fomc minutes · May 22, 1967

FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington, D. C., on Tuesday, May 23, 1967, at 9:30 a.m.

PRESENT:

Mr.

Martin, Chairman

Brimmer

Daane

Francis

Maisel

Mitchell

Robertson

Scanlon

Sherrill

Swan

Wayne

Treiber, Alternate for Mr. Hayes

Messrs. Ellis, Hickman, and Galusha, Alternate

Members of the Federal Open Market Committee

Messrs. Bopp, Clay, and Irons, Presidents of the

Federal Reserve Banks of Philadelphia, Kansas

City, and Dallas, respectively

Mr. Holland, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Broida, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Hexter, Assistant General Counsel

Mr. Brill, Economist

Messrs. Baughman, Hersey, Jones, Koch, Partee,

and Solomon, Associate Economists

Mr. Holmes, Manager, System Open Market Account

Mr. Fauver, Assistant to the Board of Governors

Mr. O'Connell, Assistant General Counsel, Legal

Division, Board of Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Reynolds, Adviser, Division of International

Finance, Board of Governors

Miss Eaton, General Assistant, Office of the

Secretary, Board of Governors

5/23/67

Mr. Kimbrel, First Vice President of the

Federal Reserve Bank of Atlanta

Messrs. Eisenmenger, Eastburn, Mann,

Parthemos, Brandt, Tow, and Green,

Vice Presidents of the Federal Reserve

Banks of Boston, Philadelphia, Cleveland,

Richmond, Atlanta, Kansas City, and

Dallas, respectively

Messrs. Fousek, MacLaury, and Olin, Assistant

Vice Presidents of the Federal Reserve

Banks of New York, New York, and

Minneapolis, respectively

Mr. Lynn, Director of Research, Federal

Reserve Bank of San Francisco

Mr. Geng, Manager, Securities Department,

Federal Reserve Bank of New York

By unanimous vote, the minutes of

the meeting of the Federal Open Market

Committee held on May 2, 1967, were

approved.

By unanimous vote, the action taken

by members of the Federal Open Market

Committee on May 12, 1967, amending

paragraphs 1A and 2 of the authorization

for System foreign currency operations,

effective May 17, 1967, to read as follows,

was ratified:

1A. To purchase and sell the following foreign currencies

in the form of cable transfers through spot or forward trans

actions on the open market at home and abroad, including

transactions with the U.S. Stabilization Fund established by

Section 10 of the Gold Reserve Act of 1934, with foreign monetary

authorities, and with the Bank for International Settlements:

Austrian schillings

Belgian francs

Canadian dollars

Danish kroner

Pounds sterling

French francs

German marks

Italian lire

5/23/67

Japanese yen

Mexican pesos

Netherlands guilders

Norwegian kroner

Swedish kronor

Swiss francs

2. The Federal Open Market Committee directs the

Federal Reserve Bank of New York to maintain reciprocal

currency arrangements ("swap" arrangements) for System

Open Market Account with the following foreign banks,

which are among those designated by the Board of Governors

of the Federal Reserve System under Section 214.5 of

Regulation N, Relations with Foreign Banks and Bankers,

and with the approval of the Committee to renew such

arrangements on maturity:

Foreign bank

Amount of

Maximum

arrangement

period of

(millions of

arrangement

dollars equivalent)

(months)

Austrian National Bank

National Bank of Belgium

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Bank for International Settlements

System drawings in Swiss francs

System drawings in authorized

European currencies other than

Swiss francs

100

150

500

100

1,350

100

400

600

450

130

150

100

200

5/23/67

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 condi

tions and on Open Market Account and Treasury operations in

foreign currencies for the period May 2 through May 17, 1967,

and a supplemental report for May 18 through 22, 1967.

Copies

of these reports have been placed in the files of the Committee.

In comments supplementing the written reports, Mr. MacLaury

reported there had been no change in the Treasury gold stock this

week nor had there been any change since February.

As recently

as yesterday it had appeared that no reduction would be required

for the next few weeks, but that was no longer certain.

Various

developments had resulted in a sharp increase in gold market

activity.

Turnover in the London market, which normally averaged

about $5 million a day, had risen to near-record levels in recent

days:

$20 million on Friday, roughly $20 million again yesterday,

and $30 million today.

The gold pool had suffered substantial

losses in the last three days, totaling about $65 million.

heightened activity reflected a combination of factors.

The

political disturbances in Hong Kong, and more particularly the

increased threat of war in the Middle East, were important.

The

U.S. Treasury's decision last Thursday to suspend sales of silver

for export added a further element of uncertainty, especially

-5

5/23/67

since it followed on the heels of last month's discussion of U.S.

gold policy.

The European press had played up the possibility that

what had been done with silver could also be done with gold, although

on any reasoned basis it was clear that the two situations were not

parallel.

As the Committee knew, Mr. MacLaury continued, only the fact

that South Africa had been running down its reserves (by $125 million

in gold since the end of 1966) had kept the pool deficit in a manage

able range this year.

At the moment there was only $40 million

available to the pool without further discussion among the members,

and an additional $50 million could become available after consulta

tion.

How quickly that margin could disappear was indicated by the

pool's losses in the last few days.

In the exchange markets, Mr. MacLaury said, the most

immediately troublesome development had been the weakening of sterling.

The momentum of recovery that had been so evident during the first

few months of the year ended rather abruptly this month, and for the

past two weeks the Bank of England had had to extend intermittent--and

at times sizable--support to hold the rate.

factors was responsible:

Again, a combination of

first, the one-half point reduction in the

British Bank rate on May 4 to 5-1/2 per cent, together with the rise

in Euro-dollar rates, had reduced the relative pull of London rates

on foreign funds; more important, the disappointing April trade

-6

5/23/67

figures, released May 11, triggered the first sharp sell-off of

sterling in many months; and finally, of course de Gaulle's press

conference a week ago, in which he painted in starkly negative

terms the hurdles Britain would have to surmount to attain member

ship in the Common Market, added a further blow.

Those develop

ments, together with the political disturbances just mentioned

in connection with gold, put sterling under substantial pressure.

For the month to date, the Bank of England had lost, net, well

over $100 million in market support operations.

At the beginning

of the month the British had repaid the final $150 million of

sterling balance credits, as required by the rise in such balances

during the preceding month.

In addition, the Chancellor announced

in Parliament early this month--before the reserve losses--that

the U.K. would prepay $485 million to the International Monetary

Fund and Switzerland on May 25.

It was still too early to forecast

how the month as a whole would turn out; the British took in $22

million yesterday and today the sterling market had been quiet.

If the line were drawn now, however, British reserves would be

down nearly $800 million from the end of last month as a result

of its market support operations and debt repayments.

Clearly,

any such drop--even though more than half explained by the

repayments to the International Monetary Fund and Switzerland--would

have a seriously damaging impact on the market.

Thus, the

-7

5/23/67

possibility of bringing into the reserves the remaining British

portfolio was being actively discussed, as was the possible

necessity of resorting once again to short-term assistance.

On the continent, Mr. MacLaury observed, the dollar had

generally remained weak.

taking in dollars.

A number of central banks had been

Early in the period the System utilized some

$30 million equivalent of its Belgian franc balances under the

fully-drawn portion of its swap arrangement with the Belgian

National Bank to absorb an equal amount of funds taken in by

that Bank.

More recently, there had been a particularly heavy

movement of dollars into Switzerland where the relative tightness

of the money market had added to the inflows generated by political

uncertainties and more recently by the pressures on sterling.

Since May 10, the Swiss National Bank had taken in from the market

well over $100 million, and, of course, it would be receiving some

$80 million on Thursday from the British prepayment.

Thus, the

U.S. faced the prospect of finding ways to absorb close to $200

million from the Swiss.

A gold sale undoubtedly would be part

of the package, and it might well be that the System would have

to reactivate its swap arrangement with them.

Certainly, the out

look for the dollar over the summer months was not reassuring,

and as Mr. Coombs had indicated at the last meeting, there was

every likelihood that the System's swap network would have to be

heavily relied upon.

5/23/67

-8

Mr. MacLaury went on to say that Mr. Coombs originally

had expected to wait until today to ask for the Committee's

formal approval of the addition of the central banks of Denmark,

Mexico, and Norway to the swap network.

However, the develop

ments mentioned in his message of May 12 transmitted by wire1/

to Committee members made it seem desirable to request approval

at that time.

As indicated in that message, Denmark particularly

wished to be able to announce its new swap arrangement on May 18

along with Norway, and Mexico preferred that its arrangement be

announced at the same time.

In Mr. Lang's conversations with the

Venezuelans following the Committee's preceding meeting, they had

indicated that they appreciated being kept informed on developments,

but since there was no present prospect of Venezuela's moving

toward Article VIII status in the near future they understood

that the System would wish to proceed with the other countries

involved

With respect to the renewal of the swap arrangement

with the Bank of France, the developments following the preceding

meeting had been reported to the Committee in a memorandum from

Mr. Coombs dated May 9, 1967.

He (Mr. MacLaury) had little to

add to the information in the memorandum, except to say that

1/ A copy of this telegram has been placed in the Committee's

files.

2/ A copy of this memorandum, entitled "Swap arrangements with

Common Market countries; discussions at Basle, May 6-7," has been

placed in the Committee's files.

-9

5/23/67

Mr.

Coombs felt that the frank discussions with the European

central bankers had done a lot to clear the air and to bring

home the importance of the swap network to them as well as to

the United States.1/

In that connection, Mr. Coombs

had asked him to say that the firm stand the Committee had taken

at its preceding meeting had been of great help to Messrs.

Hayes

and Coombs in their discussions with the Europeans.

Mr. Brimmer asked whether the operation of bringing the

remaining British portfolio into their reserves would have any

effect on the U.S. balance of payments.

In reply, Mr. MacLaury commented that the British portfolio

no longer included any equities.

They did hold a substantial

volume of debt securities with maturities of over one year,

ularly U.S. agency issues.

partic

If they liquidated those holdings or

converted them into shorter-term issues the effect would be to

increase the U.S.

deficit.

However,

the British appeared to have

adequate cash on hand, so even if they brought the portfolio into

reserves they would not necessarily convert it

immediately.

The

effects on the U.S. deficit might thus be spread over time.

Mr.

Maisel asked whether there was any significance to the

fact that the U.S. Treasury recently had redeemed bonds denominated

1/ A sentence has been deleted at this point for one of the

reasons cited in the preface. The sentence reported a further

comment on the subject under discussion.

-10

5/23/67

in Belgian francs held by the Belgians in an amount--$30 millionequal to that involved in the System's current disbursements under

the Belgian swap line.

Mr. MacLaury responded that the Treasury had accumulated

$30 million in Belgian francs last fall, and since the Belgians

had asked to have the bonds paid off at maturity the Treasury had

used the francs to redeem them.

It was simply coincidence that

the System's subsequent use of the swap line had involved the same

figure.

He added that there was no reason at this stage to believe

that the Belgians would not consider taking on additional bonds

at a later date if that seemed appropriate.

Mr. Mitchell said he was disturbed by statements in Mr. Coombs'

memorandum of May 9 to the effect, first, that there had been an

agreement by the central bank governors of the Common Market that

the Federal Reserve would have full opportunity to express its

views before those central banks reached any new binding agreement,

and secondly, that an agreement might be worked out under which

all the swap agreements except that with the French would have a

common maturity date at the end of the year.

As he understood the

matter, the Europeans had been interested in arranging common

maturity dates to facilitate multilateral surveillance.

Was it

valid to infer that the System had given up its resistance to the

efforts to put the network under surveillance by the Common Market

5/23/67

-11

countries, and was now willing to accept such surveillance at

the end of each year?

Or was that still a matter for negotiation?

Mr. MacLaury replied that the question of the kind of

agreement that would be negotiated between the Common Market

central banks and the System remained completely open.

Mr. Mitchell's point regarding common year-end maturity dates

was well taken, but perhaps equally important was the agreement

by the Common Market central banks to abandon their efforts to

present the System with a fait accompli.

Those central banks,

of course, had every right to discuss their swap lines with the

System among themselves, but the fact was brought home to them

that the System was disturbed by their action in taking a firm

decision regarding those arrangements without consulting the

Federal Reserve.

Secondly, Mr. MacLaury said, while it was probable that

there would be a move toward a common maturity date--although the

matter was still open--that move would involve not only the

arrangements with the Common Market central banks but also those

with the System's other partners in the network.

If only the

Common Market countries were involved, observers might conclude

that the System had agreed to surveillance by them.

But if the

shift was more general such an impression was less likely to be

created.

5/23/67

-12

Mr. Mitchell then said he thought the Committee should

discuss the matter further before the negotiations proceeded.

It was possible that the System might already have traded away

much of its potential for resisting surveillance by agreeing to

negotiate about a common year-end maturity date.

In any case,

a discussion would give the Special Manager a full understanding

of what the Committee would like to accomplish.

Mr. Daane agreed that such a discussion would be highly

useful.

He added that the Special Manager had been conscious of

the problem Mr. Mitchell had noted.

It was clear that avoiding a

common maturity date would be preferable from the System's point

of view, but it was important to recognize that the Common Market

countries felt quite keenly on the matter of multilateral

surveillance.

Chairman Martin proposed that the discussion Mr. Mitchell

had suggested be put on the agenda for the next meeting of the

Committee.

Mr. Wayne noted that he also had been disturbed by the

suggestion that there be common maturity dates for the swap

arrangements, although he would not necessarily question such a

move.

He thought it would be desirable to have a memorandum from

Mr. Coombs in advance of the next meeting, commenting on the

significance of common maturity dates and providing a fuller

5/23/67

-13

explanation of the implications of having the whole network on

that basis rather than just the Common Market central banks.

Mr. Hickman observed that the Committee's interest in

avoiding a common maturity date had been evident in the dis

cussion at the preceding meeting.

Mr. Robertson noted that the question at issue then had

concerned quarterly, rather than annual, common maturity dates.

Mr. Brimmer recalled a comment of Chairman Martin's at

the preceding meeting, when he had been asked whether it was his

feeling that the Committee should run the risk of having its

swap arrangements brought under the surveillance of the Common

Market.

The Chairman had replied that it was not yet clear to

him how serious that risk was, since much depended on the

attitudes of the Germans and the Italians.

In his (Mr. Brimmer's)

judgment, it was understood at that time that the Committee would

not automatically agree to negotiations with the Common Market on

the basis of multilateral surveillance.

Chairman Martin concurred.

He felt that the System had not

tied its hands, and that the Committee should keep the matter under

consideration.

In his judgment Messrs. Hayes and Coombs had con

ducted the recent negotiations in an excellent manner.

5/23/67

By unanimous vote, the System

open market transactions in foreign

currencies during the period May 2

through 22, 1967, were approved,

ratified, and confirmed.

Mr. MacLaury then noted that the $50 million supplementary

standby swap arrangement with the National Bank of Belgium, origi

nally negotiated in September 1966, would mature on June 30, 1967;

and the full $150 million swap arrangement with the Netherlands

Bank would mature on the same date.

Both had terms of three months,

and he recommended their renewals for additional terms of the same

length.

As noted in the preceding discussion, there might be a

general move toward one-year terms in the System's swap arrangements

but that, of course, had not yet been negotiated.

By unanimous vote, renewal for

further periods of three months of

the $50 million supplementary standby

swap arrangement with the National

Bank of Belgium, and the $150 million

standby swap arrangement with the

Netherlands Bank, both scheduled to

mature on June 30, 1967, was approved.

Mr. MacLaury then noted that, as the Committee would recall,

under the $100 million, twelve-month swap arrangement with the

National Bank of Belgium that had been in effect before September

1966, it had been the established practice for both parties to make

a $50 million drawing with a maturity of six months.

That drawing

would mature on June 22, 1967, and he recommended its renewal for a

-15

5/23/67

further period of six months.

As he had indicated, the System now

held in balance $20 million in Belgian francs, having utilized $30

million of the fully-drawn portion of the arrangement earlier this

month.

Renewal for a further period of

six months of the $50 million drawing

on the swap arrangement with the

National Bank of Belgium, scheduled

to mature June 22, 1967, was noted

without objection.

Chairman Martin then invited Mr. Daane to report on

developments at the meeting of the Deputies of the Group of Ten

which he had attended last week.

Mr. Daane said that the Deputies had met in Paris for a

day and a half on May 18 and 19.

The sessions were largely devoted

to further discussion of the unresolved technical issues relating

to reserve asset creation that he had mentioned at the previous

meeting of the Committee--namely, whether the new asset should be

transferable directly or indirectly, whether it should involve

pooled resources in the Fund or separate resources in the Fund or

in a Fund affiliate, and whether repayment provisions should be

attached to the asset.

It was fair to say that some further progress

had been made in narrowing the differences of view on those technical

issues.

His own judgment was that the remaining differences probably

could be resolved on the issues of transferability and fund resources.

5/23/67

-16

The issue of repayment provisions was the most difficult of the

three because it went to the heart of the question of whether the

new asset should be credit-like--which was the French view--or

money-like, which the U.S. favored.

From what he had gleaned

outside the formal sessions, it appeared that the French were

prepared to take a fairly hard position on that issue, and might

drop out of the whole exercise unless they won agreement with their

position.

The U.S. delegation had submitted two papers, Mr. Daane

continued, of which one updated the illustrative Fund scheme for

a new reserve unit.

Realistically, however, the U.S. representatives

did not see much chance for a new reserve unit to emerge from the

discussions.

The second U.S. paper not only updated the Fund's

illustrative scheme for a drawing right but improved on the type

of drawing right envisaged.

That paper had been submitted during

the course of the meeting and was not discussed.

Mr. Daane went on to say that on the fourth unresolved

issue--that of decision-making--the Deputies had made no progress.

Quite clearly that was a political issue which, he felt sure, would

have to be resolved at a higher level.

The Common Market countries

wanted requirements calling for a majority of 85 per cent of votes

in the Fund and a majority of creditor countries; and they would

like to see Fund votes adjusted to give greater weight to their

5/23/67

-17

countries.

The U.S. proposal involved a two-stage voting plan,

which had been labelled the "band" proposal.

It called for a

scheme to go into effect if it won 90 per cent of the votes, and

for a second vote to be held if the proportion favoring the scheme

fell in the band between 75 and 90 per cent.

In the second vote

a majority of at least 75 per cent would be required to carry.

The U.S. response to the insistence of the Common Market countries

on an 85 per cent requirement was to narrow the band involved in

its own proposal.

As he had indicated, however, the question of

decision-making was not likely to be resolved by the Deputies of

the Group of Ten.

It would have to go at least to the Ministers

and Governors.

The technical issues would be considered further at a joint

meeting of the Deputies with the Executive Directors of the Fund in

Paris on June 19 - 21, Mr. Daane said.

That presumably would be

followed by a meeting of the Ministers and Governors of the Ten.

Hopefully, at least the broad outlines of a plan would be presentable

by the time of the meeting in Rio de Janiero in September.

Mr. Galusha asked whether Mr. Daane now felt somewhat less

confident about the probable outcome of the discussions than he had

at the last meeting of the Committee.

Mr. Daane replied that perhaps he was a little less confi

dent than he had been earlier.

The position taken by the French

5/23/67

-18-

representatives seemed to be closely related to what their government

was likely to be willing to accept, and there was no assurance that

the other Common Market countries would be willing to go ahead

without France.

of Germany.

He supposed the key question concerned the attitude

But the matter lay in the political realm, where he

could not offer an expert judgment.

Before this meeting there had been distributed to the members

of the Committee a report from the Manager of the System Open Market

Account covering open market operations in U.S. Government securities

and bankers' acceptances for the period May 2 through 17, 1967, and

a supplemental report for May 18 through 22, 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:

Even keel considerations were the paramount factors

guiding open market operations over much of the period

since the Committee last met. While there were substantial

movements in interest rates in response to basic market

factors and shifting expectations, there was a generally

comfortable tone in the money market with reserve avail

ability a bit on the generous side.

At the time of the last meeting the books were open

on the Treasury's May refunding, and, amid uncertain market

conditions, the outcome was still in doubt. A small amount

of purchases for Treasury investment accounts was made and

the atmosphere gradually improved before the books closed

on May 3. Although attrition was relatively high on the

May and June maturities, the Treasury was able to achieve

a significant amount of debt extension. Most importantly,

holders of $1.3 billion of Government securities maturing

in August elected to prerefund--an exchange larger than

5/23/67

-19-

many market participants had expected. In view of the

Treasury's heavy cash needs in the second half of the

calendar year it was indeed useful to reduce the size

of the August refunding to routine proportions.

While dealers as a group did not take an exces

sively large position in the new issues, a few dealers

had acquired sizable blocks of the five-year 4-3/4s.

As a result, when prices of Government securities

deteriorated again a few days after the books had

closed, reflecting continuing pressures in the corporate

and municipal markets, a booming stock market, and

generally buoyant general business expectations, there

were heavy professional offerings of intermediate-term

Governments in the market. In this atmosphere Treasury

investment accounts purchased about $240 million high

coupon issues maturing in 1971 to 1974. These purchases

were helpful in reducing an overhang of securities in

the market without interfering with basic market forces

determining interest rates.

System purchases of coupon issues were deferred

until two days after payment date for the issues offered

in the refunding, when, as the written reports indicate,

$101.6 million were purchased on a market go-around.

Given the downward pressure on Treasury bill rates and

the availability of intermediate- and longer-term

Government securities, these operations were generally

taken by the market in stride, without creating any

exaggerated expectations about System interest rate

intentions.

Over the next three weeks, as the blue book 1/

indicates, it looks as if the System will have to

provide about $0.5 billion in reserves unless the

Treasury should have to run its balance at the Reserve

Banks down before mid-June. After mid-June the situation

will be temporarily reversed. Market conditions at the

moment would make it feasible to meet a significant pro

portion of these needs--perhaps half--through the purchase

of coupon issues. The availability of coupon issues and

the widespread demand for Treasury bills, noted earlier,

are technical factors that tend to make such a pattern of

1/ The report, "Money Market and Reserve Relationships,"

prepared for the Committee by the Board's staff.

5/23/67

-20-

operations feasible. From a policy point of view,

operations in coupon issues would make some marginal

contribution to the flow of funds in longer-term

markets by relieving the overhang of Government

securities now in the market. There are risks,

however, that an overly aggressive approach to the

purchase of coupon issues would lead the market to

believe that the System was attempting to establish

a pattern of long-term rates. Creation of such an

impression would, in my view, be unfortunate since

it could lead to an avalanche of offerings to the

System and since our operations to supply reserveson current forecasts--would be, at least temporarily,

reversed in mid-June. Thus a cautious approach

appears called for.

I would agree with the blue

book that there might be only limited effects on

market trends provided expectations do not get out

of hand.

Current rate trends have been described in

detail in the various written reports to the Committee.

While the downgrading of some recent economic statistics

has dampened somewhat the exuberant view of the economy

that prevailed a few weeks ago, expectations are for a

strong second half of the year. The weight of corporate

and municipal financing continues apace--the June corpo

rate calendar now appears likely to exceed the record

March calendar, the demand for funds in the tax-exempt

area continues to run high, and an announcement of $880

million FNMA participation certificates is expected

momentarily by the market. The corporate calendar has

been building for July and August with a growing volume

of convertible debentures in the works, and the debt

limit hearings have done nothing to allay market

apprehension of major Treasury and Government agency

needs, including PC's, in the new fiscal year. In fact,

the proposals for modification of the 4-1/4 per cent

interest rate ceiling had quite a depressing influence,

particularly on the market for 5-10 year Treasury issues.

Long-term rates have, of course, moved significantly

higher but further testing of the market is needed to see

whether a trading range can be established. Short rates,

in contrast, have generally moved lower with investors

tending to hole up in the short maturities while market

developments unfold. Banks have found it difficult to

place CD's with maturities of a year or more, and rates

5/23/67

-21

in that area have moved close to 5 per cent. In yesterday's

bill auction average rates of 3.49 and 3.69 per cent were

established respectively on 3- and 6-month Treasury bills,

down 28 and 22 basis points respectively from the auction

preceding the last meeting.

The impact of the massive corporate debt restructuring

so far this year on the demand for bank credit is still not

clear. Many banks report a continuous business loan demand,

but it is hard to determine how much this reflects a precau

tionary firming up of commitments and how much an early need

for cash on the barrel head. As you know, bank credit in

May appears to be expanding only moderately on average, and

despite the final round of tax acceleration, the June credit

proxy forecast is for only a 5 per cent annual rate of growth.

Perhaps the forecast is too conservative, but it appears to

be a modest growth rate in light of the over-all demand for

credit that is apparent in financial markets.

Mr. Hickman asked whether the Manager foresaw a tapering off

in corporate and municipal bond offerings over the summer months.

Mr. Holmes replied that it was very hard to judge when

offerings might taper off.

Although some issues had been postponed

recently, the corporate calendar appeared likely to be very heavy

through July and August, and municipal offerings would probably

continue in a steady stream.

Mr. Scanlon noted that he had heard reports of investors

who were encountering difficulties in disposing of fairly large

blocks of Government securities.

He asked whether that was a general

phenomenon.

Mr. Holmes replied that for tax reasons there was a tremendous

amount of swapping going on now in the long-term market, as well as

5/23/67

-22

some outright selling.

However, it was difficult to move large

amounts of securities unless one happened to find a buyer with

the right needs, because dealers were not willing to build up

their positions.

Mr. Daane asked whether his understanding was correct that

the Manager saw positive advantages in supplying some reserves

through operations in coupon issues--in relieving the market over

hang and countering downward pressure on bill rates--even though

he might be moving against the trend of long-term rates.

Mr. Holmes replied affirmatively.

As he had indicated,

any coupon operations would have to be handled cautiously.

But

operations on a fairly sizable scale need not be disturbing to

the market, given the availability of coupon issues at present

and the demand for bills.

And, in themselves, they need not have

a major impact on interest rates.

Mr, Mitchell remarked that he was a little disturbed by

the Manager's emphasis on the need for caution.

It seemed to him

that with the present state of market expectations the Desk would

have to operate aggressively in coupon issues in order to have any

significant effect.

Mr, Holmes replied that the volume of coupon operations

that he had suggested might be feasible in the coming period--on

the order of $250 million--was sizable relative to past System

-23-

5/23/67

operations, although it was not large relative to the over-all

volume of market transactions.

By unanimous vote, the open

market transactions in Government

securities and bankers' acceptances

during the period May 2 through 22,

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. Koch made the following statement on economic conditions:

It may be a late spring this year, meteorologically

speaking, but it was an early spring, economically-speaking.

The news for March and early April was most encouraging,

with consumption, production, and housing up; the unemploy

ment rate steady at a low level; and the rate of inventory

accumulation down sharply. But more recently, we have had

a flurry of less favorable news again.

First, we learned that the earlier estimated rise in

consumption had been exaggerated. Then, that employment

and industrial production had been weaker in April. More

recently, the news has included the fact that the real GNP

actually declined a little in the first quarter.

To state my conclusion on the economic outlook before

my evidence, let me say at the outset that I agree with

the conclusion of the green book,1/ namely, that we had

more or less anticipated the recent flurry of less favorable

economic news and that our confidence in renewed, more

normal economic expansion by the third quarter is not

shaken. In buttressing this conclusion today, I should

like to focus my remarks on two key areas of activity,

namely, inventories and defense spending.

1/ The report, "Current Economic and Financial Conditions,"

prepared for the Committee by the Board's staff,

5/23/67

-24-

There is little doubt that the increase in inventories

in 1965-66 was excessive and that an adjustment began in

the first quarter. The March data confirm the fact that

inventory accumulation declined from the very sharp annual

rate of $16.5 billion in the fourth quarter of last year

to about $5.5 billion in the first quarter of this year.

It also seems reasonably clear that more inventory

adjustment remains. It is impossible, of course, to say

what an appropriate level of inventories is at any given

time. But if one assumes that the inventory-sales ratio

of, say, mid-1965 was more or less normal, and if one

assumes further that final sales this year will increase

at about a 6 per cent annual rate, it would probably take

a good part of the year for the inventories that are

currently excessive to be absorbed. This conclusion also

implies little further accumulation but no significant

liquidation after March.

This is, of course, a grossly oversimplified way of

trying to measure excessive inventories. For one thing,

it implies the excess stocks are more or less uniformly

distributed among the various industries. In fact, that

is not true, for they appear to be heavily concentrated

in durable goods lines, although no longer in autos.

A significant part is in the form of materials and

supplies and work-in-process in defense industries.

Another large portion is in the hands of manufacturers

of construction and other materials and semifabricated

products such as steel, nonferrous metals, and stampings.

A third substantial amount is at wholesalers of consumer

durables other than autos and various materials. This

composition of the excess inventories may make the adjust

ment problem less difficult, at least as it applies to the

eventual working down of the increase in materials and

work-in-process associated with the defense production

build-up.

In a sense, one's whole assessment of the economic

outlook can be summarized in one word, Vietnam. We of

course have nothing definitive to say about the likely

future course of defense spending. But certain recent

developments suggest that such spending will be signif

icantly above the January Budget Document projections,

both in the current fiscal year and next year.

The first-quarter estimate of defense spending in

the GNP accounts has been revised upward twice--first,

from an implied increase of $2.5 billion in the Budget

5/23/67

-25-

to $3.3 billion in Commerce's first published figure,

and now to $4.2 billion. Also, two independent sources

suggest that spending in fiscal 1968 will exceed the

figures given in the Budget Document.

First, Senator Stennis has suggested that a supple

mental appropriation of from $4 to $6 billion will likely

be needed next year. Secondly, a statistical calculation

developed by our staff that relates GNP defense spending

to current and lagged contract awards comes up with the

conclusion that defense spending in fiscal 1968 could well

exceed the estimates in the Budget by $5 billion or more.

And to top it all off, the military and political news

about Vietnam and now about the Middle East is certainly

consistent with the judgment that defense spending is

much more likely to be higher than earlier estimates.

The only news which on its face was contradictory

to the assumption of considerably higher defense spending

was contained in last week's testimony of Secretary

Fowler and Budget Director Schultze before the House

Ways and Means Committee. They suggested that the

Administrative Budget deficit in fiscal 1968 might be

$3 billion more than estimated in January, assuming

enactment of the 6 per cent tax surcharge with an

effective date of July 1. This estimate apparently

implies an increase in defense spending of only about

a billion dollars over the January projections. Both

men admitted, though, that this deficit estimate and

its implied defense spending figure could be underesti

mated. This may prove to be the understatement of the

year.

In conclusion, some of the apparent contradiction

between today's economic bears and bulls lies in the

different time periods upon which they concentrate. The

bears seem to be concentrating on the relatively near

term future and see at least a weak second quarter, the

summer doldrums, and possibly a September auto strike

ahead of us. The bulls, on the other hand, are looking

beyond the summer and early fall and see a turnaround in

the inventory situation coming at a time when total final

private and Government sales in and of themselves may be

absorbing more goods and services than the real resources

of the economy can provide at stable prices--except for a

relatively few months while the small volume of unutilized

labor and plant capacity we now have are being put to work.

5/23/67

-26

If this is a correct interpretation of many of the

bearish and bullish views one hears today, both may be

right. Assuming that the effects of monetary policy on

spending spread out over a substantial time period, then

the possibility of a relatively sluggish economy for the

next few months and a strong one thereafter poses a dif

ficult problem for monetary policy.

From my own point of view, however, I feel the

economic outlook over both the near term and the longer

run is still cloudy enough to call for continuation of

our current policy of cautious ease. Moreover, and

perhaps most importantly, we already have had a signifi

cant rise in long-term market rates of interest that may

well have some dampening effects on housing and perhaps

on other forms of investment in the period ahead.

Mr. Mitchell commented that Mr. Koch's remarks reinforced

doubts he had had about the appropriateness of the second sentence

in the staff's draft of the first paragraph of the directive.1/

The sentence in question read "Output is still being retarded by

adjustments of excessive inventories, but growth in aggregate final

demands continues strong."

To his mind that language implied strong

growth in various categories of final demand.

But strong growth did

not appear to be evident in retail sales, or plant and equipment

expenditures, or housing starts; it was evident mainly in defense

spending.

While a large rise in GNP was projected for the third

quarter, at the moment that was still a projection for the future.

On the basis of the evidence in the green book and Mr. Koch's

statement, he doubted that the proposed sentence was justified.

1/ Alternative draft directives submitted by the staff for

Committee consideration are appended to these minutes as

Attachment A.

5/23/67

-27

Mr. Hickman said that he had reached the same conclusion

on first reviewing the staff's draft directive.

Mr. Koch remarked that the sentence in question seemed

appropriate to him in light of first-quarter GNP developments,

when total final sales rose about $15 billion.

It was true that

the rise in Government expenditures, at an annual rate of nearly

20 per cent, was unusually rapid, but personal consumption expen

ditures also increased at a rate of about 5 per cent.

Within

consumer expenditures, the evidence of weakness was limited mainly

to durable goods; both nondurables and services were advancing at

usual rates relative to income.

It was not unreasonable to expect

expenditures in the latter two categories to rise at their projected

rates in coming quarters, and a turnaround in durable goods spending

seemed likely.

More generally, Mr. Koch said, increases in real GNP at a

4 or 5 per cent annual rate--the most that could be expected--would

imply increases of about $10 billion per quarter in the GNP at its

current level.

With Government expenditures advancing at their

current rates, much acceleration in the rates at which other kinds

of outlays were advancing would put substantial upward pressure on

prices.

In response to Mr. Mitchell's question, Mr. Koch said he

would agree that the main strength in the first quarter had been in

5/23/67

-28-

Government spending.

Mr. Mitchell then observed that he thought

it would be desirable to indicate that fact in the language of

the directive.

Chairman Martin commented that Mr. Mitchell's point could

be accommodated by revising the second clause of the sentence in

question to read, "but growth in final demands, particularly

Government, continues strong."

Mr. Daane said he was agreeable to pinpointing the Govern

ment sector in the manner the Chairman had suggested, without trying

to specify the degree of strength in the rest of the economy.

personally was more sympathetic than Mr. Mitchell was to the view

that there was evidence of strength elsewhere.

Mr. Partee made the following statement concerning financial

developments:

Expansion in the monetary aggregates has proceeded at

very close to the projected rates since the last meeting of

the Committee. Bank credit is increasing much less rapidly

in May than in earlier months this year, as anticipated,

and the outlook for June is for another moderate--though

somewhat larger--rise. Business loan growth, in particular,

has slowed markedly since mid-April. With continuing heavy

capital market financing and some inventory liquidation

projected, I would expect little strength in business loan

demand over the summer, except for a temporary June tax

date surge.

Despite the recent slowing in bank credit expansion,

average rates of growth over the first half still will be

very high, reflecting our efforts to stimulate the economy

and the associated resurgence in financial intermediation.

But in a longer context this expansion can be viewed as a

catching-up phase following the period of severely restricted

5/23/67

-29-

credit availability last summer and fall. Assuming that

our June projections are about right, the rates of increase

in the banking aggregates from mid-1966 to mid-1967 will

have amounted to 6 per cent for the credit proxy, 11 per

cent for total time deposits, and 2-1/2 per cent for the

money supply.

All of these increases are a good deal below

the average rates of growth experienced in the two preceding

years of high prosperity.

Similarly, the first-quarter flow of funds estimates

show a sharp increase in total credit expansion, featured by

a massive shift towards financial intermediation. But the

$70 billion annual rate for total credit raised is not much

different from the figures for 1965 and 1964 and is well

below the increases of late 1965 and the first half of 1966.

Moreover, the ratio of private borrowing to net private

investment outlays in the first quarter remained somewhat

lower than it had been prior to mid-1966. Thus I can see

no reason, either in the banking numbers or in total credit

flows, for faulting the performance of policy over this

period, nor for changing its stance at present. Renewed

vigorous economic expansion later on may require increased

restraint in time, of course, but I agree with Mr. Koch

that the current situation remains rather spotty and that

that decision need not be made now.

Of immediate significance to the Committee, however,

are the continuing disparate movements in interest rates.

The Treasury bill market has continued very strong, with

the 3-month rate down 25 basis points further since the

last meeting of the Committee. But the capital markets

have remained under exceptional pressure; yields on long

Governments, municipals, and new issue corporates have

increased by fully 40 basis points over the last 6 weeks

and are again within hailing distance of the record highs

reached late last summer.

Both developments reflect in important degree the

continuing deterioration in investor expectations for the

future course of interest rates and bond prices. Most if

not all market participants seem convinced that there will

be a sharp economic upswing later in the year, are concerned

about the possibility of a major intensification of the war

in Vietnam, foresee the need for very large Federal deficit

financing operations in the second half, and anticipate con

tinuing strong private credit demands, at least in long-term

markets. Under these circumstances, there is a strong and

pervasive desire for liquidity by investors, and a corres

pondingly weak interest in long-term fixed-dollar commitments.

5/23/67

-30-

There obviously is substance to these apprehensions, but

the question is one of degree--has investor sentiment,

and therefore the change in yield levels, been overdone

for now?

In short-term markets, constraints on the supply of

instruments do appear to have played an important role in

the yield decline. The supply of Treasury bills available

to the public has dropped unusually sharply this year,

reflecting retirements and official purchases by the

System and by the Home Loan Banks, and banks have not

seemed especially eager to push up their totals of short

CD's. After mid-year this situation is likely to reverse,

as the supply of short-term Government securities increases

sharply with deficit financing and banks perhaps become

more interested in issuing Cd's to finance fall loan expan

sion. In long-term markets, supply has also played an

important role--in the opposite direction--as buyers have

had to absorb record volumes of corporate and municipal

bonds, as well as large amounts of participation certifi

cates. But here, unfortunately, the prospect of a reversal

after mid-year is far less certain.

The major congestion in long-term markets has been in

the corporate area, where public bond offerings have been

truly massive. In the first four months, such offerings

amounted to $4.6 billion--nearly double the year-earlier

total--and no respite is in store for May and June, when

calendars continue very heavy. There are three possible

grounds for expecting a decline in new issue volume later

on. First is that corporations, having reduced liquid

asset holdings much less than seasonally early this year,

may soon reach desired liquidity ratios once the very

heavy second-quarter tax payments are out of the way.

The second is that private placement activity is on the

rise, which may serve to shift financing from the more

interest-sensitive public market. And the third consid

eration is that the spread by which corporate outlays for

fixed investment and inventories has exceeded internal

funds is declining sharply as the year progresses.

Nevertheless, it would be extremely hazardous to

predict a decline in future capital market financing, in

view of the great influence that the decisions of a

relatively few corporations can have on the totals. In

the first four months of this year, for example, the surge

in financing was mainly attributable to the fact that 30

corporations chose to make public bond offerings of $50

5/23/67

-31-

million or more, as against only 13 in the same period

last year. Most of this increase represented the issues

of manufacturing corporations that seldom come to market.

There is a large number of such potential borrowers, and

more could decide to come to market because, for example,

they wish to reduce their dependence on bank financing or

squirrel up liquidity as a hedge against the future. And

most such manufacturing firms would probably not be dis

suaded by historically high interest rates, particularly

if they think rates may move higher in the year or two

ahead.

High interest rates can influence other borrowers,

however, including smaller business enterprises, State

and local governments, and home buyers. And many investors

can be influenced in how they commit their funds by the

differentials in yields available. It seems clear, for

example, that the recent sharp rise in bond rates presents

a threat to full recovery in the mortgage market. Institu

tions with flexible investment latitude already appear to

be diverting important amounts of funds to the bond market,

and are likely to become progressively less interested in

pushing for mortgage commitments if the yield spread as

against bonds narrows further from what already is an all

time low. Major support for the residential mortgage market

is coming from the savings and loan associations, of course,

but the record inflows to these and other intermediaries

could be jeopardized too if savings rates are reduced at

midyear or if the rise in market yields spreads into the

intermediate-maturity instruments that provide a better

substitute for deposits.

It seems altogether too early in the recovery to curb

the flow of mortgage and other non-business credit. More

over, a continuing uptrend in long rates could prove

exceedingly dangerous, coming on the eve of heavy Treasury

demands in the short and intermediate markets. There could

be an escalation in the whole rate structure that would be

at least premature, if not unwarranted, in terms of the

economic outlook.

If we are in the midst of a strong upward trend in

long-term rates, there may be little that the System could

or should do to stem the tide. But some of the current

borrowing may be anticipatory, and investor sentiment may

be too sour for prospective near-term economic developments.

If so, the stage may be about set for a market rally, which

the System could encourage and help set in motion by focusing

5/23/67

-32

its operations on coupon issues during the next few

weeks, when a net of more than one-half billion dollars

in additional bank reserves needs to be provided. The

Committee's desire to aid long-term markets, to the

extent feasible within the context of the System's

normal reserve supplying operations, could be recognized

explicitly by adoption of alternative B for the directive,

which I would recommend.

In reply to a question by Mr. Ellis, Mr. Holmes said that

the Treasury probably would have to raise cash in the market shortly

after mid-year.

Mr. Hickman referred to the proposal that part of the reserve

needs in the coming peroid might be met by buying coupon issues

rather than bills.

He asked whether any thought had been given to

the possibility of also selling bills, which were in short supply,

and concurrently buying intermediate- and long-term bonds.

Mr. Holmes said that for the peroid immediately ahead the

Desk had enough room to operate in coupon issues without engaging

in the type of operation Mr. Hickman had mentioned.

There were

risks in over-doing coupon operations, although at present the

technical position of the market was favorable to them.

The Desk's

action yesterday in bidding so as to let $100 million of its bill

holdings run off might be viewed as a small step in the direction

suggested.

Mr. Hickman then remarked that concurrent sales of bills

and purchases of coupon issues might be kept in mind as a possibility

for the future, if the present market situation persisted.

-33

5/23/67

Mr. Partee observed that such swaps would be an important

departure from past practice.

In any case, they were not likely

to be necessary in the coming period, when the Desk would have the

latitude to buy as much as $500 million of coupon issues in the

course of meeting reserve needs.

After that, of course, the

Committee might need to consider the bigger step of engaging in

swaps, depending on market conditions at the time.

Mr. Mitchell asked what was happening to the proceeds of

the current heavy corporate bond offerings.

In particular, were

they being invested in short-term market instruments?

Did corporate

buying account for much of the recent demand for bills?

Mr. Partee said that the available data indicated that the

first-quarter decline in corporate liquidity was much less than

seasonal.

In that period corporations may have bought CD's and

bills, although the supply of bills available to the public had

declined sharply this year, and CD's outstanding had not been

rising recently.

rapidly.

Commercial paper, however, had been expanding

Bank loan figures suggested heavy business loan repayments

in the last few weeks, probably reflecting in part the use of bond

financing proceeds.

Mr. Hickman asked whether there were any indications that

the recent tendency for borrowers to bypass the banking system was

5/23/67

-34-

putting pressure on the prime rate.

In his judgment the current

prime rate was too high by at least 1/2 point.

Mr. Partee said he had heard relatively little discussion

of the prime rate recently.

Mr. Hersey then presented the following statement on the

balance of payments and related matters:

I want to speak this morning about the long-run

problem of the balance of payments. But four points

about recent developments are worth recalling first.

One is that during the seven months just past, the

liquidity deficit before special transactions has

been running at a rate near $1 billion a quarter,

having been swollen by heavy imports, by increased

military expenditures abroad, and perhaps also by

unidentified movements of U.S. business funds into

sterling.

The second point is that within this

recent period, the merchandise trade balance has

imports have passed their peak and exports

improved:

seem to be still rising. Third, identified flows of

private investment funds largely offset the trade

improvement in the first quarter of 1967 and kept the

adjusted liquidity balance from improving much.

Finally, the deficit on the basis of official reserve

transactions has been very large this year because of

the repayments to the Euro-dollar market by U.S. banks;

but very recently the outflow of these repayments has

stopped and given place for the moment to some inflow,

paralleling the renewed efforts of some banks to get

domestic CD money.

The international economy, like our own, has been

standing almost still the last few months. This is

It may

going to be a testing time for U.S. exports.

the

long-run

look

take

time

good

also

problem of the balance of payments.

There are really only three kinds of paths to

international exchange equilibrium for the United

States to take. Some day the country might simply

give up, in a desperate gambler's mood, and resign

5/23/67

-35-

to other countries the fixing of exchange values for

the dollar. The consequences would be unpredictable,

but probably chaotic; as Mr. Solomon suggested three

weeks ago, we might end up with an undepreciated trade

dollar and a depreciated capital dollar. Or, the country

might take the path of isolationism, raising tariffs to

keep imports out and building up administrative restric

tions to keep capital in. Or, thirdly, we can still

aim to make headway along the path we think the country

prefers and should prefer--that is, the path symbolized

by IMF, GATT, and OECD, a path of rational international

cooperation.

When I use words like those, the first questions

you must be asking are what kind of cooperation do we

want and how are we to get it. Within the government,

questions like these receive attention, but it is a

pity that in the public mind the question of cooperation

to get balance restored has not taken root; it has been

squeezed out by the questions of cooperation to finance

the U.S. deficit and avoid speculative disturbances, as

well as by the separate question of cooperation to

invent a supplementary reserve asset.

Any cooperative solution for restoring equilibrium

will have to include elements relating to trade, to

investment and aid for the nonindustrialized world, to

capital movements among the industrial countries, and to

military expenditures. The Europeans do not see eye to

eye with us on the various elements of a solution, but

it is much too soon to give up hope.

We cannot expect the Europeans to inflate their

price levels deliberately so as to bring about a

realignment of prices and costs within the present

exchange rate structure--a realignment that I for one

think is very much needed to help restore equilibrium.

French and Italian policies in 1964 and British and

German policies in 1965 and 1966 are proof enough that

they will all resist inflation at one stage or another.

Nevertheless, it is open to us to outdo them in maintain

ing price stability--and if we can do that, they can

hardly disapprove. They may not always like U.S.

competition, but there is universal acceptance that

price stability in the United States is an essential

element for a cooperative solution.

With respect to capital and aid, the United States,

as you know, puts much emphasis on the need for development

5/23/67

-36-

of European institutional structures and fiscal policies

for a more effective mobilization of savings and for

its channeling into foreign lending and aid. The

Europeans, for their part, have urged us over the years

to let U.S. interest rates rise and to put administrative

restraints on U.S. capital outflows. By last year we

had gone quite a distance along these lines, and many

Europeans are not so sure now of what they want us to do.

I must turn to what this Committee is directly

concerned with: the relation of U.S. monetary policy to

any cooperative cure of the imbalance in international

payments. Two principles define the relation adequately,

I think. First, because the balance of payments cure is

a slow matter, changes in U.S. monetary policy should

usually be determined only by domestic needs and objec

tives. But, secondly, because an essential ingredient of

any cooperative solution for the balance of payments is

U.S. price stability, the general slant of U.S. monetary

policy should be biased toward the price stability objec

tive--more so than if we had no external deficit to get

rid of.

During the past six or seven months the Committee

has deliberately disregarded the second of these

principles. Last autumn the three largest economies of

the western world, those of the United States, Germany,

and Britain, were either on the edge of recession or in

it. From every point of view, the top priority then was

to prevent a world recession. The Federal Reserve acted

rightly in its role of international leadership, by

temporarily giving low weight to the balance of payments

and future price stability.

We should now be asking ourselves some hard questions

about ways and means of preventing price inflation. Such

as: by what means should the United States maintain

growth and stability without allowing industrial capacity

utilization to rise so much as to provoke an inflationary

boom? And, for example: is it necessary or desirable

that total non-Federal debt in the U.S. economy go on

rising from year to year at an average rate as high as

8 per cent, as it did in the decade through 1965? Or,

more generally: are low long-term interest rates really

necessary for growth?

Long before questions such as these are resolved,

we shall have to face a question of timing. Even today

we must ask whether the danger of world recession is now

past, and whether Federal Reserve policy should now again

5/23/67

-37-

give special weight to price stability for balance of

payments reasons. I cannot give an unequivocal answer

of "yes" today. In Germany,the key country in Europe

in this regard, we do not yet have evidence that an

upturn has started. Information just received on

British industrial production suggests that the cyclical

recovery there around the year-end was tending to peter

out in February and March. You have heard what Mr. Koch

and Mr. Partee have said about the U.S. economy.

Whatever the timing may be, it seems clear that

once a new advance does get strongly under way the

problem of maintaining price stability will force itself

on us.

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:

Recent statistics show the economy in a sideways

movement. Reduced inventory spending appears to be

offsetting a substantial increase in final demand. The

business atmosphere has become less buoyant and perhaps

more realistic than it was only a few weeks ago. The

economic situation, however, has strengthened in several

fundamental respects. The inventory adjustment is

apparently proceeding in a rapid but orderly fashion,

while the housing indicators have continued to strengthen

slowly. These developments are consistent with an out

look for renewed and strong economic growth in the latter

part of the year. The continued sluggishness of consumer

buying remains a major source of uncertainty in the

private sector of the economy, but the recent rapid

build-up of consumer liquid savings, as well as the

continued growth in personal income, suggests that some

strengthening in this sector is the most likely prospect.

At the same time, the Federal budget is highly

stimulative. It is apparent that there will be no

increase in income taxes at midyear. The fiscal stimulus

in the second half of 1967 is likely to be of record or

near-record proportions. The prospect for a simultaneous

push later in the year, from both a highly stimulative

fiscal policy and renewed strong total private demand,

5/23/67

-38-

is reminiscent of the situation that occurred in late

1965 and early 1966 when economic over-heating became

all too apparent.

The dangers of a reemergence of excessive demand

pressure are heightened by the cost pressures that are

now being created by generous wage settlements. I get

the impression that 6 per cent annual wage increases,

combined more often than not with cost-of-living

escalator clauses, are now viewed as attainable targets

in wage negotiations. With food prices likely to move

higher in coming months, new wage demands may be even

greater, while the escalator clauses under existing

contracts will provide a further push in wage costs.

All of this suggests that if excessive demand pressures

develop on the scale of late 1965 and early 1966, there

are Likely to be even more serious price consequences

than at that time.

The prospect for a renewal of rapid price increases

and tight supply conditions in domestic markets becomes

especially disturbing against the backdrop of recent

balance of payments developments. The situation here

is clearly deteriorating despite substantial recent

improvement in the trade surplus. The reported liquidity

deficit in the first quarter of the year was at a

seasonally adjusted annual rate of $2.2 billion, but

after the elimination of special transactions the under

lying deficit was over $4 billion. Both of these deficit

measures were about unchanged from their high fourth

quarter rates despite a $1 billion rise in our trade

surplus rate. Moreover, the deficit on an official

settlements basis was at a $7.3 billion seasonally

adjusted annual rate in the first quarter, up from

$100 million in the fourth quarter of 1966. The large

official settlements deficit reflects a shift of foreign

private dollar holdings into central banks. Some of

these shifts resulted from easier conditions in the

United States money markets, and were reflected in the

decline of U.S. bank borrowings in the Euro-dollar market.

The disturbing over-all balance of payments situation

in the first quarter of the year appears, moreover, to

have continued in April, judging by the results of the

flash report on the liquidity deficit for that month.

Turning to the banking and general financial

situation, it seems clear that liquidity rebuilding and

5/23/67

-39-

the corporate tax speedups have been the dominant

factors in the large increases this year in bank

credit and total credit flows. In May, however, bank

credit is apparently rising little if at all, and the

June forecast is for growth on a comparatively modest

scale despite another surge in corporate tax payments.

Such slowdowns are not disturbing in view of the sharp

increases earlier this year, although a somewhat higher

May-June average than is currently forecast would not

be inappropriate.

There is a large flow of funds into the savings

banks and savings and loan associations. Mortgage

credit is readily available. But current corporate

issues are attractive to savings banks, and a number

of savings banks are acquiring modest amounts of such

issues. Interest rates on conventional and insured

mortgages have been declining since last winter, but

very recently we have seen at least one sign of a

reversal in the direction of rates on conventional

mortgages and scattered reports of increases in rates

in the secondary market for FHA mortgages.

The most striking current financial developments

are in the long-term securities markets. Here rates

have been under increased pressure since immediately

after the recent discount rate reduction. Corporate

and municipal borrowings have been at record high

levels, and the markets are facing the prospect of

very heavy borrowing through the remainder of the year

by the U.S. Treasury and some of the Federal agencies.

Although some long-term borrowing rates are approaching

the peak levels of 1966, this seemingly is having little

effect on willingness to borrow.

The heavy corporate credit demands partly reflect

the need to rebuild depleted liquidity positions and

the heavy tax payments resulting from corporate tax

speedups. Two other factors are probably also at

work. First, the credit squeeze of last year may have

led to a desire to increase liquidity as a hedge against

a possible recurrence of the 1966 experience. Such a

change in liquidity preference does not imply any

definite planning by corporations to use such funds to

finance spending on goods and services; rather it would

be a precautionary measure. Second, a part of the

heavy demands may reflect a decision to accumulate funds

5/23/67

-40-

now that will be needed for spending later this year

or early next year. These two factors obviously have

differing implications for the prospective strength of

private demands for goods and services in the months

ahead. But, with respect to interest rates, it seems

to me on balance that as the second half of the year

progresses, forces will be working toward higher,

rather than lower, rates. Presumably the greatest

effect will be on short- and intermediate-term rates,

but there could also be some further rise in long-term

rates.

In summary, while the aggregative statistics

remain on a plateau, the domestic economic outlook has

strengthened. It will probably be at least a few more

months before a clear uptrend in the economic indicators

is firmly established. At the same time, market forces

have resulted in a substantial and sustained rise in

long-term interest rates despite continued ease in the

short-term areas of the market. The rise in long-term

rates carries with it the possibility of slowing the

prospective economic upturn, especially in the housing

sector,

Against this background and the poor international

balance of payments situation, it seems to me that monetary

policy should remain essentially unchanged over the

coming four weeks, and that open market operations

should be conducted with a view to maintaining about

the prevailing conditions in the money market.

During the coming weeks the routine or market

factors presumably will be absorbing reserves, and thus

the System will need to supply reserves in order to

maintain prevailing money market conditions. In such

circumstances the purchase of coupon issues would seem

desirable. Such purchases in moderate amounts in the

light of availability should tend to relieve some of the

pressures on the long-term markets generally. Aggressive

buying could generate undesirable and even perverse

shifts in market expectations, especially if the markets

were to conclude that the System had a specific interest

rate objective in mind. Caution toward buying in the

longer-term markets for the purpose of relieving pressures

in those markets is also reinforced by the strong economic

outlook for the months ahead.

As for the directive, I prefer alternative A. I

assume, with respect to the two-way proviso clause which

5/23/67

-41

is included in alternative A, that it is the current

expectation that total bank credit will rise at a rate

of about 5 per cent. I would expect the Manager to

act under the proviso clause if the growth rate of the

credit proxy were to fall much below that level or to

rise substantially to, say, a 10 per cent level.

Mr. Ellis commented that perhaps the best way to highlight

what was occurring in New England was to contrast what the statis

tics were saying about employment, production, and construction

with the attitude of buoyancy and optimistic outlook that prevailed.

For example, initial claims for unemployment compensation had been

more numerous than a year ago for thirteen consecutive weeks

through May 6. And yet the papers were crowded with advertisements

of job offerings, labor turnover was extremely high, and there was

no evident concern about difficulty in securing jobs.

Workweeks

of manufacturing production workers had continued to contract

slightly and overtime had been reduced at some nondefense plants,

and yet workers were confidently seeking, expecting, and in many

cases winning wage increases even though their contracts did not

provide formally for wage negotiations this year.

In contrast to the U.S. pattern, Mr. Ellis continued,

residential construction contracts had been declining in the last

several months, but the increased availability of mortgages had

accelerated the amount of planning for new construction and the

market reflected that optimistic sense of moving ahead.

5/23/67

-42

Mr. Ellis regarded the consumer spending pattern as a

confusing mixture of gains and losses.

The Boston Reserve

Bank's seasonally adjusted April index for department store

sales was down from its March level but held a few points above

its year-ago level.

Department store sales in the reporting

sample for the four weeks ending May 13 were 8 per cent better

than those for the same period of 1966, but that relatively good

performance only neutralized the poor performance earlier in the

year.

Cumulative sales for 1967 were just matching those of last

year.

He would point out, Mr. Ellis said, that the volume of

business transactions must be increasing.

The number of checks

the Boston Bank handled during the month of April exceeded year

ago volume by 12 per cent.

On a dollar-value basis, checks

cleared in the four weeks ending May 3 ran 16 per cent ahead of

last year's comparable period.

Credit flows in the District were

dominated by signs of more widespread easing.

At District savings

banks the rate reductions on mortgages he had reported for the

Boston banks at the previous meeting had now become widespread.

Of the 70 non-Boston savings banks in the District 28 now reported

their most common rate at 6 per cent.

5-3/4 per cent mortgage rate.

One bank had reported a

On the other hand, the rates paid

on deposits continued to rise; seven of the 80 banks in the

-43

5/23/67

reporting survey increased their rates in April.

Sixty-five per

cent of those banks now reported 4-1/2 per cent as the rate they

paid.

Discussions with District savings bankers revealed some

desire on their part for a lower rate on their deposits, but no

willingness to start a downward trend.

Happiness with the inflow

of funds did not incline them to upset the relationships which

supported that inflow.

At commercial banks, too, liquidity was rebuilding

compared to a year ago, Mr. Ellis continued.

Investment port

folios had been increased by about 25 per cent, with the major

source of funds being the time deposit sector.

Time deposits

had grown 21 per cent in the past year in the First District,

compared with 8 per cent for the nation.

With loan demand

unchanged or only slightly stronger, banks' willingness to supply

funds was definitely greater than it had been three months ago.

There was evidence also that the banks were reaching into the

fall maturities in signing up CD's.

Long-maturity CD's had been

getting the largest boost in rates, which had ranged upward to

25 basis points in the First District.

Banks appeared to be

providing themselves with funds for use late in the year when

business bank loan demand could rise appreciably.

District insur

ance companies reported that policy loans seemed to have leveled

off at a rate approximately twice their 1965 level, and that an

-44

5/23/67

increase in mortgage payments and in other flows of funds had

permitted them to resume commitments at a rate comparing very

well with the 1965 level.

Mr. Ellis found the staff analysis presented in the green

book and the blue book in advance of today's meeting to be espe

cially useful because it concentrated more than usually on

projecting the probable course of the economy for the remainder

of the year.

He agreed very much with the tone of that analysis

and with Mr. Koch's comments this morning, and was glad to see

the emphasis on final demand in the analysis.

He found himself

wanting to take issue with the projections at only two points,

at both of which he thought the analysis was more conservative

than was warranted.

His first question related to the projec

tion for "only a moderate growth in consumer expenditures in

the second and third quarters."1/

He had difficulty accepting

1/ The language quoted by Mr. Ellis was employed on

page 11-4 of the green book, in the context of the following

passage: "In real terms, the rise in disposable income in

the first quarter was larger than in any quarter of the past

year. Although the second quarter flow of income will be

somewhat smaller, the increase in spending power will still

be substantial. Gains in total employment--although not in

industrial employment--and wage rates are continuing, while

the small increase in the personal tax-take in the first half

of this year is leaving an unusually high proportion of income

gains in consumer's hands. These high levels of real income

have been reflected in an exceptionally high and rising saving

rate over the last six months, and consumers are therefore in

a position to step up spending. However, total retail sales

are still sluggish, and since extended periods of high rates

of consumer savings have occurred before, we are projecting

only a moderate growth in consumer expenditures in the second

and third quarters."

5/23/67

-45

the logic of the argument that the occurrence of extended periods

of high savings rates in the past was adequate reason to expect

only moderate growth in consumer spending.

The facts that incomes

were growing rapidly and that savings had been high would incline

him to expect a step-up in consumer spending of significant

proportion--and he said that knowing the retail sales data for

March had been revised downward.

The second point at which Mr. Ellis' expectation differed

from the staff's related to the estimates of Federal expenditures

underlying the projections of the high-employment deficit shown

in the table on page 111-18 of the green book.

As he read the

numbers, the staff's estimates were conservative.

In particular,

the projected third-quarter high-employment Federal deficit of

$10.2 billion seemed to him to be an underestimate, and portended

an even higher fourth-quarter deficit.

Unhappily, Mr. Ellis said, both of those differences in

projections served only to intensify concern for the inflationary

pressures that would be present in the economy in the third, and

especially the fourth, quarters of this year.

In that connection

Mr. Hersey had done the Committee a service in reminding it of

the importance of preserving price stability for the sake of the

balance of payments.

5/23/67

-46

In seeking to translate such economic projections into

policy prescriptions, Mr. Ellis continued, one obviously arrived

first at a conclusion that fiscal policy as presently projected

was quite inappropriate for the needs of the economy.

Not only

would fiscal policy be very stimulative; debt management would

be impeding the possibility of utilizing monetary policy smoothly

and effectively.

The unprecedented borrowing needs, on the order

of $18 billion, between July and December of this year obviously

translated into frequent and large Treasury issues in the capital

market.

The obvious desirability of avoiding major shifts in

monetary policy during the course of Treasury financing would

mean that the opportunities for shifting policy after early July

were very likely to be limited.

In Mr. Ellis' opinion those reflections added up to a very

uncomfortable choice facing the Federal Reserve.

clearly indicated intentions of consumers,

The projections

business,

and Government

to be spending at levels which could not be satisfied by an economy

already operating with high rates of utilization of its

resources.

labor

The mechanics of Treasury financing were going to

make policy moves difficult to schedule between July and December,

and yet between now and the first of July it was quite likely that

the unemployment rate might move up fractionally and there might

be additional public attention given to slight declines in the

-47

5/23/67

capacity utilization rate in manufacturing.

But because monetary

policy worked with a lag, because the projections were firm, and

because later changes in policy would be difficult, in his judg

ment the trend of policy should be gradually shifted into a

posture of lessened ease between now and the first of July.

should become clear to the market that the Committee was not

pressing to maintain a rapid rate of bank credit expansion as a

continued means of resisting recession.

Mr. Koch had used the

phrase "cautious ease" to describe the Committee's current policy.

He (Mr. Ellis) would urge rather a little more caution and a little

less ease.

From that point of view, Mr. Ellis said, it would be

clearly inappropriate to put major emphasis on coupon operations

designed to tip long-term rates into a downward path.

The volume

of coupon purchases the Manager had suggested--$250 million--was

quite large, and would signal a continued intention to fight

recession with further ease.

He thought the Committee could not

stem the tide of rising long-term rates, and an effort to do so

would be interpreted as a deliberate policy move,

Furthermore, Mr. Ellis remarked, the existence of high

long-term rates must be having some marginal effect in restrain

ing capital investment.

In view of the GNP projection, the

Committee might logically conclude that it should be thankful

5/23/67

-48

for whatever restraint such rates will have provided by next fall.

Without prejudice to the value of coupon operations on some occa

sions, he saw no long-range objective in their intensification at

this time and he would reject alternative B of the directive drafts.

In keeping with the objective he had expressed of beginning

to tip policy toward less ease, Mr. Ellis said, he would urge that

the proviso clause of alternative A be amended to provide for off

setting only those deviations of bank credit expansion in excess

of the projected 4 - 7 per cent growth rate.

That could be done

quite simply by inserting the word "upward" before the word

"deviations" in the proviso clause of alternative A.

Mr.

Irons reported that economic conditions in the Eleventh

District were strong.

Although rates of increase had moderated

considerably and the District economy was moving sidewise, activity

was at a very high level.

The employment situation continued to

be very tight around such major cities as Dallas and Houston, where

unemployment rates were running in a 1.9 to 2.2 per cent range and

the numbers of employed persons rose each month.

The District

production index had remained about unchanged for the past two or

three months, with activity in both durable and nondurable goods

industries relatively stable.

Residential construction was down

from its year-ago level, but nonresidential construction was up and

total construction activity probably was up slightly.

Department

5/23/67

-49

store sales were 7 per cent above a year ago in the week ending

May 13, and for the year to date they were up about 4 per cent.

Automobile registrations were running about 8 per cent below last

year.

The picture in agriculture was mixed; moisture conditions

had become good recently in large areas of the District, but in

the western part there continued to be a serious need for moisture.

In the financial area, Mr. Irons said, bank loans, demand

deposits, and time and savings deposits were all down less than

seasonally during the past three or four weeks.

Most of the loan

decline was in loans on Government securities; commercial and

industrial loans were up by a moderate amount.

The decline in

time and saving deposits was due largely to a reduction in large

CD's, although some bankers also reported that there had been some

slowing of growth in consumer-type CD's.

District banks, espe

cially the larger banks, were more liquid now than at this time

a year ago, just prior to the intensification of monetary restraint.

However, they were not as liquid as they would like to be, in view

of the loan demands they anticipate.

They also pointed out that,

if it became necessary for the System to shift toward restraint

again this year, the impact upon bank liquidity might be more

rapid; thus, their concern with the current liquidity position,

even though it is somewhat better than a year ago.

5/23/67

-50

Member bank borrowings from the Dallas Reserve Bank had

been negligible recently, Mr. Irons continued, but District banks

had increased their borrowings through the Federal funds market

and in total were sizable net purchasers of Federal funds.

Some

District banks were maintaining day-to-day balances of funds

purchased ranging from $25 - $35 million up to as high as $85 - $95

million.

With respect to the national economy, it seemed to Mr. Irons

that the situation was one of continuing adjustment of a sort that

the Committee had desired and had hoped would occur smoothly.

The

current inventory adjustment, and the related adjustments in indus

trial production and employment, seemed to him to be of that type.

There apparently also had been an adjustment, if that is the word

for it, between consumer income and expenditures, with the savings

rate rising somewhat.

Defense expenditures were continuing to rise,

with no promise of moderating.

He was concerned about the wage

pressures that might develop and was inclined to agree with

Mr. Treiber regarding the possibility of settlements involving

6 per cent increases.

Such wage rises would have a substantial

effect on prices.

In Mr. Irons' judgment the money markets had performed rea

sonably well in the past few weeks, but the capital market certainly

had been under pressure.

Increasing numbers of observers appeared

-51

5/23/67

to be expecting tighter money market conditions.

There was

general concern about the Federal budget deficit and the means

by which it would be financed; if an expansionary credit policy

was to be employed to help finance it, it was expected that the

System would be fighting inflation again soon.

He found very

few people who anticipated much help from fiscal policy.

On the

contrary, stimulative rather than a restrictive fiscal policy was

anticipated.

There also was concern about the U.S. balance of

payments position.

While the trade sector had shown improvement

recently, other sectors had deteriorated to the point at which

the over-all balance of payments problem continued to be serious.

Also, more people were becoming concerned about recent events and

speculations with respect to silver and gold.

The typical Eleventh

District businessman did not like the notion of tinkering with

U.S. gold policy.

Against the background of that general situation, Mr. Irons

felt that this was a good time for the Committee to indicate by its

actions that no change was being made in credit policy.

He liked

Mr. Koch's phrase, "cautious ease," and thought that should be the

Committee's objective.

He favored alternative B for the directive

because it pointed up the problem that the Committee had been and

would be facing in the capital market.

He agreed that caution

would be necessary in operating in coupon issues; it would be

5/23/67

-52

unfortunate if the market came to believe that the Committee was

virtually pegging long-term rates or setting a pattern for them.

But it might be well to engage in operations in longer-term

securities within reasonable limits and at times when the Desk

judged such operations to be feasible, simply to give some

support to the market and without leaving the impression that

the Committee was attempting to peg a rate or a pattern of rates.

With that qualification, he favored alternative B.

Mr. Swan remarked that developments in the Twelfth

District had contributed to the weakness in the national statistics

for April.

The unemployment rate in the Pacific Coast States rose

sharply to over 5 per cent, with reductions in employment most

marked in agriculture,

construction,

and manufacturing.

However,

unusual rains and cold weather during much of April undoubtedly

played a significant role in that situation.

The weather probably

was a major factor in the weakness in construction activity and

lumber production; it probably explained in good part the drop in

housing starts in the West at a time when such starts were rising

elsewhere.

District fruit and vegetable crops also had been

adversely affected by weather during the period.

Seattle was the

one booming area in the District; indeed, it was the only metropol

itan area in the District, out of 60 in the country, that had a

"B"--or "low

unemployment"--rating.

5/23/67

-53

In the three weeks through May 10, Mr. Swan said, total

credit at the District weekly reporting banks declined about

$350 million, about equally divided between loans and investments,

in contrast to an increase of about the same amount in the

corresponding period of 1966.

The major banks remained net

buyers of Federal funds and were maintaining a considerable

volume of loans to securities dealers.

As elsewhere, interest

rates on longer-term CD's had moved up fractionally in the last

few weeks, although currently there did not seem to be any great

pressure on banks to obtain funds.

Scattered replies from the

mid-May survey of bank lending practices suggested a difference

between the current situation and bank expectations for the longer

run.

The replies indicated both increased willingness by banks

to make most types of loans currently and expectations of moderately

stronger loan demands over the next few months.

Last week, Mr. Swan continued, one California mortgage

company based in Los Angeles announced an increase in rates on

residential mortgages.

That company advised that the action re

flected a decision by its principal outlet, the Metropolitan Life

Insurance Company, to favor other investments over residential

mortgages.

There had not been similar increases by other lenders

in California nor, as far as he was aware, by correspondents of

Metropolitan Life elsewhere.

Certainly, mortgage funds were still

5/23/67

-54

available through savings and loan associations at rates below

that announced by this mortgage company.

Nevertheless, the action

was an indication of some pressure in the mortgage market.

Mr. Swan said he had nothing to add with regard to the

national economic situation; he was essentially in agreement with

the analysis given in the green book and by the staff this morning.

As to policy, he also thought that the Committee should maintain

prevailing money market conditions and should continue about the

present stance of over-all reserve availability, given the bank

credit projection for June.

He would hope, however, that bank

credit growth would be closer to the lower end of the 4 - 7 per

cent range projected than to the higher end.

The money market

conditions specified in the blue book seemed rather reasonable to

him, but if the recent heavy demands for bills and other short

term instruments persisted he would expect the Federal funds rate

to be somewhat below 4 per cent, even though other money market

conditions were maintained as at present.

Given prevailing conditions in the capital market, it

seemed to Mr. Swan that some purchases of coupon issues would be

justified in the coming period within the reserve-supplying opera

tions that would be undertaken in any event.

He would not want

purchases of coupon issues to go so far as to create an impression

that the Committee had rate objectives.

But it did seem appropriate

5/23/67

-55

to attempt to relieve some of the pressures and to maintain

orderly conditions in that area.

Mr. Swan said he had a few comments on the draft directive.

The opening sentence of the first paragraph said that "

renewed economic expansion is in prospect" without any indication

of timing.

He would prefer to have the statement read, "

renewed economic expansion later in the year is in prospect."

With respect to the alternatives for the second paragraph, it was

true that the Committee had engaged in operations in coupon issues

in the past without mentioning them specifically in the directive.

He believed, however, that under present circumstances a reference

in the directive was desirable.

native B to A.

Accordingly, he preferred alter

But he had two questions about the language of B.

First, the phrase, "insofar as practicable" in the final clause

of the draft seemed to him to raise many questions.

He would

suggest dropping that phrase, and adding the word "unusual" before

the word "pressures."

The clause would then read, "while modera

ting unusual pressures in the capital market."

Secondly, whether

the Committee adopted alternative A or B he felt strongly that it

should reintroduce the proviso clause, which had been deleted from

the directive adopted at the preceding meeting only because even

keel considerations were dominant then.

He could accept either a

two-way clause such as was shown in alternative A or the one-way

5/23/67

-56

version that Mr. Ellis had suggested.

If a proviso clause was

added to B, however, he thought its opening words should be, "but

open market operations shall be modified," rather than "but opera

tions shall be modified," to make clear that the reference

intended was not to operations in coupon issues.

Mr. Galusha commented that the Ninth District economy

still seemed to be going along nicely.

It was not growing as

rapidly as it had been, but through the first quarter it grew

more, relatively, than did the national economy.

He had never

thought of his District as being an arsenal of democracy but

obviously defense orders had had a lot to do with maintaining

the growth of output.

Optimism remained high among nonagricultural producers

in the District, Mr. Galusha said.

So far, there had been no

hint of impending cutbacks in capital spending.

One could find

differences of opinion about the near-term future of construction,

but his judgment was that optimism dominated.

He had even heard

talk of an increase in mortgage rates.

There was a very sharp

increase in building permits in April.

Expectations in the

construction industry were high.

Lumber production in Western

Montana had increased, but proof of sustainable recovery had yet

to come in.

The mood of agriculture remained dark, Mr. Galusha contin

ued.

Farmers and cattlemen continued unhappy.

Although generally

-57

5/23/67

there would be increased acreages, distrust of long-run U.S.

Department of Agriculture objectives would keep plantings below

maximum acreages.

There was no credit pressure anticipated from

agriculture in the District this year.

Mr. Galusha commented that he had little to say this

morning about monetary policy.

It might be doubtful that further

purchases of coupon issues, even if sizable, would produce a sharp

decline in long-term rates.

Such a decline would come only when

financial markets became convinced that taxes were going to be

increased. In visits yesterday on Capitol Hill he had found a

surprising receptivity to a tax increase and a good deal of

unhappiness that the Administration was not openly pushing for

its tax program.

That attitude was based on many things, but

mainly on mail indicating that people wanted to have a sense of

sacrifice and of participation in the war effort.

It was not clear, Mr. Galusha continued, that long-term

rates should be a good deal lower than they presently were, given

the staff's appraisal of economic prospects.

Granting that, he

still would be more comfortable if long-term markets were less

plagued by uncertainties than they appeared to be, or were feeding

less on what hopefully were false expectations.

At the moment,

there might be no good case for appreciably lower long-term rates.

But there also seemed to be little point in letting those rates

go to levels which, come fall, would appear too high.

5/23/67

-58

Translating that view into directive language presented the

same problems to him as it had to Mr. Swan, Mr. Galusha said.

But

if he understood Mr. Swan's proposed language correctly, it would

seem to give ample latitude to the Desk to curb its operations in

the coupon area if it appeared that they were leading to the sub

stitution of a new set of false expectations for the present ones.

Mr. Scanlon remarked that the economic picture in the

Seventh District was similar to that reported at the last meeting.

A rapid, even inflationary, upswing was widely expected for the

remainder of the year, but available statistical evidence on

employment, output, orders, and retail trade did not yet support

that view.

The most spectacular development of the past few months,

Mr. Scanlon said, was the large increase in new claims for

unemployment compensation, which were no longer confined to the

auto industry.

Reports of Chicago purchasing agents for March

and April showed faster deliveries and shorter order lead-times;

stable inventories, production, and employment; lower new orders

and backlogs; and poorer profits.

Farm machinery had now expe

rienced a letdown in demand, probably associated with the recent

decline of farm income.

Tractor sales in the Corn Belt were off

more than 15 per cent from last year in the first quarter and by

more than 25 per cent in March.

5/23/67

-59

Banking data currently did not offer useful evidence as

to the underlying strength of loan demand, Mr. Scanlon continued.

The decline in outstanding loans during the first half of May was

contrary to the usual pattern, but was not unexpected following

the heavy tax borrowing in March and April.

District bank expe

rience was similar to that for the nation except for a relatively

stronger increase in real estate loans.

The first District

responses to the quarterly survey of bank lending practices

indicated "no change to moderate easing" in loan posture compared

with three months earlier.

Mr. Scanlon went on to say that because of the huge volume

of financing in the capital markets and the wide spread between

bank loan rates and commercial paper rates, business loans could

drop sharply in the months ahead, except for tax periods, unless

business activity were to be very strong.

A recent Standard and

Poor's survey indicated that only 39 per cent of corporate bond

offerings this year were intended to finance plant and equipment

expenditures, compared with 63 per cent last year.

The bulk of

those funds apparently was to be used for working capital,

refinancing bank loans, and building liquidity.

Mr. Scanlon noted that concern for liquidity continued to

be reflected in changes both in bank asset portfolios and in

liabilities.

The reduction in loan-deposit ratios of major District

5/23/67

-60

banks since late 1966 had been quite small, on the average, with

the biggest declines at banks with ratios exceeding 75 per cent.

Loan ratios of many banks had continued to rise.

Holdings of

short-term Governments and money market loans in relation to

deposits likewise did not indicate much improvement in liquidity.

Nevertheless, "borrowed" funds, from whatever source, had declined

substantially, and although a large volume of funds had gone into

"other" securities, those had been mainly short-term municipal

obligations and PC's of Government agencies.

Moreover, since

March the major time deposit inflows had been in the form of

consumer-type CD's, which the banks regarded as much less subject

to withdrawals than the negotiable type but less stable than

savings deposits.

The fact that the biggest banks still appeared

somewhat uncomfortable about their liquidity positions and desired

to be better prepared for seasonal demands later in the year seemed

to militate against any near-term downward adjustments in either

loan or deposit rates at those banks.

Mr. Scanlon agreed with the Manager that System operations

in coupon issues had to be undertaken on a cautious basis.

would give the Manager ample latitude to operate in that area,

but would discourage any feeling on the part of market participants

that the Committee was now using a rate objective over the broad

spectrum of maturities.

It seemed to him that that was a very

5/23/67

-61

delicate business, particularly in view of the amounts the

Committee was considering, and that it would require extreme

skill and care on the part of the Desk in order to avoid giving

the wrong signals to the market.

As to policy, Mr. Scanlon favored maintaining the prevail

ing conditions in the money market--which was called for by both

alternatives for the second paragraph of the directive.

If, as

Mr. Swan suggested, it was desirable to make reference in the

directive to operations in coupon issues, he would accept Mr. Swan's

proposed language.

Mr. Clay said that, taking into account new data and revi

sions of earlier data, current evidence on the private economy

and its near-term prospects was somewhat more restrained than at

the time of the last meeting of the Committee.

However, when that

recent evidence was put into the larger prospective of economic

forces at work and prospects for the balance of the year, and

when account was taken of the stimulative actions of the System

in the last six months, the monetary policy implications of the

recent changes in economic information appeared to be small.

While the future pattern of economic activity could not

be said to be clear, Mr. Clay continued, there was substantial

reason to believe that the economy would be moving ahead much more

actively in the third and fourth quarters of the year.

Recent

5/23/67

-62

official statements pointed toward a significant increase in the

stimulative thrust of the Federal budget.

Moreover, the lull in

inflationary pressures probably would be short-lived, not only

because of demand and wage developments in the nonfarm sector but

also because of increasing food and farm commodity prices.

All

factors considered, it would appear appropriate at this time to

conduct a more moderately expansive monetary policy than in the

early months of the year.

For the period immediately ahead, Mr. Clay thought mainte

nance of essentially the current money market conditions probably

would be satisfactory.

In that connection, it would be desirable

if the Treasury bill rate did not fall below the levels of last

week.

The developments in long-term interest rates and the increas

ing spread between short- and long-term rates were matters of

concern.

That became particularly true as long-term rates once

again approached levels that could have adverse effects upon the

flow of funds to the credit markets relative to the savings

institutions.

While the demand for funds in the credit markets

continued in its current volume, there was a real question as to

how much could be accomplished by conducting open market operations

in the longer maturities, at least without flooding the banking

system with reserve funds.

There probably would be some marginal

impact upon both short- and long-term yields in using such

5/23/67

-63

operations in providing desired reserves, however, and under

present circumstances that would appear to be in order.

Alternative B of the draft economic policy directives,

with Mr. Swan's modifications, appeared satisfactory to Mr. Clay.

Mr. Wayne reported that business activity in the Fifth

District had shown some small signs of improvement in recent

weeks.

Building permits rose substantially in April to the

highest level since March 1966 and reports indicated modest gains

in construction activity, while insured unemployment had declined

marginally.

Two large national companies had announced substan

tial reductions in the list prices of a wide variety of their

man-made fibers.

The optimism index of the Richmond Reserve Bank's

survey panel was a shade higher than a month ago and now better

than 80 per cent of the respondents expected stability or some

improvement.

New and unfilled orders remained weak but had perhaps

improved a shade, while the pressure of inventories seemed to have

moderated somewhat.

The substantial cuts embodied in the recent

tariff agreement would probably have a significant impact on the

important textile and chemical industries in the District, but

the fragmentary information presently available did not permit

any accurate appraisal.

District weekly reporting banks continued

to be substantial sellers of Federal funds although they had been

more active in expanding loans and total bank credit than city

banks throughout the country.

5/23/67

-64

At the national level, Mr. Wayne continued, the economy

was operating at a high rate with near-full employment, despite

several major adjustments which were the inevitable consequences

of de-escalating an inflationary economy.

In the somewhat calmer

environment of recent weeks, monetary policy had been able to

operate more effectively than in earlier periods.

Well supplied

with reserves from the earlier operations of the System, the

banks had been able to meet their loan demand with little or no

need to borrow.

Short-term rates had been pushed down to or

below the discount rate, but bank lending rates remained relatively

high and sticky, while long market rates had been moving steadily

higher.

Those rates were matters of concern and if conditions

were different it might be appropriate to return to a policy of

aggressive ease.

gave him pause:

But several factors in the present situation

the lack of improvement in the U.S. balance of

payments and the possibility of a rapid deterioration in the

country's international financial relations; the delayed effects

of the large amounts of reserves the System had already supplied;

the certainty of large but indefinite budget deficits; the uncer

tainty of any supporting fiscal action to restrain inflation if

the need should arise; and the possibility of a quick return to

an overheated economy.

If the latter should develop it would be

accentuated by the low level of unemployment.

Since the country

5/23/67

-65

was not now facing a liquidity crisis, he did not believe it was

necessary to supply reserves on the large scale of the first

quarter.

Rather, he would favor a policy which would encourage

a moderate and sustainable growth in reserves and bank credit

and he would hope that could be done without any great change in

prevailing money market conditions.

Also, he agreed with the

suggestion in the blue book that in supplying reserves the

Committee should emphasize as much as feasible the purchase of

coupon issues, and therefore he preferred alternative B.

Mr. Swan, he favored a proviso clause.

He would accept all the

amendments Mr. Swan had suggested, including the change in the

first sentence of the directive.

Mr. Mitchell said that in his judgment the current heavy

volume of capital market financing was probably all to the goodto the degree that corporations were improving their liquidity

positions, increasing their working capital, and paying off

debts--even though the large volume of financing had forced up

long-term interest rates and provided some measure of financial

restraint.

He was still quite uneasy about the economic situation,

but he thought his unease could be traced to the posture of fiscal

policy, both last year and this year.

More and more he had come

to feel that early fiscal action was needed, not only for the

reason Mr. Galusha had mentioned but also to deal with the problem

of expectations and the problems of the real economy.

5/23/67

-66

Mr. Mitchell noted that he was unhappy about the staff's

reliance on the bank credit proxy as a policy guide.

It was

evident that banks could increase the degree to which they were

intermediating if they wanted to; rate ceilings were not limiting

their ability to obtain funds at present.

But because corpora

tions were repaying bank loans, loan demands were not strong and

banks did not have an incentive to increase their intermediation.

It was a mistake, he thought, to use as a criterion for policy a

measure that was influenced by the extent to which banks chose to

intermediate.

About all the System should do in that connection

was to try to dissuade the Home Loan Bank Board from rolling back

the rate ceilings at savings and loan associations.

Thus, Mr. Mitchell continued, he thought the Committee's

objective should not be formulated in the directive in terms of

bank credit.

In what terms should the objective be formulated?

If long-term interest rates were used as a criterion, it would

appear that there had been a great deal of restraint recently.

But he did not think that the recent increases in long rates

actually were imposing a large measure of restraint; rather, they

reflected a kind of structural adjustment.

money supply as the criterion for policy.

He came back to the

In his judgment, growth

of the money supply in recent months had been adequate, if not

generous, and he would not attempt to restrict it at this point.

5/23/67

-67

That led him to favor about the same posture for policy--not much

change--that most other speakers had advocated today.

System purchases of coupon issues for two reasons.

He favored

First, with

the large demand for bills at present, it would be desirable to

avoid reducing the supply.

Secondly, such operations perhaps

would result in some moderation in long-term rates.

Mr. Daane said he had little to add to the staff materials

and the discussion today of the economic situation.

In his judg

ment, the cross-currents and uncertainties--which were well

illustrated by the colloquy between Messrs. Mitchell and Koch

following the latter's statement--pointed clearly to the desir

ability of an unchanged policy.

While he (Mr. Daane) would not

change policy today, he was concerned about the current and

prospective balance of payments situation, and by the implications

of the defense spending picture.

The latter suggested an attempt

to run a "guns and butter" economy, but he was skeptical as to

whether that could be done without regenerating inflationary

pressures.

As Mr. Ellis had suggested, the Committee might be

approaching the point at which it would be desirable to put more

emphasis on caution and less on ease--that is, the point at which

it might want to think twice about the risk of supplying reserves

at a rate that might add to subsequent inflationary pressures.

Today, Mr. Daane said, within the framework of an unchanged

policy he would favor emphasizing coupon operations in the manner

5/23/67

-68

and to the extent that the Manager had indicated, with full

recognition that there was no intention of trying to alter market

expectations regarding the level and pattern of interest rates.

He thought coupon operations would be desirable not only in

helping to relieve the market overhang, but, more importantly,

in cushioning downward pressures on bill rates for balance of

payments reasons.

Mr. Daane said he would go along with the thrust of

alternative B of the draft directives.

However, he did not favor

the language reading "while moderating pressures in the capital

market insofar as practicable" because it carried the connotation

that the Committee thought it could move against the tide.

personally would prefer language reading, "while emphasizing

operations in coupon issues in supplying reserve needs."

That

language would make it clear that purchases of coupon issues were

to be made within the framework of reserve-supplying operations,

and it did not carry any connotation that the Committee's opera

tions by themselves could move the market or that the Committee

was trying to do so.

Mr. Daane concluded by saying that he would not favor

adding a proviso clause to alternative B, as Mr. Swan had suggested.

He had been skeptical from the time the proviso clause was first

introduced into the directive about the desirability of attempting

5/23/67

-69

to "fine tune" Desk operations to deviations of the proxy from

expectations, and he continued to have that skepticism.

Mr. Maisel commented this was an unusual day.

Mr. Daane

had just made all the points he (Mr. Maisel) had wanted to make.

He had intended to recommend a change in the language of alterna

tive B along the lines of that Mr. Daane had suggested and he had

also planned to speak against the proviso.

Mr. Maisel agreed that the present was a confused period

with many types of cross-currents.

That was a prime reason why

he wished to support the policy outlined in alternative B,

although he had some misgivings over the way it had been pre

sented.

It seemed to him the Committee need not adopt a long-term

interest rate objective or even state its concern in terms of a

problem of over-all pressures in the capital market.

First, Mr. Maisel said, he would like to stress the

importance of maintaining a steady growth of credit to avoid

distortions in the economy.

The projections of bank credit growth,

for the next six weeks and for the current fiscal year, were neither

quite up to normal.

There was no reason not to furnish a normal

growth of total reserves.

Granted that posture of continuing

expansion, the System would have to furnish reserves during the

coming period.

Given the state of expectations in the market and

the over-all objectives for the economy this year, a question arose

concerning the logical place for those reserves to be injected.

5/23/67

-70

seemed clear to Mr. Maisel that the System should put

the reserves into the long-term area rather than the bill area.

In the bill area they would act mainly to force the bill rate

down even further.

Purchases would be competing in an area where

the market, through its purchases, was showing its own strong

preferences.

On the other hand, if the System put them into

longer-term issues, it would be aiding the market by supplying

bills to help meet the market's desires for short-term liquidity.

At the same time, the System would be decreasing the total of

long-term issues, which the market said it was having trouble in

digesting.

It might be noted, Mr. Maisel continued, that to do other

wise meant that the System would be continuing to shorten still

further the average maturity of its portfolio, which already was

a good deal shorter than in many past periods.

large portfolio.

length.

The System had a

That meant it had to determine its average

To shorten it rather than to lengthen it would mean the

Committee was adopting a portfolio policy opposite to its basic

goals.

Also, Mr. Maisel said, by staying in the short end, the

Committee might be increasing future problems.

He was somewhat

surprised that the question of a discount rate reduction had not

been raised by those concerned with the technical relations between

5/23/67

-71

the bill rate and the discount rate.

The gap below the discount

rate was wider now than in over five years.

Only in periods

following two or more discount rate decreases in the past had

there been a wider spread between the bill rate and the discount

rate.

Did technical relations hold in only one direction?

It seemed to Mr. Maisel that the proper policy was simply

to continue the Committee's current reserve policy, while adopting

a portfolio policy related to the market.

The reserves necessary

to insure a normal growth in bank credit should be furnished through

purchases of long-term issues.

The Committee would not attempt

to set the interest rates in the long-term market but would not

stop them from adjusting in accordance with the demand and supply

forces which its portfolio adjustments created.

While he had frequently supported the inclusion of a

proviso clause in past directives, Mr. Maisel said, he thought the

Committee ought to avoid the use of the proviso unless it had a

very firm policy goal to which it could be applied.

He had no

feelings at the moment that the Committee had a firm enough fix

on liquidity requirements and the need for bank credit to recognize

what a specific proviso should entail.

Since he believed that the directive should include the

term "coupon issues" in it, Mr. Maisel supported the wording

5/23/67

-72

Mr. Daane had proposed for that purpose.

Coupon issues should

be emphasized in furnishing reserves.

Mr. Brimmer said he favored alternative B for the direc

tive with the wording regarding coupon issues that Mr. Daane had

proposed.

He would stress that he did not consider attempts to

influence the level of long-term interest rates as "pegging" the

market.

He assumed that no one would want the Manager to engage

in coupon operations in an aggressive way; he personally would

favor supplying about half of the $500 million indicated reserve

need through purchases of coupon issues, with those purchases

spread over a period rather than made in a few days.

It was impor

tant to keep in mind the likelihood that rising long-term rates

would have an adverse effect on flows of funds to savings

intermediaries.

He noted that the staff's projection anticipated

growth in residential construction of $2 billion in the third

quarter, and that that expected increase accounted for roughly

one-fifth of the increase in total private GNP projected for that

quarter.

He assumed that the percentage would be about the same

in the fourth quarter.

If such growth in GNP was to be achieved,

it was clearly necessary to assure that the revival in housing was

not aborted.

The Committee could not accomplish that goal by itself

but it could help, by moderating increases in long-term interest

rates.

It also was vital for the System to maintain a firm stand

against proposals for reducing ceilings on savings deposit rates.

5/23/67

-73

Mr. Brimmer said he would also ask the Committee, and

particularly the Reserve Bank Presidents, to give further thought

to the problem of restructuring reserve requirements of smaller

banks.

In visiting recently with Ninth District bankers he had

learned that the Minnesota Act abolishing nonpar banking also

authorized State banks to invest up to 30 per cent of their

required reserves in earning assets.

That would seem to represent

quite a threat to Minnesota bank membership in the System, and the

System should give thought to lightening the burden of membership

on smaller banks by use of the authority it already had.

He hoped

that could be accomplished before it was precluded by a need for

over-all credit restraint.

Mr. Sherrill said he went along with the majority view

today favoring the continuation of prevailing money market condi

tions because, while he agreed that an upswing in the economy was

likely, he was not sure about its timing.

He favored alternative

B for the directive, but with the two-way proviso clause addedagain because of the existing uncertainties.

He favored operations

in longer-term issues, but would not get into the discussion of

objectives because he agreed with various objectives that had been

suggested.

Basically, he would like to see the Committee use its

operations in the longer-term market as constructively as possible,

but he was not disturbed by the possibility that those operations

would have some impact on long-term interest rates.

He agreed on

5/23/67

-74

the need for caution.

Perhaps coupon operations should be limited

at this time to the $250 million figure that had been suggested,

and the results evaluated before a decision was made to go further.

Mr. Hickman remarked that it was clear from information

published since the last meeting that the business picture deterio

rated in March and April, despite the optimistic expectations

expressed by some participants at the Committee's meeting three

weeks ago.

In real terms, GNP for the first quarter was revised

downward rather than upward, and private final sales were weaker

than originally estimated.

In April, a number of major economic

series either were level or declined, including industrial produc

tion, new orders for durable goods, retail sales, housing starts,

and factory payrolls.

Thus, the over-all business picture was

dominated by reports of declines or downward revisions in major

cyclical indicators.

For what it was worth, his staff estimated

that real GNP, after declining slightly in the first quarter,

would increase at annual rates of 1.3 per cent in the second quarter

and 3.5 per cent in the third quarter.

Those estimates were

reasonably close--although suggesting slightly less vigor in the

third quarter--to those presented in the green book, and to

preliminary forecasts submitted by Fourth District economists, who

would meet at the Cleveland Reserve Bank in early June.

The figures

indicated that the economy was in a fragile position, and would be

operating below potential for several months.

5/23/67

-75

Given that outlook, Mr. Hickman thought that monetary

policy should be moderately accommodative, to facilitate the

inventory adjustment and to provide the funds needed to finance

the expected pick-up of residential construction.

His own

preference was to permit the aggregate reserve measures and the

bank credit proxy to expand at an annual rate around 5 to 7 per

cent, with free reserves fluctuating in whatever range was consis

tent with those objectives.

In addition, he would continue to do

what was possible to relieve uncertainties and pressures in the

long-term bond market.

He therefore favored alternative B for

the directive, with Mr. Swan's amendment to the first paragraph

and Mr. Daane's to the second.

As a matter of fact, Mr. Hickman said, a moderately accom

modative monetary policy such as he had suggested would probably

be appropriate for an indefinite period, if it were not for the

fact that the Committee knew so little about the future magnitude

of defense spending.

It had been trying to sort out fact from

rumor ever since the war in Vietnam escalated two years ago.

there was another major escalation, pressures would develop that

would require a change in the mix of monetary and fiscal policy.

In fact, a major escalation of defense spending could cause the

type of overheating and financial stresses and strains that

developed in the economy in late 1965 and 1966.

At the present

5/23/67

-76

time, however, those were only conjectures; with the information

now available, and with major economic indicators level or weaker,

the Committee should do the best that it could to restore sustain

able stable economic growth.

Mr. Bopp commented that it should be no surprise that

business did not look quite so good now as three weeks ago.

Adjustment of the economy to the tremendous inventory accumulation

of the fourth quarter of last year could hardly be expected to

proceed smoothly and continuously.

Adjustment of statistics from

preliminary estimates was also a fact of life that unfortunately

had a greater effect on attitudes than it should.

However, Mr. Bopp said, after netting out the backing and

filling, he came out about where he had been three weeks ago.

The

economy remained basically strong, as witness the relative stead

iness of employment and unemployment.

But, after some favorable

news for March, weaknesses had been called to attention again by

declines in retail sales and production during April.

For the fourth consecutive month, Mr. Bopp observed, signs

of slack continued to dominate the economy of the Third District.

Manufacturing activity was still weakening and final demand

remained sluggish.

Those signs might not adequately reflect the

current climate since most District indicators were final only

through March.

Where April data were available, the rates of

5/23/67

-77

decline were slowing.

turing employment.

That was evidenced particularly in manufac

In addition, total unemployment had made a

favorable about-face by April.

Possibly reflecting those hints of an improved outlook,

Mr. Bopp said, loan activity at Philadelphia banks in recent weeks

had been increasing more than seasonally.

was expected to continue through fall.

Furthermore, expansion

That expansion reflected

(1) an expected pickup in economic activity, (2) some anticipatory

borrowing by customers, and (3) expanded lines to small businesses

under pressure from tax acceleration.

Almost all of the bankers

expected conditions to tighten as the summer progressed.

Part of

that would be seasonal, but part also reflected an expectation

that economic activity was picking up.

As yet, bankers had not

been reluctant to extend larger credit lines or loans to new

customers.

Some, however, expected reluctance to develop.

Mr. Bopp remarked that events in recent weeks seemed to

him to have clouded rather than clarified the outlook.

One basic

uncertainty--the extent and duration of the inventory adjustmentcontinued.

A second--the degree of escalation of the war effort--had

become more acute.

Given those uncertainties, for the present he

was inclined to mark time so far as policy was concerned.

He was

led to that conclusion also by developments in capital markets.

The

persistence of a large volume of new issues and the stubborness of

-78

5/23/67

longer-term rates reflected a belief that pressures for funds

were likely to build up again before long.

For those expecta

tions to be turned around, it probably would be necessary for

the Desk to pump in very large amounts indeed.

He would do

whatever was possible by operations in coupon issues to keep

long-term rates from rising, but would make no major move toward

further ease.

That position was reinforced by the large current Federal

deficit, Mr. Bopp said.

If large deficits continued as the

economy picked up in the latter part of the year, it might be

necessary to pay close attention to the fiscal-monetary mix so as

to avoid too much stimulation.

Caution in easing too much now

would help to achieve that objective.

For the directive Mr. Bopp favored alternative B, as

modified by Mr. Daane, and with a proviso clause.

Mr. Kimbrel reported that economic conditions were spotty

in the Sixth District.

The latest manufacturing figures showed

a further decline, as inventory adjustments continued to affect

adversely the apparel, lumber, and furniture industries.

However,

the Sixth District, too, was beginning to see some ray of sunshine,

which would indicate that a good many of those adjustments were

behind it. He understood that very recently a large manufacturer

of railroad equipment had been calling back employees, and that

-79

5/23/67

two steel mills were doing the same thing.

While those reports

might be only straws in the wind, they suggested that the

visible statistics might not be an entirely accurate barometer

of what was going on now.

Automobile sales, on the other hand,

were down about 10 per cent in April, after improving in March,

and remained depressed in early May.

A spot check of local

bankers also revealed a decline in the demand for automobile

and other instalment loans.

The biggest complaint of District farmers had been the

weather, Mr. Kimbrel said.

Drought conditions in Florida and

South Georgia forced cattlemen to feed hay and citrus pulp to

their cattle.

The drought was especially severe in parts of

Florida, which was finally blessed with rain late last week.

The same spottiness noted in business and agriculture

carried over into banking, Mr. Kimbrel continued.

Business

lending, which showed a revival in the first half of April,

slackened more recently, while other forms of lending improved.

Here again, though, one should probably give as much attention

to future prospects as to current developments.

According to

early indications gathered from the lending practices survey,

many District bankers expected loan demand over the next three

months to strengthen.

Those prospects tied in with a consid

erable reluctance to reduce rates on savings certificates and

5/23/67

-80

with the practice of the large Atlanta banks of offering higher

rates on CD's than banks in New York.

That anticipation of a

stronger loan demand was probably related in part to developments

in the bond markets, which in the last two weeks caused an increase

in discounts on FHA and VA mortgages in his area to 3-1/2 and 4

points.

Mr. Kimbrel said that he was, of course, quite aware that

many of those same developments were taking place in other parts

of the country as well, and that one could interpret them in

different ways.

But, to him at least, they suggested that monetary

policy need not be as expansive now as it had been earlier in the

year, although the spottiness of the statistics should caution

against any sudden tightening.

In fact, to stay about where the

Committee was might be not only good economics but would also get

applause from those academic economists who always favored a steady

policy posture.

Mr. Kimbrel added that if he were expressing a preference

for the directive it would be in the general direction of

alternative B.

Mr. Francis said it appeared that the deceleration of

economic activity had been halted, and that growth would soon be

resumed.

The increasing budget deficit of the Federal Government

was providing a growing stimulus to the economy.

Monetary actions

-81

5/23/67

had been very expansionary since early this year, and the response

in the real sectors of the economy appeared to have been relatively

quick.

Since monetary and fiscal developments usually had their

chief impact after some lag, the basic present problem was not how

to achieve adequate total demand but how to avoid excessive demand.

A review of recent monetary developments indicated that

they had been very expansive, Mr. Francis continued.

In the past

three months, total member bank reserves and nonborrowed reserves

had risen at about three times their 1960-1966 trends.

Federal

Reserve credit and the money supply had risen at about double their

trends, and commercial bank credit and money plus time deposits

had risen about 50 per cent faster than their growth trends.

Mr. Francis thought an important concern now was that the

System might overreact to the recent need for stimulation.

It was

necessary continually to keep in mind that actions had most of

their effect after a lag.

With total demand at a high level and

likely to increase rapidly in coming months, with fiscal actions

so expansionary, and with recent large increases in supplies of

money and credit, he felt that this was the time to avoid over

reacting to the pause in total demand of last fall and winter.

In formulating monetary policy for the future, Mr. Francis

remarked, an effort should be made to visualize economic conditions

as they would be when the Committee's actions became most effective.

5/23/67

-82

Projections presented in the green book indicated marked

increases in demands for goods and services and in real GNP

for the balance of the year.

The decline in real GNP from the

fourth quarter of 1966 to the first quarter of 1967 represented

only a slight deviation from the growth path of high employment

output.

Recent Administration statements regarding the fiscal

outlook for the rest of the year indicated, even if the 6 per

cent surtax was passed, a growing net stimulative thrust to the

economy from the Federal budget.

With that prospect, excessive

inflation was likely to appear later in the year unless monetary

actions were moderated now.

Mr. Francis said the Committee should profit from last

year's interest rate experience.

By limiting interest rate

increases in early 1966, the stage was set for the severe

restraint required last summer.

Forecasts of a growing Gov

ernment deficit with large Treasury borrowing and continued heavy

private demands for funds portended upward pressures on interest

rates.

System actions based on a desire to offset those pressures

would provide loan funds in excess of planned saving.

Such

accommodating actions would lead once again to a need for severe

restraint later in the year, with possible repetition of the

market dislocations of 1966.

If the fundamental situation was

such that the Federal Government and the rest of the economy

5/23/67

-83

combined were going to demand more funds than planned saving at

current rates, only inflation could follow from attempts on the

Committee's part to hold down long-term interest rates.

Since

there was a reasonable prospect of renewed inflation, the

Committee should move at this time to reduce its stimulative

force on total demand.

As to immediate policy, Mr. Francis believed the blue

book's projected increase of money at an 8 to 11 per cent annual

rate from May to June would be too rapid.

He recommended a

growth in money over the next three months at a 2 to 4 per cent

rate.

Or, in terms of total bank credit, a three-month growth

rate of 5 to 7 per cent would seem appropriate.

To that end, he

recommended an acceptance of a firming of capital market yields.

In addition, he believed some firming of the money market might

be necessary to moderate the expansion of money and bank credit.

It was Mr. Francis' belief that the proviso clause in the

directive had been useful to the System in reaching its proximate

objectives more quickly, while not reducing its effectiveness in

day-to-day operations in the money market.

In view of the dif

ficulties of selecting a money market target that would provide

a desired growth in the Committee's proximate measures, a proviso

clause seemed to be imperative for the effective implementation

of Committee policy.

5/23/67

-84For the second paragraph of the directive, Mr. Francis

favored language reading, ".

. . System open market operations

until the next meeting of the Committee shall be conducted with

a view to achieving some firming in the money market, but opera

tions shall be adjusted as necessary to moderate any deviations

of bank credit expansion from a 2 to 6 per cent range."

Mr. Robertson made the following statement:

I think we need to recognize that there is a

certain amount of uneasiness in the air these daysfor reasons which, if taken at face value, would have

quite different implications for policy. There is

uneasiness over the short-fall of recent business

statistics below the most optimistic expectations of

a few weeks ago. There is uneasiness about the state

of the bond markets, with prices falling under the

weight of the seemingly endless parade of corporate

and municipal demands. Most of all, a deep-rooted

uneasiness exists concerning the course of the war

in Vietnam, and the chances that it may add still

further to an already powerful but somewhat artificial

fiscal stimulus to business activity.

Some of these reasons might seem to argue for an

easing of policy, while others might seem to support

a tightening. In this kind of situation, I think the

right posture for the Committee is to do neither. This

is not the time to let particular developments cause

us to become jumpy or panicky. Expectations can swing

widely, and trying to follow along behind them with

counteracting policy changes can simply lead to still

greater fluctuations in economic and financial perform

ance.

As a matter of fact, a good many of the forces at

work today ought to partly compensate for one another,

and the expectation which seems to me most likely to

prove correct is for a resumption of vigorous economic

advance later in the year. Accordingly, I think the

wisest policy decision right now would be to hold a

steady course, keeping the money market reasonably

5/23/67

-85-

comfortable, and allowing the adjustments still in

process to proceed in an orderly fashion.

Even within such a policy of "no change," how

ever, almost everyone who has spoken today believes

there is room for added attention to the long-term

markets--that we should give more support to the bond

market. At the risk of sounding like a broken record,

let me say again that I think this is an area of opera

tions of which the Federal Reserve should be very wary.

The benefits, it seems clear, are not very large or

very certain, and the costs in terms of market

interference can easily outweigh them.

I do not mean to argue that the System should

never intervene in the market for coupon issues.

recognize that there can be a turn of events in which

a major overhang of securities inventories is virtually

choking the market, and in that circumstance a decisive

(and adequately explained) official move to buy up the

excess supplies in one swift succession of operations

may be the wisest course. But stepping in to buy up

bonds when the market is in less extreme difficulties,

if it is repeated often enough, will tend to reduce

the market's self-reliance, its capacity for responsible

behavior, and its ability to index and to balance

Granted that

changing demands and supplies of funds.

the Manager might well be able to complete some particular

buying action neatly, the hidden cost of any succession

of such operations may be expected to unfold over the

longer run in terms of a potentially less effective

market performance. I, for one, would rather not pay

that cost when it can be avoided.

For these reasons, I am in favor of alternative A

for the directive as drafted by the staff, particularly

with its two-way proviso clause focused on bank credit.

Recognizing that June is likely to be a month of

considerable financial churning, however, I would

encourage the Manager to wait for somewhat larger

deviations from expectations than he would ordinarily

look for, especially on the upside, before bringing

the proviso into play.

Chairman Martin said he sympathized with Mr. Robertson's

views on System operations in the long-term market; his position

5/23/67

-86

on that subject through the years was well known.

But the

Committee had taken another course for some time, and he

thought it should be prepared to play its hand out.

Accord

ingly, he had no objections to coupon operations at this time.

Much depended on how skillfully they were carried out, and he

thought the Committee could rely on the Manager in that

connection.

If such operations were to be undertaken, he

would favor referring to them in the directive, as was done in

alternative B.

The Chairman noted that the Committee was not unanimous

on policy today, with Mr. Francis favoring some firming of money

market conditions and the remaining eleven members favoring the

maintenance of prevailing conditions.

Also, a number of

suggestions had been made for revising the language of the draft

directive.

He suggested that the Committee try to arrive at a

directive that was acceptable to the majority, with Mr. Francis

to be recorded as dissenting if he so desired.

In discussing the directive, the Committee first considered

the various suggestions that had been made for revising the staff's

draft of alternative B for the second paragraph.

Mr. Mitchell

indicated that he would rather not have the proviso clause included

in the directive at this time.

Messrs. Brimmer and Treiber concurred,

5/23/67

-87

and Messrs. Daane and Maisel noted that they had expressed a

similar view in the course of the go-around.

Chairman Martin said that he also would prefer to omit

the proviso clause, which he had never liked much in any case.

He asked whether there was any disagreement on the proposal to

omit it.

Mr. Wayne commented that he still had the preference

for including the clause that he had expressed earlier, but he

was not prepared to vote against the directive if the majority

wanted to omit it.

Mr. Swan indicated that he also preferred to retain the

clause.

He noted that the broader question had been raised of

whether the directive should include a proviso clause generally.

He would be highly reluctant to see the clause abandoned, and he

hoped the Committee would discuss the broader issue at some point.

Mr. Maisel commented that as a general rule he preferred

to have a proviso clause in the directive, but thought that this

was not the right time for it since the members were not of one

view on how it should be formulated.

Mr. Mitchell remarked that the present seemed to be a

singularly inappropriate time to include a proviso clause.

Chairman Martin commented that he would prefer to eliminate

the clause in general, but his position on the issue was not hard

and fast.

5/23/67

-88

The discussion then turned to the formulation of the

phrase relating to operations in long-term markets, for which

Messrs. Swan and Daane had both proposed language different from

that in the staff's draft.

Mr. Robertson said he could vote for Mr. Swan's suggested

language, calling for "moderating unusual pressures in the capital

market."

He could not vote for a directive which, as Mr. Daane

had proposed, called for "emphasizing operations in coupon issues

in supplying reserve needs."

Mr. Daane said he thought it was the majority view that

the phrase "while moderating unusual pressures in the capital

market" would suggest that the Committee was seeking to go further

than it in fact wanted to.

The phrase he had suggested struck him

as more straightforward because it indicated that coupon operations

were to be conducted in the context of supplying reserve needs,

and he believed it was more nearly consistent with the majority

view.

Mr, Swan said he had no particular pride of authorship in

the phrase he had proposed, and had no objection to the general

thrust of Mr. Daane's suggested language.

"emphasizing" was too strong.

be found.

But he thought the word

Perhaps a more neutral word could

-89

5/23/67

Chairman Martin then suggested using the word "utilizing"

rather than "emphasizing."

Mr. Daane agreed that that substitution would be appro

priate.

He added that it might also be desirable to include the

words "part of" before "reserve needs."

The phrase would then

read, "while utilizing operations in coupon issues in supplying

part of reserve needs."

In response to the Chairman's request for comment,

Mr. Holmes said it appeared from the go-around that most members

were agreed that coupon operations would have to be conducted

cautiously, and comment also had been made to the effect that

the Desk should have latitude to curb operations in coupon issues

if they appeared to be leading to difficulties.

He thought the

word "utilizing" was more neutral than "emphasizing," and thus

preferable.

With respect to the first paragraph, the Committee agreed

to adopt Mr. Swan's suggestion to insert the phrase, "later in the

year" in the opening sentence, between "renewed economic expansion"

and "is in prospect."

Mr. Mitchell then proposed that the second sentence be

revised to read:

"Output is still being retarded by adjustments

of excessive inventories, but with no interruption in the sharply

rising trend in Government outlays now in sight the prospect is

for stronger growth in aggregate final demands."

5/23/67

-90Mr. Koch commented that the language Mr. Mitchell had

proposed did not appear consistent with the staff projections

of a declining rate of increase in Federal defense spending.

Such spending, which had risen at a rate of $4.2 billion in

the first quarter, was projected to increase at rates of $3

billion in the second quarter and $2.5 billion in the third.

Mr. Wayne said he would favor the language Chairman

Martin had suggested earlier, following Mr. Mitchell's comment

on the second sentence in the course of the go-around.

Other members concurred in Mr. Wayne's observation.

With Mr. Francis dissenting, the

Federal Reserve Bank of New York was

authorized and directed, until other

wise directed by the Committee, to

execute transactions in the System

Account in accordance with the follow

ing current economic policy directive:

The economic and financial developments reviewed

at this meeting suggest that renewed economic expansion

later in the year is in prospect. Output is still

being retarded by adjustments of excessive inventories,

but growth in final demands, particularly Government,

continues strong. Average wholesale prices have

declined recently, but unit labor costs in manufacturing

have risen further. Bank credit expansion has slowed

in recent weeks from its earlier rapid rate. Long-term

interest rates have continued to rise under the influence

of heavy securities market financing, but short-term

yields have declined further. 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

5/23/67

-91

policy to foster money and credit conditions,

including bank credit growth, conducive to

renewed economic expansion, while recognizing

the need for progress toward reasonable equilib

rium in the country's balance of payments.

To implement this policy, System open market

operations until the next meeting of the Committee

shall be conducted with a view to maintaining the

prevailing conditions in the money market, while

utilizing operations in coupon issues in supplying

part of reserve needs.

Chairman Martin then observed that the Committee had

planned to continue its discussion today of the implications

for its procedures of the "Freedom of Information Act."

noted that certain additional materials bearing on the matter

had been distributed since the preceding meeting.

These

included a memorandum to the Committee from Mr. Hackley dated

May 16, 1967, entitled "Rules regarding availability of informa

tion," and a memorandum to the Committee from the staff dated

May 17, 1967, entitled "Proposed availability of records relating

to domestic open market operations at the Federal Reserve Bank

of New York under the Freedom of Information Act."

Also, at his

(Chairman Martin's) suggestion, on May 22 the Secretary had

distributed copies of a memorandum with certain attachments that

Mr. Hackley had addressed to him on May 8, 1967.

That memorandum,

entitled "The Federal Open Market Committee and the Freedom of

Information Act," was concerned primarily with the question of

seeking an executive order exempting the Committee's records

5/23/67

-92

from disclosure. 1 /

The Chairman then asked Mr. Hackley to open

the discussion.

Mr. Hackley said he thought the most important question

immediately before the Committee was that raised at the preced

ing meeting, relating to a possible executive order exempting

all of the records of the Committee.

Before turning to that

question, however, he would touch briefly on certain other

matters.

First, last Wednesday the Legal Division had received

from the Department of Justice, with a request for comments by

last Friday, a revised draft of the Manual providing guidelines

for Government agencies in implementing the Freedom of Information

Act.

The revised draft, in his judgment, was an improvement over

the earlier draft.

For example, it contained a specific statement

to the effect that records of deliberations of an agency were

completely exempt from disclosure under the Act.

In that connec

tion, he would recommend that the Committee approve a division of

the documents traditionally known as the "minutes" into two

documents:

one, a record of actions taken, to be called "action

minutes" and to be made available on a deferred basis; and the

other, a record of the Committee's discussions, which would be

exempt from disclosure.

The Legal Division's comments on the

1/ Copies of the various documents referred to have been

placed in the files of the Committee.

5/23/67

-93

revised draft of the Manual were concerned principally with the

desirability of clarifying the point that materials which were

not exempt from disclosure might nevertheless be disclosed on a

deferred basis, where some time lag was necessary to avoid

impairing an agency's operations.

In his judgment the law could

be construed to permit such time lags, but it would be helpful to

have the point clearly stated in the Manual.

Mr. Hackley noted that with his memorandum of May 16 he had

submitted a draft of proposed new Committee Rules regarding availa

bility of information.

He recommended that the draft be approved,

subject to any necessary technical or editorial changes and subject

to the Committee's final determination with respect to the length

of the time lag for publication of its directives and authorizations.

He would continue to recommend a time lag of 60 rather than 90 days

simply because the shorter period seemed to comply more clearly with

the requirement of the Act that statements of general policy be

published "currently."

However, he thought that a lag of 90 days

would be defensible, if that turned out to be the Committee's

preference.

As the draft of the new Rules was formulated, Mr. Hackley

continued, it not only provided for specifying the lag with which

the Committee's directives and authorizations would be published,

but also indicated that certain unpublished records would be made

5/23/67

-94

available to the public with such time lags as the Committee might

decide upon.

For example, the Committee could approve a schedule

indicating particular time lags--1 day, 8 days, 30 days, or what

ever--with respect to the availability of particular records,

relating to open market operations, that were held at the Federal

Reserve Bank of New York.

A proposed schedule of that type was

attached to the staff's memorandum of May 17.

The schedule listed

only documents relating to domestic operations, but a similar

list could be prepared for documents relating to foreign currency

operations.

Turning to the question of an executive order, Mr. Hackley

recalled that at the previous meeting he had been directed to

prepare a letter to the Department of Justice asking for such an

order exempting the records of the Committee relating to both

domestic and foreign currency operations.

A draft of such a

letter had been prepared, and a copy was attached to his memorandum

to Chairman Martin of May 8 that had been distributed to the Committee.

However, he continued to feel strongly that it would be unwise and

unnecessary to seek an executive order such as that contemplated by

the draft letter, providing for exemption of all records of the

Committee.

In his judgment it would be preferable for the Committee

to take the position that in complying with the letter and spirit

of the law it would lean over backward to make available all records

-95

5/23/67

for which that was practicable; and, where absolutely necessary to

avoid impairment of its operations, it would rely upon the statutory

exemptions.

He believed, and he understood that the legal staff of

the New York Bank agreed, that practically all of the Committee's

records either were exempt from disclosure under the Act or could

be made available on a deferred basis.

It was his personal judgment

that the Committee would not find itself faced with any serious

problems if it did not obtain an executive order.

As he had mentioned at the preceding meeting, Mr. Hackley

said, the Treasury Department had requested an executive order

exempting its records relating to foreign currency operations.

They had indicated that their first preference was for an amendment

to the 1953 executive order regarding classification of defense

information, making it clear that the term "defense information"

embraced economic, financial, and monetary matters bearing on U.S.

relations with foreign governments.

Their second choice was for a

separate executive order covering their foreign currency operations.

If the Committee were to obtain an exemption for its own

foreign currency operations, Mr. Hackley observed, in his opinion

the procedure of amending the defense information executive order

to grant that exemption would lead to many problems.

The order

contained detailed and rigid requirements regarding classification

and declassification of documents, handling of classified documents,

5/23/67

-96

clearances of personnel, and so forth, that would prove burdensome.

It also would be necessary for the Committee to request authoriza

tion to make original classifications of defense information under

that order; while the Treasury had such an authorization at present,

neither the Committee nor the Board did.

Accordingly, if the

Committee were going to ask for an executive order, he believed it

should request one that was separate from the defense order.

On checking with the Treasury this morning, Mr. Hackley

said, he had learned that as yet they had had no reaction from the

Department of Justice to their request, which had been made by

letter on April 21.

At this point, therefore, it was by no means

certain that the Treasury would obtain an executive order exempting

their foreign currency records.

If the Committee wished to have the

matter pursued further, it might authorize the staff to talk with

the Treasury staff about coordinating the System's and Treasury's

approaches to the matter more closely, and to hold discussions with

the appropriate people in the Justice Department.

Mr. Maisel noted that the next item on the Committee's agenda

today concerned policy with respect to publication of information on

drawings under the swap network and on other System foreign currency

operations.

He asked Mr. Hackley to comment on the relation between

the proposed new Rules and decisions on such questions.

5/23/67

-97

Mr. Brimmer said he had a similar question.

The item

Mr. Maisel had mentioned had been placed on the agenda following

a discussion by the Board of a draft of the Special Manager's

report for 1966, prepared for inclusion in the Board's Annual

Report.

One of the points discussed, he recalled, was a request

by the Bank of Canada that information not be published at that

time regarding a drawing they had made during the year under their

swap arrangement with the System.

How would such situations be

handled under the proposed new Rules?

Mr. Hackley replied that his recommendation would be that

the Committee rely in such cases on a reasonable construction of

the statutory exemptions, as the Justice Department's draft Manual

suggested.

In his opinion one or more of the statutory exemptions

could be construed to cover information relating to operations

under a swap agreement.

Legally, swap drawings were borrower

lender transactions, and it was clear from the draft Manual that

information on such transactions was exempt.

In reply to Mr. Maisel's question about the status of

information concerning negotiations of swap agreements and Committee

discussions on that subject, Mr. Hackley said he thought it was

clear that such information would be exempt.

Mr. Treiber said he would suggest that the Federal Reserve

seek promptly an exemption from the Freedom of Information Act of

5/23/67

-98

Committee records pertaining to foreign currency transactions.

had hoped that the Treasury would join in a similar request seeking

the exemption of Treasury records pertaining to foreign currency

transactions.

As regards Federal Reserve foreign currency transactions,

Mr. Treiber continued, all such transactions, whether initiated by

the Federal Reserve or the foreign central bank, involved a confi

dential relationship between the System and the foreign central

bank.

The System should not reveal to the public on an automatic

basis information involving such a relationship.

Operations on

System initiative were undertaken to defend the dollar, a purpose

that could be frustrated by premature disclosure.

Similarly, a

foreign central bank might find its purposes frustrated by premature

disclosure.

Unless arrangements, such as the swap arrangements,

were mutually advantageous, the partnership could fall apart.

The

foreign partner might not care to be a partner if the American

partner was committed to disclosure of the transactions on an

automatic basis and not on a basis of mutual discussion and a

weighing of the interests of the parties.

Mr. Treiber noted that the Federal Reserve Bank of New York

conducted similar transactions for the System and for the Treasury.

Sometimes the transactions were alike and simultaneously executed

with the same foreign entity.

Clearly, administration would be much

-99

5/23/67

simpler at the Federal Reserve Bank of New York if the basic dis

closure rules were similar.

If the Treasury transactions were

classified as "confidential" or "secret" under the 1953 executive

order relating to defense information, and the Federal Reserve

transactions were a quite different affair, the difficulties would

be many.

If the Federal Reserve transactions were considered

"secret" defense information, there would be a whole new array of

problems.

He trusted, Mr. Treiber continued, that there could be

parallel treatment affording an exemption to records regarding

foreign currency transactions by the Treasury and such transactions

by the Federal Reserve.

He trusted that that treatment could be

provided for by an executive order addressed specifically to foreign

currency transactions.

He would consider it unwise to treat such

transactions as secret defense material with all the cumbersome

procedures and red tape associated with such a classification.

Mr. Hackley noted that the Treasury thought a separate

executive order might involve difficulties in that it would be

necessary to include a specific enumeration of all categories of

information for which secrecy was required in the interest of

national defense or foreign policy.

But there was no such enum

eration in the existing defense information order, and he did not

believe one would be necessary in a separate order.

The latter in

5/23/67

-100

general could parallel the defense order except with respect to the

detailed requirements for handling classified materials.

The sepa

rate order might simply say that information of the Committee

relating to foreign currency operations would be exempt from dis

closure to the extent that the Committee determined was necessary.

Mr. Maisel asked whether Mr. Hackley thought there would be

any substantial difference in the Committee's procedures if it did

or did not obtain an executive order exempting information on its

foreign currency operations.

Mr. Hackley replied that in his judgment the Committee's

procedures could be substantially the same whether or not it obtained

such an order, on the assumption that the Act permitted a time lag in

disclosing information in cases where premature disclosure would impair

performance of its statutory functions.

Mr. Brimmer asked whether Mr. Hackley was saying that in the

absence of an executive order the Committee could defer release of

some information relating to foreign currency operations, but would

have to make all such information available at some point.

Mr. Hackley replied in the negative, noting that most such

information would be completely exempt from disclosure in any case.

In response to the Chairman's request for comment, Mr. MacLaury

said that, while not prejudging the next item on today's agenda, the

goal with respect to information on foreign currency operations as

5/23/67

-101

seen by the staff concerned at the New York Bank was to avoid being

forced to disclose more than was currently being disclosed as a

matter of public policy.

Although Mr. Hackley had suggested that

obtaining an executive order exempting foreign currency information

would make little difference, he would urge that such an order be

sought.

Of the nine specific exemptions listed in the Act the

first, relating to information required to be kept secret in the

interest of national defense or foreign policy, seemed most closely

applicable to the System's foreign currency operations; but under

the language of the Act it could not be relied on unless an executive

order was obtained.

He agreed that if such an order was sought it

would be preferable to have it separate from the existing defense

information order, and that it would be desirable to have System

and Treasury foreign currency operations treated in parallel fashion.

Mr. Daane commented that the Treasury's request for an execu

tive order suggested that they thought one was necessary.

Mr. Hackley agreed that that might be the case.

He added

that one possible approach would be to seek a single order covering

foreign currency operations of both the Treasury and the System.

Mr. Brimmer asked whether the Treasury was relying on the

"Trading with the Enemy Act" in the present connection, and

Mr. Hackley replied that he had no reason to think so.

5/23/67

-102

Mr. Robertson asked whether there was any time limit within

which an executive order had to be sought.

If not, the Committee

might authorize the staff to consult with the Justice Department

while waiting to see what disposition was made of the Treasury's

request for an order,

If the latter was approved, the Committee

could seek an equivalent order at a later date.

Mr. Treiber said he would be disturbed if an exemption was

granted in the manner the Treasury had suggested--by an amendment

to the defense information executive order--since the procedures

for handling materials under that order were cumbersome.

He thought

it would be desirable, before action was taken on the Treasury's

request, to try to get a separate order, of simpler form, covering

both Treasury and System foreign currency operations.

Mr. Daane asked whether the question of the probable

response to such a request had been explored with the Department

of Justice.

Mr. Hackley replied in the negative, noting that the Legal

Division had felt that it should have definite authorization from

the Committee before pursuing the matter with the Justice Department.

As he had indicated earlier, however, he thought that such explora

tions might be desirable.

Chairman Martin said the Committee might authorize Mr. Hackley

to explore all aspects of the matter with the Treasury and Justice

5/23/67

-103

Departments and report back at the next meeting, on June 20.

would be necessary to reach decisions by that time since the Act

became effective on July 4.

The Chairman went on to say that he had discussed the

matter with a number of people, including the Attorney General.

The more he had thought about it the more he had come to hope that

the Committee would not permit itself to appear to be dragging its

feet in releasing information that was of legitimate interest to

the public.

On reviewing the Committee's minutes recently, he had

become increasingly convinced that its domestic operations would

not be disturbed if the current policy directives were to be

published with a 60-day lag--and certainly not if the lag was 90

days.

Mr. Daane noted that he would not be able to attend the

Committee meeting on June 20 and accordingly would like to pursue

the matter further today.

While he was not opposed to providing

information to the extent feasible, he was concerned about the

possible effects on the Committee's operations and he was not

convinced that there would not be the risk of considerable loss

of effectiveness unless the Committee was able to retain maximum

flexibility with respect to the release of information.

He agreed

that exploratory discussions should be held to the extent possible,

but he would be disturbed if decisions were put off until June 20,

when there might be fewer options left open.

5/23/67

-104

Mr. Brimmer noted that he had made a similar point in the

discussion at the previous meeting.

He suggested that the Committee

not confine itself to asking Mr. Hackley to explore the question of

an executive order exempting information on its foreign currency

operations.

The Secretary of the Treasury might also be asked to

seek postponement of action on the Treasury's request for an exemp

tion until there was an opportunity to review the question with the

Secretary and to work out a coordinated approach to foreign currency

operations.

Mr. Brimmer said he had changed his position somewhat since

the previous meeting.

He was now prepared to drop his earlier

suggestion for seeking an executive order exempting information on

domestic as well as foreign currency operations, on the assumption

that the Committee would agree to a lag of 90 days for releasing

its directives.

He was opposed to a 60-day lag.

Mr. Wayne noted that there appeared to be general agreement

on the desirability of obtaining an exemption for information on

foreign currency operations by executive order.

He suggested that

the Committee authorize Mr. Hackley to discuss a coordinated approach

with the Treasury, on the understanding that if that did not prove

feasible he would be authorized, without reporting back to the

Committee, to request a separate executive order covering System

foreign currency operations.

5/23/67

-105

Mr. Maisel remarked that in his judgment an executive order

indicating that information on foreign currency operations in

general--that is, both those of the System and the Treasury--were

required to be kept secret in the interest of foreign policy was

preferable to an order directed to the System's foreign currency

operations alone.

Chairman Martin said that he and Mr. Robertson might under

take to act for the Committee in connection with foreign currency

information.

He would much prefer not to have the Committee seek

an exemption covering its domestic operations.

Mr. Daane observed that if that was the position of the

Committee--and he continued to have reservations regarding its

appropriateness--he would share Mr. Brimmer's feeling that the

lag in releasing the directives should be 90 rather than 60 days.

Mr. Maisel commented that if the Committee agreed on a

90-day lag today, it might plan on publishing its policy record

entries for the first quarter of 1967 on June 7, 90 days after the

March 7 meeting.

Chairman Martin remarked that such a publication date would

be so close to the July 4 effective date of the Act that he could

see little gain in anticipating the effective date.

Mr. Brimmer said that whether or not the Committee planned

to publish its first-quarter record in June, it was important to

5/23/67

-106

reach a decision on the lag soon so that the staff would be able to

move ahead in preparing for publication.

He hoped that decision

could be taken today.

Mr. Daane agreed.

He added that he had some questions

regarding the list of documents relating to the operations of the

Desk, attached to the staff memorandum of May 17, that were proposed

for release with various time lags.

He personally was not prepared

to accept the list at this juncture.

He asked whether Mr. Holmes

was satisfied with it.

Mr. Holmes replied that the list in question omitted a

number of types of records at the New York Bank relating to opera

tions of the System account.

While the Bank's legal staff believed

that those documents were exempt under the Act, it was not certain

that a court would agree.

If it became necessary to disclose them

the question would be whether the lag permitted was sufficiently

long to prevent damage to operations.

The Chairman then asked whether the members would indicate

whether they would prefer a 60- or a 90-day lag for release of the

directives, noting that he personally favored the shorter lag.

Messrs. Swan and Wayne expressed a preference for a 60-day

lag, with the latter adding that he nevertheless would not object

to 90 days.

5/23/67

-107

Mr. Maisel said he thought a 60-day lag probably would be

preferable, but he would be willing to start with a 90-day lag and

consider shortening it later since it would be far easier to shorten

to 60 days than it would be to extend the delay if the initial choice

turned out to be inappropriate.

Mr. Mitchell observed that in his judgment a 60-day lag

probably would be adequate in the great majority of cases.

However,

since a 90-day lag might be desirable occasionally, he would prefer

that the longer lag be used on a regular basis.

Messrs. Brimmer and Daane commented that they felt strongly

that the lag should be 90 days.

Mr. Brimmer then asked if the

Manager would comment on the question.

Mr. Holmes said he agreed with Mr. Mitchell that a 60-day

lag for releasing the policy directive might ordinarily not be

damaging, but that a 90-day lag might be preferable for the reason

Mr. Mitchell had mentioned.

Chairman Martin then commented that the question of the

appropriate time lag seemed sufficiently important to warrant more

study.

Accordingly, he proposed that the Committee defer a decision

on it until its next meeting.

It was unfortunate that Mr. Daane

would not be present at that meeting, but if he so desired he could

distribute a written statement of his views in advance.

5/23/67

-108

Mr. Wayne noted that Mr. Hackley had made certain recommen

dations which appeared to be noncontroversial, and on which the

Committee might act today.

One such was the recommendation that

the Committee's minutes be divided into action minutes and records

of discussion.

Chairman Martin asked whether there was any objection to

approving Mr. Hackley's recommendation concerning the minutes, and

none was heard.

Mr. Hackley asked whether the Committee was prepared to

approve the draft of new Rules regarding the availability of

information on a tentative basis.

Mr. Treiber remarked that any such approval presumably

would be in principle, with the language of the Rules subject to

any changes of detail that might be found desirable after further

study.

Chairman Martin said it appeared that the Committee was

prepared to approve the draft rules on that basis.

The Chairman

then remarked that the Committee obviously had some difficult

decisions to make in connection with the Freedom of Information

Act, but he would reiterate his hope that it would not get into a

position of seeming to be reluctant to release information to the

public.

A great deal of progress had been made in recent years in

demonstrating that the Committee was not trying to operate in total

-109

5/23/67

secrecy.

In cases where secrecy was important it should be preserved,

but those who favored more disclosure had a good deal of support and

he thought the System would be better off if it furnished as much

information as possible.

The Chairman then suggested that in view of the hour the

Committee postpone discussion of the final item on the agenda,

relating to policy on information regarding swap drawings and other

System foreign currency operations.

There was no disagreement with the Chairman's suggestion.

It was agreed the next meeting of the Committee would be

held on Tuesday, June 20, 1967, at 9:30 a.m.

Thereupon the meeting adjourned.

Secretary

ATTACHMENT A

CONFIDENTIAL (FR)

May 22, 1967

Drafts of Current Economic Policy Directive for Consideration by the

Federal Open Market Committee at its Meeting on May 23, 1967

FIRST PARAGRAPH

The economic and financial developments reviewed at this

meeting suggest that renewed economic expansion is in prospect.

Output is still being retarded by adjustments of excessive invento

ries, but growth in aggregate final demands continues strong.

Average wholesale prices have declined recently, but unit labor

costs in manufacturing have risen further. Bank credit expansion

has slowed in recent weeks from its earlier rapid rate. Long-term

interest rates have continued to rise under the influence of heavy

securities market financing, but short-term yields have declined

further. 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.

SECOND PARAGRAPH

Alternative A

To implement this policy, System open market operations

until the next meeting of the Committee shall be conducted with a

view to maintaining the prevailing conditions in the money market,

but operations shall be modified as necessary to moderate any

apparently significant deviations of bank credit from current ex

pectations.

Alternative B

To implement this policy, System open market operations

next meeting of the Committee shall be conducted with a

the

until

view to maintaining the prevailing conditions in the money market,

while moderating pressures in the capital market insofar as

practicable.

Cite this document

APA

Federal Reserve (1967, May 22). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19670523

BibTeX

@misc{wtfs_fomc_minutes_19670523,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {1967},
  month = {May},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_19670523},
  note = {Retrieved via When the Fed Speaks corpus}
}