a seasonally
adjusted basis, but would remain below the first-quarter level.
Auto sales had strengthened recently, but preliminary estimates
indicated that, even with stepped-up schedules, production
(seasonally adjusted) would decline in May.
In view of the major Treasury refunding now under way,
Mr. Hickman observed, the Committee had no choice but to maintain
an "even keel" policy over the next few weeks, and to foster a
5/2/67
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receptive tone in the market.
Nevertheless, he would like to see
the Committee do what it could to hold long-term bond yields at or
below present levels so as to encourage plant and equipment spending,
and promote a good flow of funds through the mortgage market.
That
called for at least as much monetary ease as had prevailed since
the Committee's last meeting, with the major reserve and credit
measures rising at about the same pace as in April.
Mr. Hickman reported that an informal survey of savings
deposits at 21 banks in the Fourth District revealed that ten banks
had lowered interest rates on consumer-type CD's between 1/4 and
1/2 per cent since the beginning of the year, with most of the
reductions occurring in April.
Of the 11 banks that had not changed
rates, seven had never paid more than 4-1/2 per cent, and four were
still offering 5 per cent--although three of the latter group were
considering a reduction.
All banks were paying the maximum 4 per
cent rate on passbook savings except one, and no bank expected to
reduce rates in the near term.
Several banks indicated a shortening
of maximum maturities, greater selectivity in offering CD's to other
than established customers, and reduced advertising efforts to
attract new consumer-type CD's.
Mr. Sherrill said that he would not make a statement today.
Mr. Brimmer remarked that he was finding the Reserve Bank
Presidents' reports regarding rates on time deposits in their
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respective Districts to be highly interesting.
The question of time
deposit rates was likely to be arising frequently over coming months,
and he hoped that the System would be able to resist pressures to
reduce the Regulation Q ceilings in order to lower those rates.
He
would prefer to avoid frequent changes in the ceiling rates; for the
present it would be desirable to wait to see what banks would do on
their own.
With respect to open market policy, Mr. Brimmer continued,
he was concerned about the level of long-term interest rates.
The
Committee might be moving toward restraint later this year, and it
would be better not to enter a period of restraint with the level
and structure of rates that now existed.
The current Treasury
financing would, of course, inhibit efforts to lower long-term rates
at this time, but he would hope that efforts would be made to resist
increases, insofar as that was consistent with the need to maintain
an even keel.
Given the volume of security issues coming to market,
he thought that maintenance of an even keel might require free
reserves near the upper end of the $150 - $300 million range men
tioned in the blue book, although he would be reluctant to specify
a $300 million figure as appropriate.
Mr. Maisel commented that the System seemed to be doing a
good job of rebuilding the liquidity of the economy, and at the rate
things were going the Committee probably should be prepared to move
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toward more normal expansion rates in reserves and bank credit some
time after the June 15 tax date.
He agreed that in the interim the
Committee should not act in a way that would encourage a shift in
expectations.
At the moment, the market's expectations for bond
prices probably were more pessimistic than the underlying situation
warranted.
However, if those expectations were resulting in
unusually large demands for long-term funds, it should be the posture
of the System to help out by directing as large a part as possible
of its purchases into longer-term securities.
Mr. Daane remarked that the primary consideration for policy
at the moment was that a large-scale Treasury refunding was in process,
to which the market reaction was still uncertain.
Mr. Treiber had
said that current economic conditions warranted maintaining pre
vailing money market conditions and that the Treasury financing
reinforced that conclusion; he (Mr. Daane) would put the main emphasis
on the financing in concluding that an even keel policy was necessary.
He suspected, Mr. Daane continued, that the recent increases
in long-term rates despite the shift of policy toward greater ease
reflected the reaction of market participants to the developments
of last year.
Those rate increases served as a useful reminder to
the Committee that it could not always expect to be able to offset
the effects of market forces on the level and structure of rates.
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Mr. Daane said that he supported Mr. Brimmer's suggestion
that the System should not attempt to move time deposit rates up
and down by changing the Regulation Q ceilings.
As to the directive,
he was troubled by the proviso clause, particularly if it were to
be interpreted in terms of the blue book projection for May of bank
credit growth at an annual rate in the range of only 1 to 4 per
cent.
While the proviso probably would not do any real harm, in
view of the difficulties of formulating it in an appropriate way
at this juncture he would prefer to eliminate it entirely.
Mr. Mitchell said he agreed with the staff analysis today
and had little to add to the subsequent comments.
He had no strong
feelings about the proviso clause, and was agreeable to retaining
it as drafted, making it a two-way clause, or deleting it.
He agreed
with Mr. Treiber that there was a flaw in the language of the phrase
in the draft directive relating to industrial production.
As he
understood the matter, the decline in output was continuing.
Accordingly, he would suggest replacing the phrase, "with . .
industrial output reduced moderately" by the phrase, "with . .
industrial output still being reduced moderately."
Mr. Maisel commented that the phrase in the staff's draft
was appropriate if the reference was to the first quarter.
Mr. Brill remarked that the staff had in mind the fact that
industrial production in the first quarter had declined at an annual
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rate of 5 per cent from the fourth quarter, and also that the best
current estimate for April was for some further decline.
He empha
sized, however, that the April figure was an estimate, and that the
decline expected in that month was slight.
Messrs. Treiber, Mitchell, and Daane all indicated that it
was not clear from the draft language that the reference intended
was primarily to first-quarter developments.
Mr. Daane added that
it seemed preferable to him to refer to more current developments,
as Mr. Mitchell had suggested, in a directive that was updated at
each meeting.
Mr. Ratchford said that he would first report briefly on
changes in rates paid on small CD's and savings deposits in the
Fifth District.
No changes in rates paid on savings deposits, nor
any intentions to change, had been found.
At least four fairly
large banks had reduced their rates on small CD's from 5 to 4-1/2
per cent within the past month, of which one was in Baltimore, one
in Washington, and two in Virginia, but none in Richmond.
A large
North Carolina bank had reduced its rate from 5 to 4-3/4 per cent.
A small bank in West Virginia had raised its rate from 4 to 4-1/2
per cent for selected customers.
One of the reductions was in
Roanoke and was followed by a considerable number of smaller banks
in the area, but elsewhere the reductions apparently were not
followed by other banks.
Some of the banks which had not reduced
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rates were either encouraging or requiring shorter maturities and
one had imposed a maximum of $50,000 on amounts accepted.
Mr. Ratchford then noted that the slowing trend in business
activity which had prevailed in the Fifth District for some time
had become less distinct.
The picture now was more spotty, with
small gains reported in several areas.
That was accompanied by
slightly more optimistic expectations on the part of both business
men and bankers.
Inventories were still heavy, especially in the
textile and furniture industries, and manufacturers continued to
report considerable weakness in new and unfilled orders, but the
number reporting slight gains had risen.
Almost all textile
manufacturers reported lower prices received for finished goods.
Nonagricultural employment declined slightly in March but at the
same time the rate of insured unemployment declined in every District
State except one.
There was also a small decline in man-hours in
manufacturing but it was much smaller than the large drop which had
occurred in February.
Inadequate moisture in many parts of the
District had delayed the growth of some crops and the seeding of
others.
Mr. Ratchford observed that the Richmond Bank's analysis of
national economic conditions was quite similar to that in the staff
materials and in the comments around the table today, so he would
make only two points.
First, it was remarkable that such great
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strides had been made in bringing the growth of inventories under
control with only a modest slowing of industrial production.
The
March figures on manufacturers' inventories reported in this
morning's newspapers indicated that the inventory adjustment was
continuing.
A second outstanding feature of the adjustment was
that it was not proving to be cumulative.
It might well be that
the massive supplies of reserves provided by the System in recent
months had averted the chain reactions in the financial areas which
often caused declines to feed on themselves.
As for monetary policy, Mr. Ratchford said, he shared the
views that had already been expressed.
In light of the very large
amounts of reserves already supplied and the indications of a
turnaround in expectations of the economic outlook, he thought that
the time had arrived for a breathing spell, even apart from the
Treasury financing.
Accordingly, he favored no change in policy
and considered the draft directive appropriate.
Mr. Clay reported that a check in major cities of the Tenth
District indicated that most city commercial banks paying 5 percent
on consumer time deposits in recent months had reduced the interest
rates they now paid for such deposits.
He noted that most of the
city banks had been at the 5 per cent rate.
in the rates paid on savings deposits.
No change had been made
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However, Mr. Clay continued, the changes in time deposit
terms were not universal, and the types of changes made varied
considerably.
In some instances, the change made was in the maximum
amount for which 5 per cent would be paid, such as $15,000, with the
rate limited to 4 or 4-1/2 per cent for larger amounts.
In other
cases, the maximum rate paid on any amount had been reduced to
4-1/2 or 4-3/4 per cent, with individual accounts limited in size
or larger amounts subject to negotiation as to terms.
In a number
of cases, the maximum maturity had been reduced, but that was by no
means universal.
Only a few banks specified that they contemplated
future reductions in time deposit interest rates, and those were
invariably contingent upon reduction in rates paid by competing
savings and loan associations or other commercial banks.
Mr. Clay noted that adequate information was not available
for generalizing about Tenth District commercial banks in smaller
cities and towns.
Information had become available, however,
indicating reductions or contemplated reductions in interest rates
paid on time deposits by a number of such banks.
That had been a
subject of intense discussion among bankers in recent weeks, and it
was reasonable to assume that such actions by country banks were in
excess of those known by the Reserve Bank.
Mr. Clay pointed out that since last fall the Federal Reserve
System had taken stimulative action on a major scale.
While monetary
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-69
policy should continue expansive, it seemed logical to proceed
somewhat less aggressively for the present.
Business prospects
looked stronger than earlier in the year, even though the situation
was not altogether clear.
Moreover, possible larger military demands
upon the economy, arising out of the war in southeast Asia, had to
be accorded careful evaluation.
For the period immediately ahead, the current Treasury
financing program appeared to Mr. Clay to call for the maintenance
of essentially the prevailing money market conditions.
He thought
it would be desirable to have moderately greater expansion in bank
credit than that indicated in the blue book as probable under
even-keel money market conditions, but at a somewhat lesser rate
than in recent months.
Accordingly, it would be desirable to aim
toward such a goal insofar as that could be accomplished within
essentially prevailing money market conditions.
Mr. Clay proposed revising the proviso clause of the draft
economic policy directive to read "and to attaining somewhat greater
bank credit expansion than currently anticipated, if Treasury
financing permits."
Mr. Scanlon remarked that April saw a pronounced improve
ment in views of the economic outlook for the remainder of 1967.
Seventh District bankers and businessmen increasingly were confident
that the decline in activity registered in the first quarter of the
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year would not cumulate in the second quarter, and that the second
half would see renewed growth.
Those attitudes were based in part
on recent indications of an uptrend in retail trade, the rapidity
of inventory adjustments, the highly expansive posture of monetary
policy, and the probability that defense spending would accelerate.
Loan demand at major banks in the Seventh District continued
strong relative to the country as a whole, Mr. Scanlon said.
That
strength seemed to be concentrated in the commercial and industrial
area.
To accommodate that demand, the major Chicago banks had been
heavy purchasers of Federal funds.
They had not made aggressive
efforts to get CD money, which might suggest that no strong upward
surge in loan demand was expected or, more likely, that they would
not be back in that market until absolutely necessary.
With regard to rates on consumer CD's and savings deposits,
Mr. Scanlon continued, there was much discussion of possible rate
changes among both banks and savings and loan associations but
relatively little action.
Conversations indicated that literally
everyone would like to see someone announce a forthright reduction.
But the demand for bank loans had been strong enough to forestall
such a move.
Most of the banks and savings and loan associations
had stopped advertising for 5 per cent CD money, and some had
reduced the amounts they would accept and shortened the maturity.
5/2/67
-71Mr. Scanlon noted that there had been a meeting yesterday
of the National Agricultural Credit Committee at the Chicago Reserve
Bank.
Participants included the major lenders to agriculture-
mortgage and nonreal estate.
To summarize the discussion, it appeared
that mortgage loans made in recent months and commitments were both
down sharply from a year ago.
A few lenders had recently sought to
increase commitments but had found that farmers were holding back
in the hope that interest rates would decline.
Policy loans of
insurance companies were down from the high volume of last fall but
still ran two to three times the normal monthly volume,
Delinquencies
on principal and interest payments and foreclosures of outstanding
loans were at very low levels, as were rates of repayment of out
standing loans.
Banks and other lenders were generally expected to
be able to accommodate the prospective demand for farm loans--both
short-term and long-term--in 1967 at about current interest rates.
Many farmers had had losses of $20 to $30 per head on fed-cattle
marketed in recent weeks; a few had reported even larger losses.
Farm land prices had risen rapidly in recent months but were thought
to be rising much less rapidly now.
The Farm Credit Administration
had sought Congressional action to raise or eliminate the 6 per cent
ceiling on interest rates they could charge farmers on mortgage
loans and on the rates they could pay on debentures.
The first was
rejected--no Congressman would introduce the measure--and the second
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was approved with the greatest reluctance by both the Congress and
the President.
One FCA official responding to criticism from the
insurance company representatives stated, "Apparently we will
make mortgage loans within a 6 per cent ceiling or not at all."
As to policy, Mr. Scanlon concluded, he favored maintaining
the prevailing conditions in the money market, and his interpreta
tion of that was the one given in the blue book.
He found the
draft directive acceptable, although he would be just as happy
without the proviso for this period and he believed that Mr. Mitchell's
point regarding the language of the first paragraph had merit.
Mr. Galusha observed that reports of the April storms which
had crossed the great plains were disturbing.
The climax, the
blizzard of the last five days--which stretched over eastern Idaho,
Wyoming, the Dakotas, Montana, and into Alberta--was truly severe.
It was being called the worst in history, at least in its economic
impact.
Coming as it had right at the height of lambing and calving,
the storm would likely have far-reaching consequences, although
principally within the District.
District retailers were going to
know that there had been a storm, and so were the country banks.
The storm should relieve some of the present pressure on their
swollen coffers.
country banks.
For of late, loan demand had not been strong at
They seemed to be relatively liquid and probably
5/2/67
-73
would be able to meet emergency loan demands without great
difficulty.
The loan demand at District city banks had, however,
been very strong.
It was possibly the imbalance in District loan demands
which explained differences of opinion about the financial out
look, Mr. Galusha said.
Some bankers were talking about declines
in deposit and share rates and further declines in loan rates.
It
was difficult to know, however, whether that was prophecy or hope.
Anyway, there were others predicting that fall would see a return
to higher loan rates.
It seemed to him that that was the dominant
expectation, and, as such, he believed it explained why consumer
rates had not yet been moved lower.
In the Minneapolis Bank's
sampling, it had found changes only in Minnesota, where two banks
had lowered their rates on savings certificates from 5 to 4-1/2
per cent, several banks indicated they were not accepting new large
CD's at a 5 per cent rate, and one bank had reduced its passbook
rate from 3 per cent to 2 per cent, which he doubted would be a
pace setter.
In a way, then, Mr. Galusha remarked, it was too bad that so
many of those engaged in finance were doubtful--indeed, understand
ably doubtful--about the chances of getting a tax increase early in
1968.
That, it seemed to him, was ultimately why consumer and
long-term rates had proved so sticky.
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Mr. Galusha thought it also was too bad that the Committee
could not be surer about a tax increase.
Were it more certain, it
could confidently press further in the direction of monetary ease,
and so ease the members' minds about once again having to start off
a period of more rapid economic growth from a historically very high
level of long-term rates.
But without greater assurance about an
increase in tax rates, there must be some little doubt about how
much further the Committee could prudently press.
There was much
for the Committee to be uncomfortable about as it contemplated the
economic and political environment that would be confronting it
next fall or winter.
The battle might have been won, but hardly
the war--literally or figuratively.
The economy was still badly
dislocated by Vietnam and there was little reason to believe normal
forces of market allocation would be restored very soon.
However, Mr. Galsuah concluded, all of those remarks were
distinctly academic this morning, since an even keel was certainly
appropriate in light of the Treasury refunding.
Mr. Swan reported that manufacturing employment in the
Twelfth District had remained virtually unchanged in March for
the third consecutive month, and the over-all rate of unemployment
rose by only 0.1 to 4.6 per cent.
declined, housing starts had risen.
below their year-ago level.
Although construction employment
However, starts remained well
5/2/67
-75Mr. Swan noted that the larger banks in the District were
still net buyers of Federal funds, but in somewhat smaller amounts
than in earlier weeks.
The Reserve Bank's check with commercial
banks in the larger centers indicated that no changes were antic
ipated in the 4 per cent rate paid on passbook savings accounts.
With respect to rates on consumer CD's, the 5 per cent rate
remained general in San Francisco and Los Angeles, but there had
been a few reductions below that level in other major cities.
A
few reports of somewhat less active advertising for funds had been
received, and one bank indicated that special approval was now
required before larger amounts would be accepted.
However, a
Los Angeles bank had recently announced a new one-year, 5 per
cent "savings bond" which was a certificate issued in amounts from
$100 to $100,000.
In general, rates offered by banks in the area
were related to the 5-1/4 per cent rate paid by California savings
and loan associations.
There was a feeling among both types of
institutions that it would be desirable for rates to come down but
they all seemed to be waiting for someone else to act.
The hope
was that the regulatory authorities would lower ceiling rates.
With respect to policy, Mr. Swan thought that the Treasury
financing, the general shift toward a more optimistic attitude on
the economic outlook, the Committee's success in achieving declines
in short-term rates, and the substantial expansion in bank credit
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5/2/67
all argued for no change at this point, despite recent increases
in long-term rates.
He could accept the staff's draft directive,
with the change in the phrase relating to industrial production
that Mr. Mitchell had suggested.
He would be willing to include
the proviso clause as drafted or have it eliminated entirely, but
he would not favor a two-way proviso clause at this point.
The
slight increase in bank credit projected by the staff for May was
acceptable to him but he would hope that the phrase, "if bank credit
appears to be expanding significantly less than currently antic
ipated" would be interpreted to mean that an actual decline in
bank credit over the next three weeks would be avoided, if that
was possible within the constraints imposed by an even keel policy.
Avoiding a bank credit decline should be one of the Committee's
objectives at present whether or not a proviso clause was included
in the directive.
Mr. Coldwell remarked that the economy of the Eleventh
District was heavily reliant upon a few diverse and widely
differing sectors which currently were moving moderately in
divergent directions.
Strength was continuing from the large defense
manufacturing plants and the extensive military installations.
New
support was developing in construction activities, including
residential, highway, and municipal facilities.
Oil and gas
production had weakened but chemical and petrochemical industries
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were still expanding.
Agriculture had declined sharply under the
onslaught of reduced cotton acreage, near drought conditions, and
poor cattle grazing.
The April 1 wheat estimates might prove
optimistic at 24 per cent under last year's crop.
Declining prices
were reducing income, and cash receipts were 28 per cent below 1966.
District financial conditions reflected April tax borrowing,
increased investments in non-Government securities, and a sizable
decline in large CD's offset by demand deposit growth, Mr. Coldwell
said.
Uncertainty in deposit-loan trends, aggressive competition
for funds--even of two-year maturity--at large banks, and uneven
loan demands characterized District banking today.
Bankers were
worrying about rapid advances in interest costs and loss of deposits
to aggressive banks.
Prudence argued against their being panicked
into a rate or maturity war, but deposit declines, customer losses,
and higher than normal loan-deposit ratios counseled differently.
As usual, the smaller banks in outlying areas looked to the Federal
Reserve to protect them.
They wondered if Regulation Q ceilings
moved only upward.
Mr. Coldwell noted that the Reserve Bank had made a survey
of time deposit interest rates at 22 banks--half reserve city and
half country banks.
There had been no change in the 4 per cent
pattern on savings deposit rates and there was no prospect of
change, but the pattern with respect to changes in consumer CD
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-78
rates was mixed.
In 1966 and early 1967 such rates had moved to
5 per cent in and near metropolitan areas.
In April there had
been some scattered reductions to 4-3/4 and 4-1/4 per cent in
areas of largely conservative bankers, involving ten of the 22
banks surveyed.
Dollar limits per customer were coming down and
maturities also were being reduced.
As to the future, the
observation made for other Districts held true in the Eleventh
District also--nobody wanted to lead, but they would be delighted
if someone would act for them in reducing rates.
In selected
areas strong loan demand was limiting bank willingness to slow
time deposit inflow.
Savings and loan associations in many cities
reportedly were ready to cut their rates on July 1.
In concluding comments, Mr. Coldwell noted that a director
of the Reserve Bank, whose bank was located 60 miles from Dallas,
wanted his view brought to Washington that the Board should lower
the ceilings on consumer CD's to cut big-city competition for his
deposits.
Aggressive bankers were still willing to pay the top
rate even for two-year maturities to obtain funds for further
growth and loan expansion.
Mr. Ellis remarked that spring had been more of a calendar
notation than a change of seasons in New England.
With full sympathy
for those who were snowed in on Sunday in the Dakotas, he could
report that New England had had snowstorms, freezing cold, and work
5/2/67
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interruptions up to just last Monday.
That had meaning for District
economic statistics, such as those covering hours worked and retail
sales, especially of autos, and accordingly it flavored some of the
business performance in the period under review.
Mr. Ellis noted that the Boston Bank's latest regional
index of manufacturing production derived from an employment survey
made during the week including March 15 in which there had been 10
inches of snow and temperatures had fallen as much as 21 degrees
below normal.
In some ways it was good news to learn that the
index had dropped only two points in the month, holding one point
above its March 1966 level.
He found the projection surveys so
heavily influenced by one or a few very large defense producers
that it became difficult to appraise their meaning for the whole
District.
Reports from 193 firms showed that first-quarter sales
rose 2 per cent from the fourth quarter of 1966.
If a single
aircraft manufacturer was added, however, the sample total showed
an increase of 15 per cent.
It was quite clear, however, that the
pressure on the labor market had not abated.
Starting wages in
Boston (including those at the Reserve Bank) were being raised
this week and last from $60 to $65 a week.
That also was largely
a paper record since it was next to impossible to obtain and/or
to hold employees at that wage level.
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In the financial picture, Mr. Ellis said, the most notable
change in recent weeks had been a thawing in rates.
Five of the
10 Boston banks lowered their rates on mortgages from 6-1/4 per
cent to 6 per cent (75 per cent mortgage basis).
Also, brokers
were being offered finder's fees to bring in customers, a practice
that vanished about a year ago.
lower rates on savings.
Savings banks had been slow to
Only one savings bank in the sample moved
last month and that was down from 4-3/8 to 4-1/4 per cent.
District
commercial banks, however, had quite generally reduced rates paid
on deposits.
Within the past few weeks (as of April 24) seven of
the eight largest New England banks had lowered the rates they
paid on consumer-type CD's, the most common drop being from 5 per
cent to 4 per cent.
Mr. Ellis noted that new commitments by the large insurance
companies in the District recovered in March to their average level
for the first quarter of 1965, before the policy loan breakout had
assumed epidemic proportions.
Policy loans continued falling,
although the March outflow was still more than double early-1965
outflows.
With respect to monetary policy, Mr. Ellis said that the
desirability of maintaining prevailing money market conditions
during the current Treasury financing could be safely acknowledged
in view of improvement, documented in the background materials, in
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business sentiment and outlook.
Having been embarrassed at other
recent meetings by his disagreements with the staff regarding the
outlook, he took comfort today in agreeing with the analyses of
Messrs. Brill and Partee.
He would like to highlight the first
quarter strength of final demand; between the fourth quarter of
1966 and the first quarter of 1967, final takings had expanded by
$16 billion (annual rate), of which the Federal Government accounted
for only $3.3 billion.
Consumer spending expanded by $8.1 billion,
and the saving rate in the first quarter was now calculated at 6.1
per cent rather than 7 per cent as shown in the GNP projection of
four weeks ago.
Over-all GNP was presently recorded as rising by
$5 billion in the first quarter, but since the preliminary estimates
for the quarter depended heavily on data covering the weaker months
of January and February, he anticipated that they would be revised
upward, perhaps substantially.
Mr. Ellis said he was frank to confess that that retrospec
tive view colored his attitude toward monetary policy appropriate
for the next several months.
Starting with a conviction that there
was strong underlying demand from consumers, business, and government
at all levels, it was quite natural to conclude that the Committee
should avoid inflating that demand further by credit creation beyond
the economy's basic growth needs.
He was reminded of a recent
comment by Mr. Shepardson to the effect that the Committee should
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-82
feel committed to reshape policy toward lessened ease just as
readily as it had moved to create ease last fall.
In terms of the next three weeks, Mr. Ellis thought that
the pattern described in the first paragraph on page 4 of the blue
book was entirely appropriate.1 /
However, if the projection of
bank credit expansion in May at an annual rate in the range of
1 to 4 per cent was fulfilled, it would be the first time that
such a modest rate had prevailed since the Committee's policy
change in November.
His own expectation was for a higher rate of
credit expansion.
In that context, Mr. Ellis said, he would point out that
the proviso clause in the draft directive was completely silent
on what action the Manager should take in the event bank credit
expansion during May substantially exceeded present expectationsrising, say, at a rate twice as fast as projected, or continuing
to expand at the 12.9 per cent average rate that had prevailed
since November.
The proposed clause would direct the Manager to
1/ The paragraph mentioned read as follows: "Maintenance
of prevailing money market conditions over the next three weeks
would involve a Federal funds rate averaging 4 per cent or a
shade below and a 3-month bill rate fluctuating generally in
a 3.65 - 3.85 per cent range. Member bank borrowings are likely
to be in the $100 - $200 million area. Free reserves could vary
more widely, perhaps in a $150 to $300 million range, depending
in part on bank reserve management policies, on dealer financing
needs and reinvestment flows associated with the Treasury refund
ing, and the need to maintain an 'even keel' monetary posture."
5/2/67
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ease if the rate of bank credit expansion fell below the expected
1 to 4 per cent range.
To be consistent, the clause should be
amplified to include some expression about desired action if bank
credit again surged, or it should be deleted entirely.
He was
inclined to agree that it would be difficult to frame an appro
priate symmetrical clause at this juncture, and accordingly he
would urge the Committee to omit the proviso clause.
Mr. Robertson then made the following statement:
Like all the rest of you, I have been gratified
by the signs of an improved business outlook that have
appeared since we last met. While I recognize that
our economic adjustment is not yet over, it seems to
be proceeding constructively. Recession talk seems
to have evaporated, and I have the impression that,
barring major strikes, a fairly vigorous resumption
of economic expansion can easily be under way by the
end of the summer.
That outlook has particular pertinence to our
present deliberations, because, given the admitted
lags in the influence of monetary policy, it is
probably the trend of GNP beginning next fall--and
running into next year--that we shall be influencing
the most with what we vote to do, or not to do, today.
To me, that trend looks so promising that further
aggressive monetary stimulus at this time would be
unwarranted. I think we have come a long way in our
reversal of monetary policy since last fall, and it
has done much to contribute to the brevity and relative
painlessness of the current readjustment. Whether I
look back or look ahead, therefore, what I see makes
me reasonably satisfied to hold our policy right where
it is--on "even keel"--whether or not we had a Treasury
financing in process.
Some observers, I realize, are much more concerned
than I about the current state of the financial markets.
The money market surely is comfortable, and reserve
5/2/67
-84-
availability is ample; but the long-term bond markets
are undeniably very soggy. The basic reason is equally
obvious. Those market participants are smart, too. They
can read economic signals just as we can, and at least
some of the time they are every bit as right. If a
vigorous economic expansion is in the cards later this
year, it makes good business sense for supplies and
demands for funds in the bond markets to shift in such
a way as to hold up bond rates, and that is just what
has happened.
What should we do about it? You all know how I feel
about our dabbling in long-term bond markets. In the
current situation, moreover, with economic sentiment so
much stronger, it would undoubtedly take large and
sustained operations by us to markedly lower bond ratesand the resultant greatly increased reserve availability
might finance a credit and spending bulge whose timing
would prove to be very badly wrong in hindsight.
Excessive ease now might well increase the chances of
our reaping both an excessive rise in demands toward
year-end and some nasty tightening consequences in the
financial system as we tried to undo what we had done.
I, for one, would much prefer to hold at something
like our present posture for as long as we reasonably
can, so long as the economic adjustment continues to
show signs of proceeding satisfactorily and credit flows
remain ample to all major sectors of the community.
Mr. Robertson added that while he could accept the directive
drafted by the staff, he would prefer to incorporate Mr. Mitchell's
suggested change in the first paragraph and he would certainly
prefer Mr. Clay's suggestion with respect to the proviso clause.
He did not agree with Mr. Ellis that there was great danger that the
projected growth rate in bank credit would be outrun in the weeks
ahead, and accordingly he did not think a two-way proviso was neces-
sary at this time.
5/2/67
-85Chairman Martin commented that there was a high degree of
agreement today with respect to policy, and the only problem seemed
to be that of deciding on language for the directive.
Mr. Maisel commented that he shared the view that the proviso
clause should be deleted.
Chairman Martin said that he also thought the proviso clause
might be omitted for this period.
The staff might attempt to
formulate an appropriate version of the clause for Committee consid
eration at the next meeting.
The Committee then resumed the earlier discussion of the
second sentence of the first paragraph of the directive, and reached
agreement on language.
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 suggest that prospects for renewed economic
expansion have improved. The adjustment of excessive
inventories is proceeding, as a result of the reduced
level of industrial output and with consumer buying
strengthening. Average wholesale prices have declined
recently, reflecting reductions in farm and food prices
and stability in prices of industrial commodities; but
unit labor costs in manufacturing have risen further.
Bank credit expansion has moderated in recent weeks from
its earlier rapid rate. Long-term interest rates have
risen considerably under the influence of heavy securities
market financing and more optimistic market appraisals of
5/2/67
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the business outlook, but short-term yields have declined
further following the recent reduction in Reserve Bank
discount rates. Interest rates abroad have continued
to decline and some further reductions have been made in
foreign central bank discount rates. The balance of
payments deficit has remained substantial despite some
improvement in the foreign trade surplus. In this
situation, it is the Federal Open Market Committee's
policy to foster money and credit conditions, including
bank credit growth, conducive to renewed economic expan
sion, while recognizing the need for progress toward
reasonable equilibrium in the country's balance of
payments.
To implement this policy, while taking account of
the current Treasury financing, System open market operations
until the next meeting of the Committee shall be conducted
with a view to maintaining the prevailing conditions in
the money market.
Chairman Martin then observed that the Committee had planned
to pursue its discussion today of the implications for its procedures
of the "Freedom of Information Act."
He noted that the earlier staff
memoranda on this subject had been supplemented by a memorandum from
Mr. Hackley dated April 26, 1967,1/ and he invited Mr. Hackley to
open the discussion.
Mr. Hackley said that he would confine his remarks to the
principal points at issue, including several questions that had
been raised by members of the Committee in the discussion of the
Freedom of Information Act at the March 7 meeting.
The first was
whether the Act would require publication in the Federal Register
1/ A copy of this memorandum has been placed in the Committee's
files.
5/2/67
-87
of the current economic policy directives and the other authorizations
and directives of the Committee.
He had reviewed that question
further and had decided that those instruments were clearly "state
ments of general policy" of the type for which publication was
required, and that none of the exemptions listed in the Act applied
to them.
It had been suggested that the Committee might seek an
Executive Order to have them exempted.
However, the Act provided
for such Executive Orders only where secrecy was required "in the
interest of the national defense or foreign policy," and that would
not seem to him to apply to the domestic operations of the Committee.
On the other hand, it would appear appropriate to seek an Executive
Order exempting Reserve Bank operations in the foreign currency area.
He had learned only yesterday that the Treasury had referred to the
Department of Justice a request for an exemptive Executive Order
covering all of its foreign currency operations, including those of
the Stabilization Fund.
The Committee might wish to consider making
a similar request.
A second question discussed at the March 7 meeting, Mr. Hackley
continued, concerned the time lag with which the Committee's
directives might be published under the requirement that statements
of general policy be published "currently."
On that point he still
felt that a 60-day lag would be more defensible than one of 90 days,
but he did not mean to say that the 90-day lag would be indefensible.
5/2/67
-88
He had reason to believe that if the question were tested in court
the Justice Department would support a lag of either 60 or 90 days.
With respect to the Committee's minutes, Mr. Hackley said,
the staff was agreed that it would be desirable to divide them into
"action minutes" and "memoranda of discussion."
The latter, which
would be similar in form to the documents heretofore described as
"minutes," would be exempt from disclosure as intra-agency memoranda.
The action minutes would not be exempt, but he thought that would
not present any great problem.
Mr. Hackley observed that the Legal Division had drafted
proposed new "Rules regarding availability of information" to
replace the corresponding present Rules of the Committee.
The
proposed new Rules were framed in general language and did not appear
to pose much of a problem.
The principal question on which Committee
guidance was needed related to the time-lag for publication of
directives.
More troublesome than the language of the Rules was
the problem of identifying and characterizing records--particularly
records held at the New York Bank.
It was necessary to determine
which were in fact records of the Committee subject to the Act, and
of those which appeared clearly to fall within the statutory exemp
tions.
That matter was now under study both at the New York Bank
and the Board, and he would hope that by the time of the next meeting
the staff would be able to make definite recommendations.
5/2/67
-89
In conclusion, Mr. Hackley noted that the Department of
Justice Manual for the guidance of Government agencies in complying
with the Act was expected to be issued some time in the latter part
of May, so that additional guidelines might be available by the
time of the next meeting.
Also, the Legal Division wanted to explore
some possible further changes in the proposed new Rules.
He
suggested that the Committee plan on considering new Rules for final
adoption at either its May 23 or June 20 meeting.
Mr. Daane said he disagreed completely with Mr. Hackley's
conclusions on the first two questions.
It seemed to him if the
Treasury could ask for an exemptive Executive Order covering all
of its foreign currency operations, including those of the
Stabilization Fund, the Committee had a very strong case for such
an Order relating to its currency policy directives and other
records; the Committee's domestic open market operations had highly
important implications for "national defense and foreign policy."
He thought the Treasury's action was clearly illustrative of proper
approach.
Secondly, he did not understand why a 60-day time lag in
publishing the directives was more defensible than a 90-day lag.
If the directives were to be published, he would consider a 90-day
lag to be the minimum.
Mr. Hackley said he was suggesting that the Committee might
consider following the Treasury's course in requesting an exemptive
Executive Order with respect to its foreign currency operations.
5/2/67
-90
Mr. Daane replied that he would favor broadening the request
to cover domestic as well as foreign operations.
The domestic
operations of the Committee influenced the position of the national
economy relative to the rest of the world, and in his judgment they
could not be separated from other forces affecting the value of
the dollar.
Mr. Mitchell asked Mr. Hackley whether he had the Committee's
deliberations in mind when he referred to foreign currency operations.
Mr. Hackley replied that he had meant to refer not to the
Committee's deliberations but to information on foreign currency
transactions and to the authorization and directive regarding such
transactions.
He added that even if an exemptive Executive Order
was obtained the Committee could still publish those instruments,
as it had in the past.
Mr. Mitchell then said that he thought Mr. Daane's point
had merit.
The Committee's domestic policy decisions had important
international implications, and at times they were strongly moti
vated by international considerations, such as concern over capital
outflows.
If an exemption for the current policy directives could
be obtained by Executive Order, he thought the Committee should
request such an Order.
Mr. Hackley said that the possibility of getting an Executive
Order covering both domestic and foreign currency operations certainly
5/2/67
-91
could be explored, although he had some reservations as to whether
the effort would be successful.
Mr. Maisel remarked that he saw no reason for even exploring
the possibility of getting an Executive Order if a 90-day time lag
in publishing the directives appeared defensible.
In his judgment,
publication with such a time lag would not pose problems.
Mr. Brimmer noted that he had mentioned the possibility of
getting an Executive Order in the Committee's earlier discussion,
and Mr. Hackley had indicated some reluctance to pursue that
possibility at that time.
He (Mr. Brimmer) still felt that the
Committee needed some indication of the probability that it could
obtain a general exemption, within which it could work out appropriate
procedures for release of materials.
As to timing, he thought it
would be unfortunate if important issues were left to be resolved
until June 20, and he proposed that the Committee try to reach the
necessary decisions at its May 23 meeting.
Mr. Treiber remarked that he also would favor an exploration
of the possibility of getting an Executive Order covering all of the
Committee's operations.
Mr. Hackley then said that if it was agreeable to the
Committee the Legal Division would prepare a letter addressed to
the Justice Department requesting an Executive Order of the broadest
possible scope, exempting from publication in the Federal Register
5/2/67
-92
not only the foreign currency instruments but also the domestic
directives.
Mr. Daane suggested that the letter indicate that the Committee
was reviewing its general policies on publication.
Mr. Brimmer agreed, and added that it should be made clear
that if the Order was issued the Committee would still try to work
out the best possible procedures with respect to releasing informa
tion.
Chairman Martin then proposed that in view of the lateness
of the hour the Committee defer the planned discussion of its policy
on publication of information on drawings under the swap network
and on other System foreign currency operations, and no objections
were heard.
Chairman Martin then reported that the trilateral negotiations
among the United Kingdom, the United States, and Germany with respect
to the cost of maintaining troops in Germany had finally come to
a conclusion which Mr. McCloy would be announcing today.
One product
of the negotiations was a letter that had been addressed to him
(Chairman Martin) by President Blessing of the German Federal Bank,
stating that that Bank did not intend to convert any of its dollar
holdings to gold for the time being.
released today.
That letter probably would be
-93
5/2/67
Mr. Daane asked whether the letter did not simply reaffirm
a policy the Germans had been following, and the Chairman replied
affirmatively.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, May 23, 1967, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
May 1, 1967
Draft of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on May 2, 1967
The economic and financial developments reviewed at this
meeting suggest that prospects for renewed economic expansion have
improved.
The adjustment of excessive inventories is proceeding,
with consumer buying strengthened and industrial output reduced
moderately. Average wholesale prices have declined recently, re
flecting reductions in farm and food prices and stability in prices
of industrial commodities; but unit labor costs in manufacturing have
risen further. Bank credit expansion has moderated in recent weeks
from its earlier rapid rate. Long-term interest rates have risen
considerably under the influence of heavy securities market financing
and more optimistic market appraisals of the business outlook, but
short-term yields have declined further following the recent reduction
in Reserve Bank discount rates. Interest rates abroad have continued
to decline and some further reductions have been made in foreign
central bank discount rates. The balance of payments deficit has
remained substantial despite some improvement in the foreign trade
surplus. In this situation, it is the Federal Open Market Committee's
policy to foster money and credit conditions, including bank credit
growth, conducive to renewed economic expansion, while recognizing
the need for progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, while taking account of the current
Treasury financing, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
the prevailing conditions in the money market, and to attaining
somewhat easier conditions, insofar as the Treasury financing permits,
if bank credit appears to be expanding significantly less than
currently anticipated.
Cite this document
Federal Reserve (1967, May 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19670502
@misc{wtfs_fomc_minutes_19670502,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1967},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19670502},
note = {Retrieved via When the Fed Speaks corpus}
}