June 14, 1960 FOMC Minutes: Full Text
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 on Tuesday, June 14, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Szymczak Messrs. Leach, Allen, Irons, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Brandt, Eastburn, Hostetler, Marget, Noyes, and Tow, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Koch, Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Knipe, Consultant to the Chairman, Board of Governors Messrs. Mitchell, Jones, and Daane, Vice Presidents of the Federal Reserve Banks of Chicago, St. Louis, and Minneapolis, respectively
Messrs. Einzig and Leisner, Vice Presidents of the Federal Reserve Bank of San Francisco Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Messrs. Gaines and Black, Assistant Vice Presidents of the Federal Reserve Banks of New York and Richmond, respectively Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on May 24, 1960, were approved. Before this meeting there had been distributed to the members of the Committee (1) a review of open market operations covering the twelve week period from March 17, 1960, with a detailed report on operations from May 24 through June 8, 1960, and (2) a supplementary report covering the period June 9 through June 13, 1960. Copies of both reports have been placed in the files of the Committee. With further reference to developments since the Committee meeting on May 24, 1960, Mr. Rouse made the following comments: As indicated in the written reports to the Committee, open market operations since the last meeting supplied $445 million reserves net, mostly during the few days preceding the Memorial Day holiday. Since the beginning of June, operations have been more moderate in scale, and include not only purchases but some sales that were made yesterday and the scheduled runoff of about $98 million of Treasury bills next Thursday. The money market was moderately easy during the period, reflecting in part the easier position of the New York banks, which were net sellers of large amounts of Federal funds on nearly every day of the period. On the other hand, the reserve figures and Federal funds demands suggest persisting shortages of reserves in some other parts of the country. There has been no evidence as yet of any of the customary strains that develop around quarterly tax and dividend dates. There has been some selling of very short-term bills, but this
selling seems to have been readily absorbed and the market has not so far evidenced any concern over its ability to absorb the selling that may yet appear or its ability to refinance securi ties held under repurchase agreements that terminate tomorrow. This fragmentary evidence would suggest that corporate liquidity positions are more than adequate. The Government securities market showed considerable strength after the first of the discount rate reductions was announced on June 2, and again after the announcement last Thursday of a reduction in the rate of eight other Reserve Banks. Reducing the rate has not, thus far at least, resulted in a closer alignment between market rates and the discount rate. In yesterday's bill auction, for example, three-month bills went at 2.29 per cent, or about 1-1/5 percentage points below the discount rate, and this was close to the maximum spread that developed before the discount rate was reduced. The six-month bills went yesterday at an average rate of 2.50 per cent, and this spread of a full percentage point was not much less than the maximm that developed when the discount rate was 4 per cent. The most interesting market development has been the experience with the Treasury's advance refunding. The Treasury made this offering with the major objective of breaking up the $11 billion maturity of 2-1/2 per cent bonds in November 1961, and they did not expect to extend the debt substantially. They placed main reliance on the offering of $3.5 billion of 3-3/4 of 1964, and did not expect to achieve a very per cent notes into the $1.5 billion of 3-7/8 per cent bonds of large exchange 1968. They recognized that sizable blocks of 2-1/2's were in and larger banks which, for liquidity the hands of corporations be expected to extend in very large amounts, reasons, could not might not reach the this reason the total exchange and that for The limitations on amount were considered amounts offered. from being vulnerable to what necessary to keep the offering to be a possibility of speculation, seemed, a week ago Monday, by reason of not to discourage exchanges and at the same time possible size of new issues. interest has been light As was anticipated, corporation banks has also been light. initial response from large and the came to understand the as the market However, interest increased offering from the in evaluating the arithmetic involved complex per cent bonds. hold the 2-1/2 of those who already standpoint a holder of the looked upon by the notes can be The offering of 1961 maturity by to refund the November bonds as an opportunity which the holder extension for years, an it by 2-1/2 extending cent. On this about 4-1/2 per equivalent of receive the would comparison with current was attractive in basis, the offering such other considerations are, of course, yields. There market
as original cost and related tax and liquidity problems and expectations as to the future of rates. A pickup in market atmosphere as a result of the second round of discount rate reductions has helped the offering and, at present, the prospects are for an exchange of $2.5 to $3 billion into the four-year notes, but only $1/4 to $1/2 billion or less into the bonds. As the Committee will note from Mr. Larkin's memorandum of June 10, transactions in the July 15 bills have been very small since the last meeting, amounting to only $6.4 million. All of these represented outright purchases. Our holdings of the July 15 bills now total $111 million. According to the present outlook, the Treasury may well reduce the forthcoming offering of July 15, 1961 bills to $1.5 billion--in which case the acquisition of further amounts of the July 15 bills by the Account is less important than if the full $2 billion of these bills outstanding were to be rolled over. Finally, I should call to your attention additional rates in all forms of prime short-term paper that reductions in yesterday. Bankers' acceptance rates were reduced developed 1/4 per cent, and finance company paper and FHMA discount by paper were also reduced in rate. Thereupon, upon motion duly made and by unanimous vote, the and seconded, open market transactions during the period 1960, were approved, through June 13, May 24 ratified, and confirmed. consisted of a visual-auditory review at this meeting The economic participated along Noyes, and Marget which Messrs. Thomas, presentation in members of the and Altmann, Williams, Solomon, Messrs. Garfield, with meeting for this who joined the Board of Governors, staff of the research purpose. was as of the presentation portion of the introductory The text follows: at Paris four Summit Conference of the The breakdown in dramatic developments followed by has not been weeks ago example, have prices, for Sensitive material the economy. the past year. prevailing over at about the level continued
Common stock prices showed little change until last week when they advanced to a point 4 per cent below the January high. The likelihood that defense appropriations will rise now appears greater but increases being considered are not large. Industrial production in May was up about 1 per cent from April, reflecting increases in output of consumer goods and business equipment. Meanwhile, retail trade in May fell back from the advanced April rate and in June steel mill oper ations have been only a little above 60 per cent of capacity. Reviewing events from the recession low of April 1958, we see that rapid expansion brought industrial production up more than a fourth in 14 months to a level, in June 1959, 10 per cent above the 1957 average. Production in June last year included considerable output of steel and steel products for inventory. In fact, over the past year wide fluctuations in output have reflected, more than anything else, extensive anticipations and repercussions of the four-month steel strike, and cyclical changes have been less clearly defined than usual. The index of industrial production, to be released tomorrow afternoon, will show 110 for May, the same as June last year. From June 1955 to May 1956, the comparable period of the previous cycle, it rose from 96 to 99. Gross national product, now estimated at an annual rate of a little over $500 billion in the second quarter, is up moderately from a year ago. In real terms GNP will probably show a rise of about 1-3/4 per cent from midyear to midyear as against 2-1/2 per cent in 1955-56. Unemployment, which had declined from a rate of 7-1/2 per cent in mid-195 to 5 per cent in mid-1959, has since shown little net change, as in 1955-56, but is appreciably above the rate of mid-1956. prices, which advanced during most of the first Industrial year of recovery, have shown little change over the past year. This is in sharp contrast to what happened from mid-1955 to increases in prices. Prices when there were widespread mid-1956 of farm products have risen more than seasonally so far in 1960 as they did in 1956. prices have been stable over the past year, While wholesale consumer price index has risen nearly 2 per cent, reflecting the advances in services and some increases in continued marked increase in consumer prices than commodities. This is more 1955 to 1956, but it the corresponding period from occurred in year ahead the index will show any seems unlikely that in the advance as the 4 per cent rise from mid-1956 to mid-1957. such in markets for real account also developments Taking into and in the monetary and fiscal property and for securities,
situation, it is evident that inflation is by no means as inevitable as many analysts thought only a short time ago. Now, one question being asked is whether the economy can operate at a high and rising level without inflation. Fiscal and monetary developments have been of special interest over the past year. The shift from a $13 billion cash deficit in fiscal 1959 to a small anticipated surplus in fiscal 1960 and the prospect of a considerably larger surplus in fiscal 1961 was one of the key factors discouraging inflationary expectations and reversing the course of interest rates last winter. Early restraint on monetary expansion was another key factor in keeping demand from assuming inflationary proportions. Now, although bank reserve positions have been eased in recent months, the private money supply is still declining and activity in the economy is still appreciably below capacity. Questions naturally persist as to whether credit is available in sufficient amount and on such terms as to be conducive to higher and rising levels of activity without revival of inflationary pressures. The money supply has been declining since last summer and was down by $1.6 billion before the large decline last month, which may have been due, for the most part, to a temporary increase in Treasury deposits. For six months last year, from April to October, the turnover of deposits showed no increase. Since then, however, turnover has risen at an average rate of 1 per cent per month. Holdings of liquid money have also risen further--although not assets other than Most recently, interest rates so rapidly as the year before. for both short- and long-term funds have been moving in markets not only a sharp reduction in Treasury require down, reflecting also some reduction in other credit demands. ments this year, but that the discount rate noted, the same day As was widely the rate at the at Philadelphia and San Francisco, was lowered Bank was raised. In fact, in many foreign German Federal the current problems of adjusting monetary policy countries, with those in this contrast sharply to economic developments country. with developments abroad, price There followed sections dealing demands for capital inventory demands, in the United States, developments recent changes in consumer demands, building activity, goods, residential and equity markets. changes in credit supply, and the money
The significance of recent business and financial developments for monetary policy was discussed in a concluding appraisal, as follows: The review this morning has touched on the business investment boom developing abroad and has covered in more detail the less exuberant situation in the United States. In this country output is below plant capacity by a margin probably larger than would be necessary for sustained growth without inflation and unemployment continues around per cent. Exports are now expanding in relation to imports but in none of the broad categories of domestic demand--inventory accumulation, capital goods, residential building, consumer spending, and Government activity--is any great upsurge evident at this moment. In appraising the present situation and looking ahead, note may well be taken also that the current physical volume of output--real GNP as well as industrial production--is above the high of 1957 by as much as output in 1956 was above the high of 1953. Furthermore, this level has been achieved without price advances of the magnitude that earlier raised basic questions about the possibility of avoiding creeping inflation, and of maintaining a volume of saving adequate to provide for a high rate of growth in the economy. Thus a good start may have been made toward laying the foundations for a more sustainable prosperity and a higher rate of growth over the longer term. With regard to monetary policy, net borrowed reserves have been progressively reduced since the beginning of the year, as declined more than seasonally and as the required reserves Government securities in recent weeks. System has purchased borrowed reserves of $450 million in Compared with average net quarter of 1959, there has been a small free reserve the last reduction in Reserve Bank in early June The recent position has also tended to ease rates to 3-1/2 per cent discount on bank credit expansion. restraints the period ahead monetary policy will be operating In policy likely to provide for no great change alongside a fiscal in a moderate cash sur and to result in Federal expenditures be needed from other in demand thus will plus. Increases utilized and to not now some of the resources sectors to absorb becoming available. of additional resources make use and local government in various private Such increases and lower the greater availability facilitated by demands may be a result of developments apparent as credit now becoming cost of in the economy generally and in monetary policy.
Banks apparently began the year 1960 with policies quite restrictive with respect to some types of loans. These policies tended to keep loan growth moderate, particularly at city banks. Real estate and security loans at these banks declined in early 1960 and growth of consumer loans slackened. Business loans, after declining sharply in January, advanced briskly in February and March when metals manufacturers were borrowing heavily for rebuilding inventories, and then beginning in April expanded more moderately as these inventory demands abated. Despite the moderate rate of loan expansion and the easing of reserve positions, banks reduced their holdings of Govern ment securities through May 1960 almost as much as in the same period in other recent years when loan expansion was unusually rapid. The reduction was mostly in Treasury bills and other short-term securities, while holdings of 1 - 5 year securities increased. These shifts reflected, in part, changes in the maturity composition of the public debt but also the continued demand for Treasury bills by nonbank investors. Under the pressure of these demands, Treasury bill rates declined to below the discount rate, giving banks an inducement to sell bills in order to reduce their borrowings as well as to make loans. As we approach midyear, the question whether banks are in a position to extend credit to facilitate expansion in private demands becomes more pertinent. At city banks, business loans have shown no marked change in recent weeks. The reduction in real estate loans at these banks, however, has slowed somewhat and growth in consumer loans has accelerated. City banks have continued, however, to reduce their holdings of Government securities. Although borrowings at the Reserve Banks have considerably from early in the year, city banks been reduced still have a large volume of other indebtedness, consisting entirely, of purchases of Federal funds from mostly, but not other banks. As a result of further declines in yields on Treasury reductions, a wide gap between bills since the discount rate may continue to find borrow rates remains. Thus banks these costly means of reserve Reserve Banks a relatively ing at the but with the level of borrowing lower, this adjustment, differential should be less significant than early in the year. seasonal changes in reserve Except for temporary variations, will be moderate in the next few months. needs at this time, the Committee faces In establishing policies seems to be for the immediate outlook a situation in which or decline in than marked expansion little change rather
economic activity and there seem to be few inducements for speculative commitments in either direction. Meanwhile activity is at a comparatively high level and prices are relatively stable. In implementing policies, the System faces a question as to how responsive the banking system may be in the period ahead to given changes in net reserve positions and interest rate differentials and also questions as to how changes in bank credit may be related to changes in the whole credit structure and in final demands for goods and services. It is always possible that market shifts in the economic situ ation are in the making even when available information suggests little change. Credit restraints have been greatly eased, if not fully removed. For monetary policy, the period ahead perhaps should be one of watchful waiting. It was understood that copies of the text of the economic presentation and accompanying charts would be sent to the members of the Committee and the Presidents not currently serving on the Committee as soon as available, and that copies would be placed in the files of the Committee. the following statement of his views Mr. Hayes then presented on the business outlook and credit policy: some of the business data that have become avail Although able during the last three weeks have been disappointing, they prospects of further moderate business do not alter the second half of the year. The disappointing expansion in the with the level of consumer statistics had to do principally was slightly less than the record spending in spending, which The weakness in new and with the new orders outlook. April, in only a few sectors--notably steel, orders has centered case the decline in items; and in any appliances, and defense growing confidence in an easier orders may reflect a welcome stability. Encouragement and in general price supply situation that steel output and housing may be found in the likelihood bottom, in the continued have about touched construction in the favorable employment of exports, and favorable trend just released. The new SEC data are also encouraging figures plans continue largely that business investment evidence prices, while doubtless The course of stock unchanged. also suggests a in discount rates, by the reduction affected of the business outlook. more optimistic view
I think we can find satisfaction in the fact that the summit fiasco has been taken in stride, with no significant reaction in the world commodity markets, and with no evidence that it has generated pressures for significantly higher defense spending or has caused major new uncertainty in the business outlook. A review of postwar business expansions, including the present one, suggests the possibility that a new alternative pattern may be developing for the late stage of a cyclical expansion. Instead of the typical pre-World War II inflationary upsurge prior to the upper turning point, often accompanied by dramatic financial developments, we seem more recently to find a situation in which the forces which casued the original expansion exhaust themselves before the ceiling of productive capacity is reached. Signs of exuberance fade away, and the economy coasts along on a high and perhaps even rising plateau, with commodity prices staying stable. If there is any substance to this analysis, it may call for a different type of credit policy from that which we would have followed under the old pattern. We may regularly face a situation well before the cyclical turn when a sustaining support from monetary policy, such as we have been endeavoring recently to provide, can prolong the period of high level activity without generating or validating speculative expectations. Recent figures on bank credit point to a continuing growth of business loans about in line with seasonal expec tations. If we take into account total liquid assets of nonbank holders rather than the money supply alone, we find no clear for believing that inadequate liquidity is restraining basis spending on goods and services. Moreover, it is interesting to note that since early April the effects of System policy, reflected in the trend of nonborrowed reserves and at least as have been expansionary on balance. required reserves, It seems to me there should be no change in the objectives of the feel of the market or open market operations in terms of we should perhaps be somewhat free reserves. However, I think the money supply if the try to force an increase in hesitant to market interest rates even lower than they effect is to drive that the Manager should have authority, now are. I would expect connection with the required in usual, to provide reserves as date cash needs in the currency drain and statement holiday be a favorable occasion 6. Perhaps this might week ending July additional vault cash, especially to consider the release of also to the country banks funds available directly as it might make and reserve city banks, where pressure has apparently been plateau in economic and the same time the present greatest. At
financial affairs may provide an opportunity to take a modest step in the direction of equalizing central reserve city and reserve city requirements. However, if this were to be considered, it might be desirable to make clear that such an action was only the first step in a scheduled program of reductions rather than an action motivated by broad policy considerations related to economic conditions. This might be accomplished by announcing a schedule of reductions to occur at various specified times, when it is expected that the market will need reserves, over the course of the next six months or one year. The discount rate would not seem to call for any attention today, and the present directive strikes me as quite satisfactory. Mr. Johns made substantially the following statement: The chief problem facing the Committee, it seems to me, is to reverse without further delay the downward trend of member bank reserves which has persisted notwithstanding the Committee's directive of May 24 to supply reserves needed for moderate bank credit expansion. For the period May 24 through June 8 the Federal Reserve Bank of New York reports that the daily average of total reserves was $197 million less than the daily average of the preceding three weeks. We estimate that on a seasonally adjusted basis the amount of this decline was not that great but nevertheless was a decline. In the longer run, New York reports that the daily average of total reserves for the March million less than the daily average 17-June 8 period was $434 for the December 10, 1959-March 16, 1960 period. Seasonally estimate that this decline was of about the same adjusted, we The persistence of the decline in total reserves magnitude. months past has heretofore been the subject of for several table. The notable fact today, I considerable comment at this the Committee's directive of May 24, think, is that despite reserves has continued in tandem with the contraction in total reserves, thus indicating that contraction a decline in required than expansion, was occurring. Obviously, of bank credit, rather on the problem of the Committee needs to concentrate I think, in its May 24 directive. the objective stated how to accomplish past three weeks that developments in the I am aware of no on net, ccuse the Committee to deviate from the policy should, rate of bank credit determined, i.e., a moderate objective last above year-ago levels. unemployment remains expansion. Insured The decline in production is discouraging. The rate of steel despite a of the year, since the beginning interest rates reserves and the in the stock of restrictive decline continuing pressure is lacking. supply, indicates that inflationary money
A decline of market interest rates of the magnitude and duration of that of the last five months has never, I think, been associated with a period that proved to be one of continuing prosperity. The reduction of discount rates since the last meeting was in my opinion wholly appropriate, but I think this should not be considered as eliminating or mitigating the need for growth in the total reserves of member banks. The discount rate which prevailed from February to June was instrumental in reducing borrowings at the Reserve Banks from about $900 million to less than $400 million. Since the discount rate is still above short term market rates, there is continuing pressure on banks to reduce their borrowing, and therefore we probably cannot look to this source as a means of increasing reserves. In the next few weeks a large volume of currency is expected to flow into circulation, reducing bank reserves. Hence, it will probably take a sizable injection of reserves in order to offset these market forces, to make up for the past decline in reserves, and to provide the basis for growth in bank credit and money. to me that this may be a fortunately appropri It appears to provide reserves by allowing member banks to count ate time as reserves and to eliminate, at least more of their vault cash in reserve requirements between in part, the differential city banks. Quite aside from central reserve city and reserve to me that there are reasons matter of timing, it seems the the objectives prescribed by the for making progress toward vault cash and central reserve city Congress with respect to However, the need for reserves bank reserve requirements. time, and I regard that need uppermost in my mind at this is as urgent. have already said, it follows On the basis of what I I would leave the directive unchanged today. that developments and on by Mr. Bryan on Sixth District The comments were substantially as follows: monetary and credit policy District does not situation of the Sixth The economic situation to merit from the national differ sufficiently together with the reports discussion. Our figures, detailed indicate that the and Head Office Directors, of Branch at a high level and, if anything, with District is operating pessimism in the There is no general a slight upward bias. great optimism. I must report District; neither is there any news from Florida is pessimistic. However, again that our means that judge it, merely far as we can so this pessimism, space into from outer of descending is in the process Florida the stratosphere.
My impression is that the banks of the District are under continuing heavy pressure. That impression comes from the prolonged existence of disproportionate and continuous borrowing from the Atlanta Reserve Bank, from loan and investment data, and from the number of banks showing persistent deposit declines as measured against a year ago. As for policy, it seems to me that we should not, for many reasons, push the panic button. However, I believe that the situation requires a policy of consistent, moderate increases in the supply of bank reserves. I also feel that the shift from net borrowed to free reserves during each of the last three weeks is deceptive; for, although member bank borrowing dropped in that period from the $550 million level to the $400 million level in the week ended June 8, required reserves in the same period fell by nearly as much. As for total reserves, the Atlanta figures indicate, on a seasonally adjusted basis (revised) that there has been a decline in reserves from December 1959 through May 1960 amounting to $546 million, allowing for no growth factor at all. I do not regard this development with equanimity. As I have said, it now seems to me that, without pushing the panic button, we should begin a policy of steadily increasing reserves in moderate amounts; and I would at this time advocate an increment composed of three elements: An increment at a 3 per cent annual 1) rate, which would be $47 million for June; seasonal, which would be plus 2) A June $36 million; of the decline 3) And a slow correction between December and that took place May. I would suggest for June $100 million. on a daily average basis, were Since actual reserves, a daily average come out with in May I would $18,236 million for this month. That reserve target of $18,419 million on the part of the considerable activity target would require of May and in this the latter part for we have, in Account, reserves to decline 8, permitted total month, through June week ended June 8 was The average for the substantially. $18,109 million. increment to a steady moderate While I have advocated I have considerable market operations through open reserves that would precipitate a large concern about any action as an rates. Consequently, in short immediate reduction join with others I would market purchases, to open alternative
in suggesting to the Board that it might be appropriate to consider increasing reserves by increasing the vault cash allowable, which would be spread throughout the country and be less likely, I feel, to precipitate an immediate large reduction in short rates; and, secondary to such a step, I would join with others in suggesting for the Board's consideration some further equalization of reserve require ments as between central reserve cities and reserve cities. If it is agreeable, I would like to distribute to the members of this group the Atlanta charts on total reserves and the derivation of the target figures I have used here today. Chairman Martin indicated that there would be no objection to distribution of such material. Mr. Bopp said that developments in the Third District had been mixed. For every favorable development it seemed that there was also an unfavorable one. By and large the movement had been sideways, but at a relatively high level. As to policy, Mr. Bopp said he would like to see an expansion of base, but without forcing down short-term rates unduly. He the reserve of providing reserves where attracted to the possibility found himself amounts of vault cash for needed by releasing additional they were most changing the directive He would not favor in required reserves. inclusion or the discount rate at this time. activity could of Fourth District that the trend Mr. Fulton said was still at a low point, as sideways. Steel production be characterized to be living off their steel companies appeared the customers of the and the order books expected. However, anyone had longer than inventories decline was further abrupt and no off somewhat, to be leveling now seemed
anticipated. Estimates of steel production for the year as a whole had now been revised to around 112-115 million tons, well below the 130-135 million tons that were forecast earlier in the year. According to the current estimates, production would not reach the 1955 total of 117 million tons, which was the highest on record. Steel requirements of the auto industry for production of the new model cars were affected by the prospect that approximately 50 per cent of the new cars would be of the smaller varieties. Mr. Fulton went on to say that construction in the District was up a little, but for the year to date was lower than in most recent years. Production of heavy machinery was going at a fairly substantial rate, although shipments were small because of the time needed to build such machines. While the aluminum industry was expecting an increase in ship ments of from 7 to 10 per cent over lest year, the situation was not satisfactory because of low prices and increasing costs. At the same expected greater amounts of aluminum to be used in time, the industry the future, and research and development programs were in high gear. were holding up fairly well, but auto sales Retail sales in the District had sagged somewhat in the past couple of weeks. For the year to date, department store sales were about 3 per cent above last year. said, and loan demand was had increased, Mr. Fulton Bank loans Member banks had not been using the reported strong in most areas. running at only about borrowings were discount window inordinately;
2 per cent of the System total. Free reserves were shown for the District as a whole. In summarizing, Mr. Fulton repeated that the movement in the Fourth District appeared to be sideways. Expectations were for an upturn in the last quarter of the calendar year, but if that upturn did not begin to manifest itself by August the District probably would be in for a rather bad time. Mr. Fulton said that he would not recommend changing the directive or the discount rate at this time. As he had indicated at the Committee meeting on May 24, he would be favorable to permitting additional vault as required reserves. He would favor aiming for a cash to be counted of free reserves. In mentioning a range somewhat higher dollar volume he indicated a preference for the latter from zero up to $150 million, to zero that had persisted in figure in contrast to the figures closer the past few weeks. comments made thus far had been King noted that most of the Mr. found himself in agreement with character and said that he similar in opinion there was no need to the views expressed. In his almost all of the directive, but he in the wording of at this time any change consider free reserves might be net borrowed and net that the figures on felt in different parts of reports he got from banks deceptive. The somewhat few smaller, and some larger, the effect that quite a the country were to This was a a rather tight position. themselves in banks still found do, within reason, to anything the System could he suggested, when time,
give the economy as a whole a little nudge and push forward would be appropriate. Many small businesses with which he was acquainted were operating at a high level of activity but on narrow profit margins or even at a loss, and a lot of them could fall off the fence very fast. He was not sure what means it would be appropriate for the System to use. He did not think, for example, that forcing short-term rates lower or encouraging them to drop substantially, as in 1958, would be in order or would produce good results in the long run. On the other hand, whatever actions the Open Market Committee or the Board might take to give some encouragement to the picture as a whole would seem appropriate. The reduction of the discount rate was in his opinion an action that did help the general psychology of the business community. It was an encouraging community to have a tangible sign that the Federal thing for the business could be flexible in one direction as well as the other. However, Reserve the rate probably would not produce the results further reductions of for which he was looking. What he desired was something that would help forward to a period of stable, high-level activity. in pushing the economy the picture in the same that he did not view Mr. Robertson said around the table judging from the comments apparently did, way as others comments was reflected in those opinion, the pessimism far. In his thus discussion and brought out in the economic by the facts not justified the economy was now the position of As he saw it, accompanying charts. Likewise, the move in either direction. the economy could favorable, and reason for adding to He saw no move in either direction. System could
the supply of reserves merely for the sake of doing so. Instead, he felt that the System must gear itself to the economy and what was needed in terms of reserves. The System should stay where it was at present and move sideways along with the economy, watching carefully all movements and trends, which could be in either direction. He would not favor changing the directive or changing policy. He would be neither easier nor tighter, and instead would pursue a policy of watchful waiting. Mr. Mills said that to him the economic review and the comments on the credit outlook that preceded the general discussion today revealed a cloudy situation, one in which it was difficult to foretell with any accuracy the course of events. As a phase of that difficulty, he sensed a groping by those who had spoken around the table for an appropriate policy position. This caused him some concern because he believed it important to guard against a temptation to take a proprietary interest in some line of reasoning that would lead to fixed policy attitudes and positions from which extrication might be difficult. Personally, he must admit vulnerability to such a charge with respect to his own reasoning, but that did not excuse the fact that one should be cautious about the positions he took in a period such as the present. His to System policy at this time was set forth in the following approach statement, which he then read: economic activity raises evidence of slackening The growing easier Federal Reserve extent to which an the question of the be expected to reverse credit policy might System monetary and of credit. In the by stimulating an expansion present trends base for credit a broad historical experience, light of
expansion has not proven to be a very effective stimulant for an economy that is moving downward from the peak of a major business cycle. Although there are not conclusive signs that the United States economy is moving into a drastic cyclical change, even so it is unlikely that at this juncture the forced injection of reserves into the commercial banking system would reverse the trend of economic developments. Under other circumstances and economic conditions, such as have been experienced in the minor recessionary movements of recent years, an aggressive injection of new reserves into the commercial banking system by way of Federal Reserve System open market policy actions in the Treasury bill sector of the U. S. Government securities market would produce a lower level of short-term interest rates whose effect would in due course be transmitted to the intermediate and long-term sectors of the U. S. Government securities market, with a consequent lowering of interest rates for long-term obligations, thereby enhancing the incentive for borrowing in the long-term markets to finance expanded capital investment programs. Considering the growing slackness that is occurring in economic activity, it is unlikely that lower interest rates would offer sufficient attraction to industrialists to undertake new capital programs when over capacity is already apparent in many segments of industrial and commercial fields of endeavor. Viewed in this light, an aggressive injection of new reserves into the commercial banking system would undoubtedly force short-term interest rates down to unrealistic levels and in the process of doing so risk the avoidable possibility that the United States money markets to funds would be diverted from in quest of more generous interest returns foreign money markets and at the expense of a further outward on short-term investments, States. It is granted that movement of gold from the United of aggressively active ease would the adoption of a monetary policy a lower long-term interest rate in due course be reflected in are not sound grounds for but, as indicated, there structure interest rates at this time would believing that lower long-term capital investment programs. serve as an incentive for stimulating Federal Reserve System monetary and credit A more viable to maintain a modest be one that would continue policy would the commercial banks reserves on which volume of positive free and, in doing so, prevent expand their credit commitments can money supply. There are already any further shrinkage in the System's current policies that the Federal Reserve indications in larger centers tendency for banks fruit in some are bearing and investments. In view, however, of to increase their loans commercial banks and their illiquidity of the the general
growing efforts to correct this kind of situation, it is unlikely that the commercial banks will be inclined to expand their loans and investments in a major way, and in probability such steps as they take in that direction will be by way of increasing their holdings of short-term U. S. Government securities. If this proves to be the case, the joint action of the commercial banks in expanding their Treasury bill holdings will of itself exert a downward impact on Treasury bill yields, which would be aggravated disadvantageously if the Federal Reserve System were in turn to operate aggressively in the open market as a purchaser of U. S. Treasury bills. Collateral effects would, in my opinion, stem out of either changes in the vault cash requirements or early reductions in legal reserve require ments. In due time an expansion of commercial bank loans and investments, commencing in the central reserve city bank sectors, should witness some movement of the deposits generated by these actions into the reserve city bank and country bank sectors where an improvement of individual bank deposit positions should act as an encouragement to their own loan and investment expansion, with the result that a moderate and desirable expansion of commercial bank credit would take place on a national scale. The gist of this reasoning is that at the present juncture the economy can best be served by a Federal Reserve System monetary and credit policy that will provide a moderate base for commercial bank credit expansion, but will avoid an excessive injection of new reserves, the effect of which would only be to distort unrealistically the interest rate structure with harmful economic consequences. entire Mr. Leach said incomplete data and reports for the past month indicated that the Fifth District's manufacturing industries probably rate of activity close to the high levels of April. Depart maintained a one extreme to the other the other hand, went from ment store sales, on in over a year. The cotton textile in declining to the lowest volume such as the lagging demand for industrial industry had some weaknesses, factor of strength in in general it was still a sustaining fabrics, but orders in the furniture industry economy. Conversely, new the District had been supporting strength no increase in declining, and had been poor demand from In addition to continued at the retail level. evident
foreign markets, coal production was feeling the effects of declining steel operations. On the other side, construction had been an element of strength in the economy all year. In the agricultural sector, planting and crop growth were running quite late and income continued below year-ago levels. In general, available evidence indicated that Fifth District business activity had held at or near the high levels attained earlier, had shown some signs of uncertainty, but as yet had not moved discernibly toward either contraction or renewed expansion. Mr. Leach reported that although there had been in recent weeks a slight reduction in loans outstanding at weekly reporting member banks and a decrease in their borrowings from the Reserve Bank, Fifth District banks continued to borrow Federal funds and liquidate investments. under pressure and were still forced to Bankers stated that they continued screen loans with more than ordinary care. said that since there had been a Turning to policy, Mr. Leach net borrowed to a free reserve position, along movement from a substantial be argued that before rate, it could in the discount with a reduction wait and see how much easing measures the System should taking further few weeks. On the other these actions in the next would result from banks had not yet position of the that the it could be maintained hand, would seem to be and that there much as would be desirable eased as or thereabouts, to in adding $100 million, inflationary danger little tend to force this might weeks, although the next three reserves in free from a had fallen that borrowings lower. Now rates still short-term
$900 million to a $400 million level, additional free reserves were more apt to reverse the decline in total reserves and permit bank credit to expand. On balance, he was inclined to favor maintaining substantially the present posture, resolving all doubts on the side of ease. Under such a policy, he would expect that free reserves would fall in the zero to $100 million range. He would not recommend changing the directive or the discount rate. To provide the reserves that would be needed for seasonal reasons, he would favor utilizing the vault cash mechanism at the appropriate time. Mr. Leedy said there were no new developments of significance in the Tenth District. The picture as presented for the nation in the chart show reflected Tenth District conditions quite well, although in several respects conditions were not quite as favorable as indicated by the national picture. On balance, perhaps, the economic level of activity in the District was somewhat lower than nationally. As to System policy, Mr. Leedy said it was his view that the objective of adding somewhat to bank reserves, with a view to encouraging an increase in the money supply, should be continued. However, he felt that this should be done in a moderate way. Looking at the period ahead, the projections indicated that for the next two weeks there might be little reason for System operations. Assuming a runoff of $98 million of bills this week, the level of free reserves for the week ending June would be around $100 million, and for the week following 22 apparently the same level. Thereafter, however, some they would be at about
problems apparently would be presented; if the System did not supply reserves, there would be substantial net borrowed reserves for a couple of weeks. Mr. Leedy said he had the feeling that the recent reduction of the discount rate had produced more in the way of results, as far as the bill rate was concerned, than was anticipated. The performance of the market had been such as to cause one to be hesitant about taking any further overt actions immediately. The Committee could make some additions to reserves, but care should be exercised not to force down short-term rates too much further. He did not feel that the Committee could take total reserves as the objective and disregard completely the bench mark it had been using, which for the period ahead would be free reserves rather than the net borrowed reserves that had existed until this period he would attempt to add moderately to the recently. Over system, but he would not available to the banking supply of reserves way of providing reserves through the undertake to do anything in the a little later to There might be an opportunity vault cash mechanism. look on such a move kind, and if so he would do something of that would not favor moving on vault For the present, however, he favorably. requirements between differential in reserve toward reducing the cash or apprehensive of the city banks. He was reserve and reserve central if they were taken, placed on such moves, that might be interpretation and also from in the stock market had been going on the light of what in of the bill rate. the standpoint
Mr. Allen said that employment in the Seventh District continued to be less vigorous than in the nation as a whole. Three cities were classified downward in May by the Bureau of Employment Security, and in the four weeks ended May 28 new claims for unemployment compensation exceeded a year ago in each of the States of the District by a higher figure than the national average. Employers' reports to State agencies showed a majority looking toward a reduction in force or at least further cuts in hours. Home building had not shown the pickup in the District, or nationally, that had been hoped for earlier. In Chicago, housing starts were 21 per cent under the year-ago figure in May, and a recent survey disclosed the unfavorable factor that building costs were somewhat higher than last year. Department store sales in the District for the four weeks 6 were off 3 per cent from last year compared with a drop of ended June nation. Sears Roebuck's sales dropped below last year 1 per cent for the Their economist, however, reported in May for the first time this year. three weeks as favorable and indicated that the sales trend of the past in relation to sales. are "about right" inventories sales for the first five months Mr. Allen noted that automobile first five months of cent more than in the 2,660,031, or 12 per were however, was ten days of June, for the first daily sales rate 1959. The disappointing figure--somewhere 20,500 and 21,500--a to be between expected Sales should be 23,000 to 25,000 to 6 per cent over last year. from 1 down record and to whittle production schedules to support current accustomed to to become it would be necessary Probably inventories.
higher inventory figures, with so many car makers either producing or preparing to produce compact models in addition to their former lines. This might turn out to have been a transitional period if, as some felt, the manufacturers of so-called medium priced cars, while offering compacts plus the old lines in 1961, were ultimately to give up the old lines and confine themselves to compacts. Commercial and industrial loans at reporting banks in Chicago, after expanding sharply in the first three weeks of May, had now declined for three consecutive weeks, although only by $35 million. The major factor had been net loan liquidation by firms in the metals industries. Chicago central reserve city banks improved their basic reserve position by more than $100 million since May 18, but still showed a basic deficit of $165 million for the week of June 8. Although these banks sold a large volume of securities, a substantial deposit loss, mainly via Treasury calls, abosorbed some of the reserves provided by asset liqui dation. The improvement in basic position, plus continued availability made it possible for these banks to curtail their use of Federal funds, fact, none of the six largest Chicago banks of the discount window. In Bank during the reserve period ended June 1, borrowed from the Reserve borrowing in the first full week event. Total Seventh District a notable for less than 13 per cent only $51 million and accounted of June averaged of the System total, the lowest share since late January. to have been more Allen said, there seemed In summary, Mr. past three weeks. He had business news in the unfavorable than favorable
not concluded that a general downturn had begun, but it appeared that the sluggishness which had characterized many lines of business activity through the current year would continue for some months to come. There fore, the trend of monetary policy, including reduction of the discount rate, appeared to be justified. He would not urge further easing at this time, but if the Board of Governors considered this an appropriate occasion to add to vault cash reserves or to move toward equalization of central reserve city and reserve city bank reserve requirements, he would not feel that such action should be criticized or that its effects would be harmful. Mr. Deming reported that the economic picture in the Ninth District had shown no appreciable change in the past three weeks. The main point he wanted to make, however, was that the banking picture also showed no change. The banks were not any easier than three weeks ago, as a matter of fact, they did not seem to be any easier than three months ago, perhaps even a little tighter. Mr. Deming said that he found Mr. Mills' statement this morning most interesting. He was in general agreement with Mr. Mills' broad conclusion and with his admonition to approach the present situation cautiously. However, he saw the banking picture as being somewhat tighter than did Mr. Mills, and therefore he would be a bit less cautious. Ninth District developments and the national Against the background of today, he concluded that picture, as presented economic and financial there was no particular danger in moving toward an easier position- -moving
modestly, probing, but nevertheless moving. However, while there might be no particular danger from a broad economic standpoint, there were obvious technical difficulties--particularly the short-term interest rate picture--that attended a movement, however cautious, toward more ease. Assuming that the reserve projections were reasonably accurate, Mr. Deming felt it would be feasible to let market factors do much of the System's work in providing more ease in the next couple of weeks. After that time more positive action might be required, and he concurred in the suggestion that action by way of releasing additional vault cash for reserve credit might be considered. While he had no particular enthusiasm for reducing the differential between reserve requirements at central reserve and reserve city banks at this time, because it seemed to him that the reserve city banks needed more relief than those in New York he would not object to such action. Something must be done or Chicago, in this area at some time within the next couple of years, and this might could be taken with the least difficulty. be one of the times when action reported that employment in the Twelfth District Mr. Mangels which in turn had shown little little change in May from April, showed improved somewhat in May, with change from March. Steel production against 70.8 per cent in April, at 72.6 per cent of capacity operations a marked decline to first week in June indicated but estimates for the the Northwest the lumber areas of capacity. In the 67 per cent of and production. At with declining orders situation was unsatisfactory,
the May 24 Committee meeting he reported that some mills had closed down; now about one-third of the plywood producing capacity in Oregon and Washington had been shut down, and the mills still operating were on a three- or four-day week basis. Construction was down about per cent in April, with residential and nonresidential construction both below the March and the year-ago levels. For the first half of May, automobile sales in California were 14 per cent below the first half of April. Department store sales showed practically no change from a year ago. Turning to the agricultural situation, Mr. Mangels commented on union picketing of tree-fruit areas in California. In the past two weeks the estimated loss amounted to $300,000, and the potential loss was high as $40 million. It was hoped generally that the State estimated as not allow the picketing to jeopardize the public interest authorities would in the supplies of tree fruits. extent of a substantial reduction to the some frost damage to area crops. Northwest a cold spell had caused In the said, District bank loans couple of weeks, Mr. Mangels In the past were down about week while demand deposits about $50 million per increased by bankers to credit was reported The demand for million per week. $100 tight position, but were said to be in a rather be heavy, and the banks Although purchases were quite nominal. the Reserve Bank borrowings from in the past week, the aggregated $2.8 billion of Federal funds and sales of $24 million. with net sales balanced out, about transactions
The over-all situation, Mr. Mangels said, still appeared to be fairly good, but there were certainly no clear indications of an upward trend. Comments by bankers and businessmen reflecting some concern about business prospects for the remainder of the year continued to be heard. Although the directive was amended at the May 24 Committee meeting to call for supplying reserves needed for moderate bank credit expansion, that expansion had not yet been accomplished, the funds supplied apparently having been used primarily to reduce Reserve Bank borrowings rather than to increase investments and loans. Under these circumstances, Mr. Mangels said that he would use as a goal free reserves somewhere between $100 and $200 million. He regarded the discount rate and the directive as satisfactory. Mr. Irons said that Eleventh District conditions were generally satisfactory, with the sideways trend prevailing that had existed for some time. Most areas were at or near their highs, not showing a great deal of added strength or, on the other hand, any particular tendency to weakness. If there was any bias directionally in the Eleventh District, slightly upward. Retail trade had improved a bit from a it probably was rather unfavorable level in May, and construction was up. The agri was favorable and promising, and employment was probably cultural situation was no change in the petroleum situation rising about seasonally. There of any real significance. showed little change, Mr. Irons The District banking picture heavily from the Reserve Bank, but said. The banks were not borrowing
they continued to use Federal funds, although to a somewhat lesser extent than earlier. The District was not contributing to the decline in bill rates because the city banks had few bills or certificates in their portfolios; they were reluctant to sell long-term Governments and take the loss involved. A week ago, total bill holdings of 39 weekly reporting banks were only about $30 million. Borrowings from the Reserve Bank would be higher if the Bank was not following the principles of Regulation A in respect to continuous borrowing. If those principles were disregarded, the Reserve Bank could quickly get an increase in borrowings of $50 to banks were firm, yet the banks The reserve positions of the $75 million. reported that they were meeting essential credit requirements. Mr. Irons expressed the view that this was a period when the term "watchful waiting," as used by Mr. Thomas in the economic presentation, appropriate. He was not pessimistic about the economic was quite thought it would be a mistake to attempt aggressive situation, and he he would like to see policy easing of the credit situation. Accordingly, to force funds into the status quo, with no attempts held in about the change in bill rates that He was concerned about the substantial market. had taken place. he spoke in support of the May 24 meeting, Mr. Irons recalled, At Since that time, however, the System a change in vault cash provisions. market and the in the of securities substantial purchases had made rather prefer to main he would not reduced. Therefore, rate had been discount action to reduce vault cash or action on and not take the status quo, tain
the differential between reserve requirements of central reserve city and reserve city banks. In that way the System would be able to move, either moderately or sharply if necessary, one way or the other. He felt that the possibility of favorable and strengthening economic conditions should not be disregarded or discounted too heavily. In his opinion, the Committee, under prevailing conditions, should avoid a tendency toward deciding at each meeting to pump more reserves into the market. Instead, it seemed better to take a breathing spell for the next three weeks, to maintain the status quo, and to watch the situation closely. Mr. Erickson reported that in the First District there was still a generally high level of economic activity although, as in other districts, some segments of the economy were performing better than others. The New England industrial production index from February through April was in the range of 117 to 118. Nonagricultural employment was up, than for the nation as a whole. Some industries, however, slightly more as a year ago. The strike at the Bethlehem were not in as good a position had now gone on for 20 weeks, and a United Aircraft strike, Steel shipyards ago, affected 30,000 workers. One more community which began two weeks as an area of substantial unemployment. the District had been classified in a trend in that he had reported previously Mr. Erickson recalled trend. However, April District counter to the national construction in the which was a record from April 1959, down 40 per cent was a poor month, figure on the cumulative of 1958. Accordingly, 72 per cent ahead month, of this year was first four months District for the in the construction
down more than for the nation as a whole, although residential con struction was better than the national picture. Department store sales were still good; through June 4 they were up 3 per cent from last year. The gain in personal income also was better than for the nation, and the figures on business loans, measured either for the past four weeks or from the first of the year, also were better. In the past three weeks, District banks were net purchasers of Federal funds to the extent of $800,000,000. The use of the discount window was relatively small in total dollar amount, but many country banks were using the window. Their deposits were down and loan demands up, and relatively few of the banks had much in the way of bills to sell. Mr. Erickson expressed agreement with those who had suggested that during the next three weeks a policy of watchful waiting would be He would recommend no change in the directive, the discount in order. to the Desk, and he would maintain the status rate, or the instructions As to vault cash, he agreed with the analysis quo as nearly as possible. do anything for the next few weeks, presented by Mr. Deming. He would not the System had to supply reserves later on, but if there was a time when additional vault cash to some consideration to releasing he would give at present on the reserve requirements He would make no move reserves. of central reserve city banks. recommended no with those who had Szymczak expressed agreement Mr. and he felt that the System The time was one for re-evaluation, change. He would favor only sparingly. the supply of reserves should add to
maintaining a very modest amount of free reserves. Eventually, he would consider the advisability of changing the percentage of vault cash permitted to be counted as required reserves. Mr. Balderston said that he found himself in agreement with many of those who had spoken. While member banks had reduced their indebtedness to the Federal Reserve Banks, he noted that many banks were still borrowing Federal funds and therefore must feel under such constraint as debt imposed. He did not disregard the fact that the puzzling decline in the active money supply was offset, at least in part, by an increase in total liquid assets and an increase in the rate of turnover of deposits. However, he could not understand fully the reasons underlying the increase the beginning of this year, because the enthusiasm to in turnover since conserve cash had been with corporate treasurers for a long time. One might have expected that efficiency in the use of cash would improve but the developments since the turn of the year were difficult gradually, to understand. said, that the legitimate financing It might be, Mr. Balderston met largely by internal funds, but he was needs of business were being to be studied over the next the central question not sure. Therefore, banks were in such a tight two or three weeks was whether the commercial and whether the failure legitimate borrowing was inhibited, position that upward was retarding the growth sought of the active money supply to move know the answer to that question, he by the System. Since he did not
subscribed to what several others had said about maintaining the status quo until the visibility was more clear. Chairman Martin said that perhaps he was getting a little too complacent. However, it was his feeling that Federal Reserve policy was behaving well at the present time. Give or take a few weeks, he thought that the System had been right on the ball in attuning itself to the economy and to the problem of the money supply. It is not possible to force the money supply, he noted. He had expressed on several occasions his lack of understanding about the money supply, and he still had that lack of understanding. Nevertheless, it seemed to him that the System was doing surprisingly well at the present. In essence, he would agree with Mr. Mills' comments, as modified by those of Mr. Deming, and he would likewise agree generally with all of the comments that had been made with respect to marking time, watchful waiting, and being cautious. System could be too precise, much as that He did not believe that the a pendulum that swings for it is dealing with might be desired, and this must be recognized. continually were on the side of he believed all the odds Chairman Martin said in increasing the money be as helpful as possible reserves to supplying if the System forced To use golf terminoligy, without forcing. supply, The System must follow slice or get in the rough. too hard it would let market forces as possible and simple a way in as easy and through would be surprised one probably were done, out. If that play themselves in line with the economy. supply would develop at how well the money
The month of July, the Chairman noted, would probably be the month of doldrums this year. There were signs that August might look a little better than had been anticipated some time ago. If there should be a fall revival, the System had acted at the right time, because it was not able to move in either direction. However, in view of the present overcapacity and underemployment, he felt that the System could afford to make errors on the side of ease during a period of this kind. All of the odds seemed to be with the System in moving in that direction, although he would not want to do so aggressively. As to vault cash and reserve requirements of central reserve city banks, it probably would be necessary to relate the problem to the needs for reserves. In the next couple of weeks, for example, it appeared that there was going to be a relatively be a tighter period, and the Treasury would easy period. Then there would at the end of June. There might be some opportunity for be in the market consider the reserve problem in the interim, but such consider the Board to ation would have to be related to the problem of the Treasury. Martin then said that the consensus at this meeting Chairman a clear majority in favor of making favored marking time, with apparently errors on the side of ease. Rouse with a request for Chairman turned to Mr. At this point the problems the latter could foresee. comment on any Rouse noted that request, Mr. response to this made in In comments would be a cash 15 bills there of July to the refunding in addition require additional which would $3 billion of approximately financing
reserves on the payment date. Then there would be the need for currency over the July 4 week end. The Treasury was due to pay out a lot of money on June 22; about one-half of the $4 billion of tax anticipation bills presumably would be used to pay taxes and the balance would be paid out in cash. Therefore, there would be a need for investors to reinvest these funds, which probably would have some impact on the bill rate. Mr. Rouse also made a supplemental report on the advance refunding of the 2-1/2s of 1961, to which he had referred earlier in the meeting. Based on reports from New York this morning and subscriptions reported by other Reserve Banks through yesterday, it appeared that subscriptions for the 3-3/4 per cent notes of 1964 amounted to about $2.6 billion, and might billion. On the other hand, New York subscriptions for even reach $3-1/2 the 3-7/8 per cent bonds of 1968 totaled only $126 million and subscriptions to $73 million through yesterday afternoon, at other Reserve Banks amounted a total of only about $200 million. making that this report was more encouraging Chairman Martin commented the prospect last week. than if there was no objection the policy The Chairman then stated that would stand as change and the consensus would be renewed without directive he had indicated earlier. a footnote on the would like to add commented that he Mr. Hayes to short-term not refer specifically he said, did The Chairman, consensus. the table, he (Mr. Hayes) to the discussion around interest rates. Listening
noted that a large number of those who spoke had expressed concern about the rapid decline in market rates and about forcing them down any further. Chairman Martin said that this comment was quite appropriate. He added that he did not know, however, whether anything could be done about the matter, and Mr. Hayes said that he did not know either. Mr. Rouse commented on the 1-1/4 per cent rate differential in favor of United Kingdom bills, after forward exchange cover, that existed before the auction yesterday and said that money was beginning to move to that market. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Com mittee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering sustainable growth in and employment by providing reserves needed for economic activity credit expansion, and (c) to the practical adminis moderate bank that the aggregate amount of tration of the Account; provided securities held in the System Account (including commitments for of securities for the Account) at the close the purchase or sale than special short-term certificates of of this date, other to time for the temporary accom indebtedness purchased from time modation of the Treasury, shall not be increased or decreased by more than $1 billion; direct from the Treasury for the account (2) To purchase Bank of New York (with discretion, in of the Federal Reserve issue participations to one it seems desirable, to cases where of special short-term Banks) such amounts or more Federal Reserve
certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. There had been distributed to the Committee copies of a memorandum from Mr. Rouse dated June 10, 1960, transmitting a memorandum of the same date from Mr. Larkin, Assistant Vice President of the Federal Reserve Bank of New York, concerning System Open Market Account transactions in one-year Treasury bills of July 15, 1960, under the authorization given by the Committee on April 12, 1960, and renewed at the two subsequent Committee meetings, to acquire up to $150 million of such bills either by outright purchase or by swapping other bills. Mr. Larkin's memorandum showed that $6.4 million of these bills had been acquired since the meeting on May 24, a total of $97.9 million acquired under all by outright purchase, making and total System holdings of $111.3 million. the Committee authorization suggestions in the light of Mr. There being no comments or the authorization be renewed Martin suggested that Larkin's report, Chairman at which time the matter the next Committee meeting, until the date of would be discussed further. it was agreed to renew Thereupon, until 12, 1960, authorization the April meeting of the Committee, Mr. the next "no" insofar as the Robertson voting related to "swap" trans authorization actions.
After discussion, it was agreed that the next meeting of the Federal Open Market Committee would be held on Wednesday, July 6, 1960, rather than on Tuesday, July 5. The meeting then adjourned. Secretary
Also: Record of Policy Actions