July 26, 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, July 26, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Messrs. 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. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Hexter, Assistant General Counsel Mr. Mr. Thomas, Economist Brandt, Eastburn, Hostetler, Marget, Messrs. and Tow, Associate Economists System Open Market Account Mr. Rouse, Manager, to the Board of Governors Mr. Molony, Assistant Division of Research and Mr. Koch, Adviser, Board of Governors Statistics, the Chairman, Board Knipe, Consultant to Mr. of Governors Government Finance Section, Mr. Yager, Economist, Statistics, Board of Research and Division of Governors Jones, and Einzig, Vice Messrs. Ellis, Baughman, Federal Reserve Banks of Presidents of the Louis, and San Francisco, Chicago, St. Boston, respectively
Mr. Garvy, Adviser, Federal Reserve Bank of New York Messrs. Parsons and Coldwell, Directors of Research at the Federal Reserve Banks of Minneapolis and Dallas, respectively Mr. MacDonald, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Holmes, 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 Committee held on July 6, 1960, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period July 6 through July 20, 1960, and a supplementary report covering the period July 21 through July 25, 1960. Copies of both reports have been placed in the files of the Committee. With further reference to developments since the Committee meeting on July 6, 1960, Mr. Rouse made the following comments: In the period since the last meeting of the Federal Open Market Committee, the money market has reflected about the same over-all atmosphere .,; in other recent periods despite the higher free reserves. If anything, the money market has been a bit tighter due largely to the impact of Treasury borrowing operations with resulting churning and dislocations which created pressures centering on the New York City banks. The New York banks took sizable amounts of both the new tax anticipation bills and the new one-year bills during the period and were called upon to finance a substantial portion of the enlarged bill holdings of securities dealers. Although bill rates fluctuated Government the period, the swings were less extreme than widely during early in the period to expectations of previously, relating of discount for the two special bill auctions but higher rates in the past week moving up as the dealers found difficulty in swollen portfolios. In the last day or two the reducing their have been able to move bills and yesterday's auction dealers went quite well, the average rates being 2.40 and 2.70 per cent, respectively, for 3 and 6-month bills.
Market expectations have leaned toward easier money or at least no higher interest rates. The figure of $210 million free reserves for the statement week ended July 13 inspired considerable talk of a sharp shift in credit policy toward more ease and some speculative activity developed. With the publication of the lower average of $93 million free reserves for the week ended July 20, the market seemed to place less emphasis on policy change. Nevertheless, prices of intermediate and long-term issues continued to move up, with gains in various issues running to more than a point. The strength in the long-term area has continued despite growing expectations of an advance refunding in the area of the 2-1/2 per cent optional or "tap" issues. Several members of the Committee have been especially interested in the trend of the total money supply. It is encouraging to see that so far in July required reserves, total reserves, and "non-borrowed" reserves have all increased, suggesting that possibly a modest growth of the money supply is taking place. According to the statement issued yesterday afternoon, the Treasury has made public its plan to do its August refunding through a cash offering. In addition to the $9.6 billion of Treasury notes maturing August 15, 1960, $800 million of Federal National Mortgage Association notes maturing August 23 will be refunded. However, as against this aggregate of $10.4 billion maturing issues, the Treasury will only borrow about $9 billion, relying on its unusually large cash balances for the remainder. The exact terms of the offering will be announced on Thursday, with the subscription books opening next week. The cash refunding technique is a new departure and, as the Committee is aware, arrangements are being made to permit the roll-over of the $5.5 billion of maturing August notes in the System Account. The arrangement will be that full allotment will be made on all subscriptions from States, political subdivisions, or instrumen talities thereof, public pension and retirement and other public funds, international organizations in which the United States holds membership, foreign central banks and foreign states, Government investment accounts, and the Federal Reserve Banks. The maturing notes will be accepted at par in payment for the new securities allotted. This will be consistent with the understanding reached with the Treasury in May when a cash refunding was considered. Applying the full amount of the about $1.4 billion to the amounts remaining after paydown of in full should put the new issues allotting the above holders in a very favorable position marketwise. The market is expecting will consist of an 11-1/2 month certificate and that the offering year area. If that is the case, the a bond, perhaps in the 7-10 the System Account subscription to the Manager plans to limit certificate.
Finally, I should like to call your attention to the fact that in addition to the $79.5 million Treasury bills purchased in the market yesterday, as reported in paragraph three of the supplementary report, the Account also purchased $500,000 from a foreign account for cash. This purchase was included in the total purchases set forth in the written report but was omitted in the more detailed description of yesterday's operations. Thereupon, upon motion duly made and seconded and by unanimous vote, the open market transactions during the period July 6 through July 25, 1960, were approved, ratified, and confirmed. Supplementing the staff memorandum distributed under date of July 22, 1960, Mr. Koch made the following statement with respect to economic developments and related matters: At the last meeting of this Committee, I concentrated on recent economic developments. Since only limited new informa tion has become available over the past three weeks, and since numerous questions have been raised about the current inventory and unemployment situations, I shall say a bit more than usual about these matters today and only touch base briefly on the new information. economic situation, it looks to me a As for the current little weaker today than it did three weeks ago, although part can probably be attributed to an inade of this seeming weakness quate discounting of the summer doldrums. Economic activity level, but with sizable amounts of unutilized continues at a high and without exhibiting any significant plant capacity and labor, upward thrust. production index of weakness, our industrial As for evidences 1957 average, as com be 109 per cent of the in June turned out to and 111 per cent in January. The pared with 110 per cent in May higher and may be a bit lower. is not likely to be any July figure about which I shall rate of unemployment, The seasonally adjusted 5.5 per cent in June, up from more to say later, rose to have a year ago. No signifi in May and from 5.0 per cent 4.9 per cent in July on the to be taking place seems likely cant improvement insurance. New on claims for unemployment basis of weekly data to a new low further in June goods fell off orders for durable backlog for these goods year, and the unfilled order for the recession low. Liabilities level near the 1958 declined to a very sharply last month, and of business failures increased
stock prices have declined since early June. Several of these signs of current weakness are components of the leading indi cator series but the significance of short-run movements in these series for current cycle analysis is by no means clear. Looking at the brighter aspects of the current economic scene, the consumer continues to make good news. Retail sales in June approached the April record level, and sales for the second quarter as a whole were 3 per cent above the previous record level reached in the first quarter of this year as well as in the second quarter a year ago. Department store sales in July appear to have increased somewhat further. The nation's personal income increased again in June to a record seasonally adjusted annual rate of $406 billion, and income receipts correlate closely with personal consumption expenditures. Housing starts apparently ceased their decline in the second quarter, and applications to the FHA for mortgage insurance, and to the VA for appraisals of new homes, both barometers of consumer spending on housing, in creased in June. Also, net exports continue strong, and State and local as well as Federal government expenditures are stable or rising. Turning now to the special problems I have chosen for some what lengthier discussion, in the case of inventories our staff feels that although they are ample, they are not generally high in relation to sales unless one assumes the imminence of recession. When one looks at inventory/sales ratios for particular industries, he finds them high only for industries producing durable industrial materials like metals, lumber, stone, clay, and glass, and for auto dealers and other retail outlets for durable goods. In most of these areas, output of the product concerned has been curtailed substantially since the beginning of the year in an effort to correct the inventory situation. In judging the appropriateness of the current level of in ventories, one has to take account of the fact that there are many differences between the current economic situation and that prevailing in the recent past, say in late 1956 and early situation is much easier the supply and delivery 1957. Thus, prices have not been increasing; the cost of now; industrial borrowing has been higher; and techniques have been flowering which permit the economizing of inventories. Under these and with dampened sales and price prospects, there circumstances inventories, and businesses been little incentive to expand has have been pursuing a cautious policy. part of the recent rise in view of this caution, some In involuntary, and in can no doubt be considered inventories development in itself has that sense, excessive, but this
induced efforts to curb such accumulation. The seasonally adjusted monthly rate of accumulation of all durable goods inventories at manufacturers, for example, was reduced from almost $700 million in January to an average of less than $200 million in April and May. Since the end of May, steel consumption has apparently been well above steel output and auto sales have remained favorable, suggesting that whatever excess in current inventories exists in these lines is likely to be dealt with successfully. As for unemployment, the sharp jump in the unemployment rate in June to 5.5 per cent occurred despite an accompanying rise in total employment. This June development empahsizes the fact that a continuing high level of unemployment for this phase of the business cycle is one of the most worrisome aspects of the current economic situation. As a matter of fact, when one looks at a chart of the rate of unemployment over the past decade, it is not difficult to see in the configuration a striking step-up effect, with a somewhat higher rate of unemployment occurring in the prosperous phase of each of the last three business cycles. Turning back to the June figures, perhaps half or more of the one million increase in the unemployed can be explained by the usual seasonal influx of students seeking employment. This was larger than usual for two reasons. First, the year's influx which the survey was taken occurred somewhat later than week in consequently found more teenagers out of school and normal and it also reflected a longer-run upward looking for work. Second, which is not adequately taken trend in the teenage population of in the seasonal adjustment factors. account taking these considerations into account, But even after than seasonal rise in adult unemploy there remained a greater of adult unemployment is per ment in June. The current level It reflects both the persons higher than in 1957. haps 600,000 in the labor force and number of middle-aged women growth in the in manufacturing, mining, construction, lower employment levels and transportation. even if less significant note, On a somewhat more pleasant, their seasonal high in rates usually reach total unemployment low is reached month until the seasonal and then decline each June were to be the next four months If changes over in October. unemployment would factors, total only by seasonal influenced June to 3.1 million in million persons in decline from 4.4 of course, affect the seasonally This decline would not, October. rate of unemployment. adjusted
Since this is my last substitute appearance before this Committee for the present, let me indulge in a concluding personal comment on the relevance of current economic develop ments for monetary policy. Assuming the evidence that is accumulating is not solely due to the summer doldrums, we may be facing another period of limited economic growth. In such a situation, a further easing of monetary policy would seem to hold little hazard. There may be more question, however, as to how much a further easing in monetary policy in itself would contribute to a speeding up of growth. Staff memoranda on the outlook for member bank reserve positions and on the outlook for Treasury cash requirements had been distributed under date of July 22, 1960. With further reference to the current financial situation, Mr. Thomas presented the following statement: In financial markets during July, the most striking develop ments have been a further decline in long-term interest rates drop in stock prices. Credit demands are not along with a sharp particularly vigorous and may have slackened somewhat. Whether these movements are indicative of the true state of the underlying situation or merely the views or uncertainties that exist economic of market participants remains to be seen. The in the minds gives some basis for the conclusion review of economic developments real and not imaginary influences. that the changes reflect in stock prices in the past two weeks has so far The decline weeks of this year, when the drop been the largest since the early extended over a longer period. from a higher level and started the low level reached early in averages are again close to Price March. Volume of trading has also declined from the fairly high and in June when prices were rising, levels reached in late May in July. These movements in activity often occurs but some drop a growing realization that as the result of can be explained with stock not increased commensurately profits have corporate little prospect for enough in recent years and have prices returns at current prices. increase to provide adequate Treasury bonds, which declined sharply Yields on long-term lower than at and are now further this month June, have fallen in have declined only Corporate bond yields any time since 1958. issues have State and local government and those on moderately, volume of new issues reflecting the recent large continued firm,
and the increase in dealer inventories. The calendar for new issues, however, indicates some seasonal falling off in the weeks ahead and dealers seem content with their holdings. Yields on medium-term Treasury securities have declined below those on long-term issues and are likewise at the lowest levels since late 1958. This may reflect the prospect that the Treasury might reduce the supply of such issues by advance refunding or at least will not have to increase the supply as it did in the past year or more. Treasury bill rates, which declined sharply in June, have been steady or higher this month, particularly in the longer term issues. This change in trend reflects in part additions to the supply of longer-term bills by offerings in July. It may also reflect the effect of an increase in dealer holdings of the longer term issues of bills to a relatively high level. Banks also have increased their bill holdings in the past three weeks. Thus market absorption of the longer bills is yet to come. Results of the Government's budget for the fiscal year just ending and prospects for the year beginning indicate that the dramatic shift from large deficit to moderate surplus has probably been completed. Indications are that the cash surplus for fiscal year 1961, though somewhat larger than that for the past ficcal year, will be no greater than for the current calendar yearbetween $2.5 and $3 billion. Seasonal borrowings needed in the last half of this calendar year, however, are much less than those for the same period last year, largely because of the build up in the Treasury cash balance to an exceptionally high level at the end of June. The Treasury is in a position to retire debt on balance in August. With the present state of the market, it could also effect an advance refunding operation into long term securities sometime soon without exceeding the interest rate ceiling. credit continues to show little tendency to expand. Bank the first half of this year now reveals that The record for of all commercial banks, which total loans and investments than usual in the first quarter of this year, declined more about in accord with the usual increased in the second quarter showed a larger decrease in the seasonal pattern. City banks larger increase in the second quarter first quarter and also a leading cities, according to estimated than did banks outside at the banks outside leading data for the latter. In fact, decline in total loans to have been a net cities there seems the first half of the year as a whole, and investments for increased about as usual, increase is usual; loans whereas some their holdings of U. S. these banks continued to reduce but quarter. City banks securities in the second Government along with their loans their holdings of Governments, increased declines in both after showing marked in the second quarter, during the first quarter.
The position of banks outside the cities is also indicated by the sustained level of borrowings at Reserve Banks by country member banks during the first half of the year, in contrast to the sharp reduction in the borrowings of city banks during the period. There are also some regional differences in this respect that may be significant. Explanation for these differences between city and other banks and their significance is not clear. They may relate to the change in the Treasury position. When the Treasury has a deficit and is a substantial net borrower, funds seem to move from the large cities to smaller places through out the country. A Treasury surplus, however, accompanied by debt retirement and particularly by a build-up in the Treasury cash balance, tends to draw funds from all areas. Perhaps as the Treasury reduces its balance and needs to borrow during the months ahead, the funds will become more widely distributed away from financial centers. Partial data for city banks for the first three weeks of July show a marked increase in total loans and investments, reflecting bank purchases of the new Treasury bill offerings. Loans on Government securities also increased as banks helped to finance the larger additions to dealer holdings. Business loans, in contrast, declined, as did real estate and other loans. These types of loans all increased during the same period of however, indicate that some decrease 1959. Data for other years, in business loans is customary for the period, though perhaps not as large as that occurring this year. Loans to finance companies changed little in the three weeks, in contrast to declines in other recent years except 1959. Deposits at city banks, after increasing more than season ally in June, show no pronounced trend during the first three weeks of July. Daily average data for all member banks show a further increase, seasonally adjusted, in the first half of July over June. U. S. Government deposits increased further at the time of the cash financing but are now in the process of declining It is still too early to determine whether these rather sharply. Treasury payments are going to enlarge private deposits or to provide funds to be used to reduce loans or purchase Government securities from banks. Banks have needed additional reserves in July to meet the increase in required reserves related to Treasury financing, to prolonged than usual currency drain cover a larger and more an accelerated gold outflow. in the month, and to cover early These needs have been covered by an increase in the System port million. Most of these purchases were folio of about $400 made, however, at the beginning of the month, and later large
reserve needs were covered by the post-holiday return flow of currency and the mid-month float increase. There were some reductions in System holdings. The supplies and the needs did not mesh completely and many banks found it necessary to borrow at times from the Federal Reserve and to purchase Federal funds. The money market continued to have a feeling of pressure, not withstanding the maintenance of an average level of free reserves of close to $100 million or more. Seasonal factors will necessitate supplying rather sub stantial amounts of reserves during the next two statement weeks, in addition to those already provided by operations in the last few days. In the middle weeks of August reserves will become available from the usual float increase and from a reduction in Treasury tax and loan accounts which will result in a decline in required reserves. At the end of August and early in September reserve needs will increase and again be followed by a temporary increase in reserve availability in mid-September and a drain at the end of the month. In summary, reserve demands, though erratic, will mount on balance during the remainder of the year. The projections allow for a gold drain of about $100 million a month, presented which would build up to a substantial amount by the end of the year. They make no allowance, however, for any more than seasonal growth in the money supply. decisions will need to be made in A number of important the period ahead. One question to be faced is whether in should be made for greater reserves some allowance supplying growth in the money supply. In view of the than seasonal moderate pace of economic activity and the clear evidence of tendencies, not to mention lack of speculative or inflationary slackening, a strong case can be made the possibility of undue If credit demands more freely available. for making reserves a policy would probably result not expand accordingly, such do that result should not be interest rate declines, but in further feared under the circumstances. how these reserve needs also has to be made as to Decision through open market operations be supplied--whether entirely will in reserve needs or whether to the weekly variations adjusted through release of vault reserves shall be made available some in reserve requirement percentages. cash, together with alterations to foster moderate credit may be desirable, in order It amount of free somewhat the average expansion, to increase reduce borrowings somewhat member banks to reserves and permit much as $200 million free reserves of as further. Perhaps is evidence of credit expansion. be appropriate until there would
In view of the wide spreads that have again developed between bill rates and the discount rate, which make banks more reluctant to borrow for temporary reserve adjustments, and particularly in view of the reduced liquidity position of banks which makes it difficult for them to obtain reserves by selling bills, consideration may also need to be given to a further reduction in the discount rate. One factor in the situation that has elicited some discussion and question is the renewed gold outflow. It is evidently due in some part to a movement of capital attracted by higher interest rates in other markets. It is doubtful that the movement for this reason alone will be sufficiently large to justify failure to adopt a monetary policy called for by domestic considerations. Such a decision would be appropriate only if a righter policy were essential to bring about more fundamental adjustments that may be needed to keep our international payments in balance. Under existing circumstances, it is doubtful that such a policy is needed or desirable. The adjustments that should be made lie mostly outside the financial area, they seem to be in process, and they will take a long time to complete. Mr. Marget presented the following statement with respect to the United States balance of payments: A week ago today there was a meeting of a group of technicians who assemble at fairly regular intervals for the purpose of forecasting probable developments in the U. S. balance of payments. This is the Balance of Payments Group Foreign Trade Council. The group is generally of the National very highly regarded, and I think rightly so, since it of standing, inside and includes virtually all the individuals outside Government circles, who are working continuously on the problem. All the more reason, however, for prefacing a of this group as to what is report on the current forecast to our balance of payments for the rest of likely to happen a report on how accurate their fore the calendar year with turned out to be in the recent past. casts have the forecasting record thing to be said about The first to be very accurate so hasn't turned out is that it really are concerned. This is not far as the concrete figures because there is for no other reason, said in criticism--if have done any better. group I know of who no other comparable therefore be rather I think, should The first conclusion, with respect to this business of forecasting one of humility
or "projecting," in the field of balance-of-payments projections, as in the field of economic forecasting generally. One does the best one can; but one retains, it is to be hoped, a saving sense of awareness that one might, after all, turn out to be wrong. The second comment to be made about the forecasting record is that, during the period to which I have reference, the forecasts erred almost invariably on the side of pessimism: that is, the balance of payments almost invariably turned out better than the forecast said it would. Specifically, for example: the forecast of the Group for the calendar year as I duly reported to this Committee at the time--was for a balance of payments deficit of $4.5 billion. Actually, as you know, it turned out to be around $3.8 billion. The third comment I should like to make about the forecasting record may throw some light on why, during this particular period, the errors seemed so consistently on the side of pessimism. My comment is simply this. Quite apart from differences in temperament and the kind of bias which may derive from nothing more basic than a general conviction that observers are likely to be less bitter in their comments if a pessimistic forecast goes wrong than they are likely to be if an optimistic forecast goes wrong, most "forecasts" and "projections" tend to assume that what has been happening ill continue to happen, simply because the factors that will make for change are not yet discernible. Thus, in calendar 1959, what was happening in the first part of the year was that our balance of payments was deteriorating: as you know, in the second quarter it reached a low of a of $5 billion, annual rate. Taking into account the deficit relatively better performance of the first quarter of last year, the projection of $4.5 billion for the calendar year 1959, as against the $3.4 billion deficit realized in calendar 1958, to a missing of the turn for the better which, really amounted strike created at the time, all the fog which the steel despite mid-year in 1959, while we were still we now see occurred around delayed statistics telling us that belatedly receiving the our balance-of-payments position was still deteriorating. course, by January of this This was no longer true, of of Payments Group made its first year, when the Balance At the time, one was a little projection for calendar 1960. amused by the air of precision which was given by the billion; but the figure for the projection--$2.9 announced was clear enough: around $3 billion, general order of magnitude as against the $3.8 billion deficit realized in calendar 1959 realized in calendar 1958, the and the $3.4 billion deficit
first of the big deficit years. The latest projection of the Group for calendar 1960 represents a further revision down ward of the expected deficit: it is now expected to be around $2.5 billion, instead of around $3 billion as forecast last January. It is interesting to observe--apropos, at least, of my comment on how projections in economics tend to assume that what has been happening will continue to happen--that this figure of $2.5 billion is just about the level, in terms of annual rate, at which our balance-of-payments deficit will probably turn out to have been running for the first half of the current calendar year. But it is much more interesting, I think, to ask just what part of the earlier projection went wrong. What was it that had not been adequately foreseen? Mainly, it would appear, the degree of improvement in our exports. The January forecast had, to be sure, assumed an appreciable rise in our exports above the $16.2 billion level realized in 1959, to a figure just over $18 billion. Actually, however, by April and May of this year our exports had reached a seasonally adjusted annual rate of around $19-1/2 billion. It will be interesting to see whether the new projection for 1960, at $18.8 billion (again it is easy to be amused at the degree of precision suggested by that decimal figure) will also turn out to have been on the somewhat pessimistic side, particularly in view of the replies to one of the questions circulated to National Foreign Trade Council members before meeting, according to which over a third of the respondents the had already revised upward their expectations reported that they exports in the course of the past with respect to their company's while fewer than one-tenth had revised their expec half year, tations downward. I think, about the perils of fore But I have said enough, in the field of balance-of-payments figures, casts and projections statistics, to make it clear as throughout the field of economic substitute a private guess as to the that I am not prepared to to be realized in 1960 for the actual magnitudes that are likely this able and extremely well-informed group collective guess of specialists. I do think that the record of adjust of expert we have had since the low our balance of payments that ment in last year--from a merchandise the second quarter of point in zero to the current annual rate of around $3.5 export surplus of optimism as to developments ground for a reasoned billion--is if the cyclical constellation near future, particularly in the continues to remain as between this country and abroad as position as it seems improvement of our trade favorable to the evidence. But in the to on the basis of present to be likely
end the basis for optimism here, as in any field involving economic policy, is not so much what the statistics of the moment happen to show as it is a belief in the efficacy of market processes in bringing about adjustment, provided that our policies are such as to favor, and not hinder, the working of those market processes. Danger comes when this proviso with respect to policy is forgotten. To judge by the degree of adjustment we have had thus far, the proviso has not yet been forgotten. But the adjustment itself is still very far from being complete. Mr. Hayes presented the following statement of his views on the business outlook and credit policy: This is unquestionably a period of low visibility with respect to the business outlook. While there has been little change in the statistical position of the economy in the last three weeks and business activity continues strong in most sectors, there has been a marked deterioration in business sentiment. This reflects such factors as the lag in new orders, the dwindling orders backlog, a considerable involuntary accumulation of inventories, and signs of a squeeze on profits--besides concern over domestic and international political develop ments. The steady 10-day decline in stock prices may be considered both a contributory cause and a reflection of this growing disappointment with business prospects. Purchases of final users actually increased from the first to the second quarter (according to the preliminary GNP estimate made by the Council of Economic Advisers). The trend of consumer buying is favorable but not exuberant. Construction may have bottomed out, and aggre gate Government expenditures are more likely to rise than to decline in the coming months. But despite these factors, and in view of the fact that the rate of inventory accumu lation will probably decline further, there seems to be less and less likelihood of a strong new forward surge in the economy. The prospect appears to be for an economy moving along on a high plateau, but with a considerable volume of unemployed human and physical resources. more encouragement to be found in bank credit There is suggest that our policy of relaxation statistics, which over the last six months is beginning to bear fruit. Although
the banks' liquidity is still very low and their loan-deposit ratios exceptionally high, bank borrowings have been sharply reduced and the banks are no longer being forced to liquidate Government security holdings rapidly in order to meet loan demands. Demand for business loans and for total loans has been running a little behind seasonal expectations; but total bank credit (loans and investments) showed a larger growth in the second quarter than in any recent year, whereas the comparison with earlier years was unfavorable in the two preceding quarters. As for the money supply, the rise in June was accomplished in spite of the fact that Government deposits remained at a very high level. The potential for a further money supply increase is strong as Government deposits are drawn down from present levels. Over the year ended June 30, the money supply would have shown virtually no decrease ha, it not been for a $2 billion rise in Government deposits. In contrast with the money supply itself, other nonbank liquid assets declined in May after increasing for many months. This, together with the possibility that the improved Federal budget may lead to further declines, suggests that we may not be able to rely in the future as much as we have in recent months on upward flexibility in the velocity of money, accompanied by an increase in the volume of money to permit rising over-all expenditures on goods substitutes, Under these circumstances it would become all and services. important to encourage a rise in bank credit and the more It is distinctly encouraging to note that the money supply. the last few weeks total reserves, nonborrowed reserves, during more than in the same and required reserves rose substantially other than 1959. And if free reserves period in recent years level, I would expect nonborrowed are kept around their present less in the first three weeks of August reserves to drop much than in recent years. to me that we are fully justified in maintaining It seems by free reserves of toward ease, symbolized a policy tilted on the side of ease million, with any errors $100 to $200 take into account the to the Manager to and with ample leeway way of expressing this objective feel of the market. Another to provide reserves a little be to instruct the Manager would advance of seasonal needs. in over the still considerable concern I feel very Although problem, I believe that this unsolved balance-of-payments than the mere flow of short-term problem runs much deeper and while I would to rate differentials; funds in response rates to still lover any forcing of interest hope to avoid
levels, in the final analysis we should give priority to the needs of the domestic economy. However, on neither domestic nor international grounds do I think it advisable to reduce the discount rate any further for the time being. An increased willingness and ability of the banks to lend represents our major goal, and this can be attained better through affecting their reserve position than by cutting the discount rate. The imminence of the Treasury's refunding announcement also points to the wisdom of deferring any consideration of a lower discount rate until the next meeting. The tight reserve position of country banks and the reduced liquidity of banks in general might appropriately be dealt with through a further release of vault cash and through a reduction in central reserve city requirements. By reducing the need for open market purchases, such measures might minimize downward pressure on bill rates. It might be well to announce in advance a schedule of reserve requirement changes to provide for seasonal expansion of credit in the autumn and to avoid any seeming change of policy in the midst of the Presidential campaign. I see no need to make any change in the directive at this time. also presented a statement, as follows, on the question Mr. Hayes other short-term securities in addition of open market operations in to bills: with a great deal of interest the staff analysis I read by several people, including 13 of the suggestion made of July Market Committee meeting, and myself, at the last Open subsequently distributed by elaborated upon in a memorandum authorize the Account York Bank, that the Committee the New in other short-term open market operations to conduct seems to me, however, to bills. It securities in addition that were not analysis answers questions that the staff a major proportion of open raised, for I do not suggest that during a given period in any market operations required other than bills. be conducted in securities substantial size assumes the the staff analysis apparently what Yet this is at several points been, as indicated to have proposal further indicated quite the analysis and as throughout of the conclusion on page 7, explicitly in the first sentence
which says that "Under existing circumstances System purchases of certificates or notes rather than bills to supply reserves for seasonal needs in any substantial amount would seem inadvisable." The staff analysis reviews many points about the long run, ultimate effects of large-scale purchases of securities other than bills. While I do not agree with many of those points, I do not propose to debate them here, first because they have been debated many times before, but most importantly because our suggestion was addressed not to the ultimate effects of large-scale operations in securities other than bills, but rather to immediate advantages to be gained through limited operations in such securities under certain kinds of conditions. Specifically, we had in mind that, as on many occasions in the past, there will be periods when the market supply of bills is temporarily scarce, and to supply all reserve needs at such times through purchases of bills would tend to drive bill rates sharply lower. We have in mind that if on such occasions there is available in the market a supply of other short-term securities--and this is often the case--it would seem to make good sense to avoid concentrating all our purchases in bills, and to purchase some amount of these other securities in addition to bills. there is no reason to assume that other short Furthermore, securities, which would be purchased in modest amounts term on such occasions, could not be sold in modest amounts on when we wished to absorb reserves and when other occasions showing a good demand for such issues, the market was in the early part of the year. They as is usually the case to run off in reasonable amounts at may also be allowed We do not have to roll over total holdings of maturity. more than we do Treasury bills. certificates or notes any in addition to run-offs of such securities, Moderate should be under appropriate conditions, outright sales quite in order. thus a modest one, and indeed fits Our suggestion is conclusion stated on page 8 well the language of the quite of securities other than the staff analysis: "Purchases of might be undertaken if bills to cover seasonal needs relatively moderate amounts and only purchases were made in stronger than usual and at times when bills were temporarily sold to absorb releases securities would be in case similar or at other times." Our in January and February of reserves staff analysis in the language of the suggestion also fits
the second part of paragraph 8 on page 6: "To be sure, it would be appropriate to conduct System operations in other securities so as to avoid adding to market distortions due to temporary influences. If operations in other securities than bills are conducted with this point in mind they need not be harmful and might be beneficial, but they would probably be relatively small and in any event should be reversed at times to avoid a gradual distortion of the portfolio." This, again, is what we have in mind. Mr. Johns made a statement substantially as follows: I am gratified to observe that in the week ended July 20 total reserves of member banks, on a seasonally adjusted basis, were $300 million more than in the five preceding weeks.1/ This increase put reserves for the moment back to the level where they were at the beginning of the year. This was, in my opinion, in accord with the action of the Committee on May 24 when the directive was changed to provide for "fostering sustainable growth in economic activity and employment by providing reserves needed for moderate bank credit expansion." I entertain the hope that this new level of reserves will not be permitted to fall off and that continued growth will be achieved. The trend of business and employment conditions is, and has been, I think, such that we have need of stimulative or, if you will, less restrictive monetary policy and policy action. In order to stimulate economic activity I think we need to increase reserves and the money supply. With supply, it appears that there was an respect to the money increase in June, but the figure at the end of June, about the figure of $139.5 billion billion, was well below $138 at the end of April and the end of March. It was also below billion of early in the year, and below the $141 the $140 billion of a year ago. In the period from last summer the money supply was declining at through March of this year a year. Since March, the decline a rate of about 2 per cent at a rate of about 3 per cent a year. has been desirable to increase reserves It seems to me especially with respect to near money in view of recent developments and or liquid assets. The amount of U. S. Government monies 1/ In deriving these figures, we used our own seasonal adjust ment; although it differs somewhat from those of the Board's staff and the Atlanta Bank, the differences are not significant.
securities maturing within one year, held by the public, which rose so rapidly during much of 1959, increased little after the beginning of this year, declined greatly in May, and, I expect, declined again in June. The public's holdings of total liquid assets, which increased rapidly from mid-1958 to mid-1959, have risen but moderately in 1960, and most recently have declined. In mid-August the Treasury has a $9.6 billion issue maturing, of which about $4.0 billion is held outside the Federal Reserve System and Government investment accounts. Expected lengthening of maturities of the Federal debt incident to this refunding would of course reduce further the public's holdings of close-money substitutes. Considering all this, it seems to me that proper economic stabilization policy calls for a somewhat greater supply of money than might otherwise be considered appropriate. The turnover of money, which increased so greatly in the first part of this year, now appears to be rising at a much slower rate, if at all. Possibly, it may be said that a decline in reserves and money was appropriate when near monies and velocity were increasing rapidly, but, if the growth of near monies and the increase in velocity have greatly slackened, it may be imperative that we strive to bring about growth of reserves and money. During the second quarter of 1960 the Federal Government operated at a cash surplus of about $4.4 billion. By contrast, in the April-June quarter of 1959, there was a cash deficit of about $0.4 billion. In view of the magnitude of this shift, which is a significant depressing factor on economic activity, it would seem to me appropriate that monetary policy actions be more expansionary than would otherwise be necessary. Interest rates on money market instruments have declined true, but this need not cause in recent months, it is sharply in view of the current lack of ebullience in the us concern decrease has probably reflected a business situation. The contraction in the demand for borrowed funds, chiefly by the monetary authorities not permitted Federal Government. Had the if they had increased the supply to contract, or, the money have fallen even interest rates might supply moderately, taking a position of I question the System's further. adjustment of market rates deliberately dampening the downward activity is not ebullient at a time when business of interest and total demands for credit are slackening. current levels of interest rates After all, the recent and low when viewed in perspective. Despite are not particularly quite high to borrowers. rates are still declines, interest
Current rates on long-term Government, corporate, and municipal bonds, as well as on mortgages, are higher than at any time between 1945 and 1959. The prime bank rate has not been changed from the peak rate of 5 per cent reached last fall. It seems to me that interest rates might well be permitted to adjust to an even lower level than has occurred up to now. Coming back to the increase of reserves which took place last week, I observe that it was similar to the increase which took place at the time of the Treasury financing in April. At that time the loss of total reserves which had occurred since January was largely restored, but attrition was subsequently resumed and continued until early July. I hope that now there will not be another such attrition, but rather some further increase. I hope we ill not let some preconceived notion of a level of member bank borrowing or of free reserves deter us from maintaining the level of total reserves which we have achieved or from continuing to increase reserves. The difficulty of getting and keeping an increase in reserves and money in recent months has been the greater, I think, because of a penalty discount rate. Since the cost of borrowing from us has been greater than the return on liquid short-term assets, banks have had a motive to avoid borrowing from us. Accordingly, borrowings from have continued to decline and this has been Reserve Banks an offset to our open market purchases. Even now we might somewhat arrest the decline of borrowing and enable further to increase reserves if we were to open market purchases the discount rate substantially, e.g., by one reduce percentage point, to 2-1/2 per cent. the discount rate, we can But if we do not reduce new reserve level and achieve a further still maintain our and money if we have the resolve to increase in reserves been about $400 million. do so. Borrowings have recently a figure which has to decline to $150 million, If they were minimum since the about the seemingly irreducible been about $250 million would open market purchases of accord, total reserves from declining be necessary to prevent that would probably increase further. Purchases beyond if such purchases are necessary and I propose that reserves, bank reserves they should an increase in total to maintain be made. and current business I believe that recent Not only do for monetary expansion, but employment conditions call and of reserves and money it may be that the failure I believe year may have a cumulative increase during the past to we are yet to feel in full. upon the economy which effect
There is opinion to the effect that monetary action may act with a lag of varying and uncertain length. While this idea may not be so well established or precise as to have great weight in our decisions, I think it needs to be borne in mind. Reserves and money have declined for a year. If there is anything to the lag idea, we may discover later that we have been more restrictive than we thought we were being or wanted to be. This, I think, furnishes a further consideration arguing for bringing about some monetary expansion. Certainly, I see no reason for any fear that the increase of reserves last week was too great or that moderate bank credit expansion, in accordance with the directive, should not continue to be our policy objective. Mr. Bryan presented substantially the following statement: The Sixth District is still operating at a high level of economic activity, but considerable diversity of movement is exhibited by various economic indicators, with few, if any, showing much strength in upward thrust. Borrowings from the Federal Reserve Bank remain disproportionately high, although commercial bank loans indicate a stable to declining trend, and bank investments are being rapidly liquidated. It can only be concluded that the banking situation in the District is far from easy. If there is banking ease anywhere in the country, the Sixth District is not the place. As for the national scene, it seems obvious that the economy is still operating on a high plateau and has thus far shown a remarkable facility for taking some massive adjustments in stride. It seems equally obvious that the economy is not currently in a boom-like phase of an expansion cycle. Indeed, we are bound to note that nearly all of our expanding statistical measures have in recent months been recording diminishing rates of change. Many recorded figures well below the peaks of the present others have below year-ago comparisons. We may note in one cycle or are or the other category: manufacturing employment, department bank debits, construction contracts, construction store sales, employment, money supply, average hours worked, industrial and, to the same tenor, we have production, new orders; as a per cent of the insured unemployment and unemployment labor force at levels that are substantially above a year ago. All of these figures, plus many others, add up to the the economy is presently underemployed, both conclusion that with respect to manpower and material; and, in recalling that is now old when measured by the present expansionary cycle
historical precedent, we must bear in mind, I think, the quite real possibility that the underemployment of manpower and material might get worse before it gets better. In my judgment, no dramatic measures of policy are now called for; and, in order to reduce the chances that dramatic policy measures might later on be required at some tragic point in time--say middle October--I believe, as has been my view at recent meetings, that we should steadfastly adhere to the intention expressed in our current, recently changed directive, wherein we recorded our considered intention of fostering: ". . . sustainable growth in economic activity and employment by providing reserves needed for moderate bank credit expansion. . ." That is what we have done in a modest way and that is what I believe we should continue to do. Now, since the resultant of Account actions and market factors is a reserve figure, I will try to state a figure that, with appropriate allowance for the practical administration of the Account, would seem to me--as of now but subject to modification as the meetings of the Committee roll around--a reasonable level of total reserves to aim for. This effort to state a figure will at least--or, rather, it would if the effort became general around the table--have the merit of assisting the Account Management in understanding verbally-expressed intentions of the Committee without the Account Management's presently necessary resort to exhausting exercises in intuition, revelation, and auto-suggestion. I start with a daily average of total reserves for June of $18,294 million (revised). Thus far in July we have attained a figure of approximately $18,511. Last year in daily average August the daily average of total reserves was $18,613, a million of reserves between present difference of roughly $100 levels of last year. I can see no reason in levels and August state of the economy and the present banking situ the present ation for our heading in this August for a daily average of less than the same figure last August, so that total reserves the first component of the target figure I would assume to be would be an addition of, roughly, $100 million of reasonable $18,511 million. present level of approximately reserves to our component for the secular we should have a Then, I believe say $47 million--at a 3 per cent expansion of the economy, annual rate. This brings me out with a reasonable daily average target of $18,658 million for August. and appreciation to the I wish to express congratulations recently-issued seasonal adjustment Board's staff for the will hereafter use the total reserves. Atlanta figures on
Board's figures rather than its own series. We are glad that, vhile there are some conceptual differences between the Atlanta series and the Board's series, the figure differences are essentially small and do not affect significantly any conclusions that might be made regarding the recent reserve situation. Mr. Bopp said there was little new to report from the Third District. Business activity continued much the same as it had been recently; one of the Reserve Bank directors characterized it as sluggish at a high level. Employment was looking a little better, but the unemployment picture still was not good. New claims for unemployment compensation were above 1959 and 1958, and continued claims were above 1959. So far as the banking situation was concerned, there had been some suggestion of slightly reduced pressure on reserve positions, and some evidence of a slow upswing in the total of loans and investments. However, Philadelphia banks were still under considerable pressure as to their basic reserve position. Mr. Bopp expressed the view that on balance there was less danger of a renewed burst of inflation than of continuation of the current lull or a turn downward. Therefore, he said, he would favor a slightly greater reserves. As to the discount rate, he rather wished the provision of System were operating under a procedure similar to that discussed by whereby the discount rate would be lower with Mr. Knipe in recent papers out the necessity of an overt move. Under existing procedures, however, he would go along with a reduction after the current Treasury financing He would not change the directive. was out of the way.
Mr. Fulton said there was little of a happy nature in the Fourth District that he could report. The expected increase in steel orders had not yet materialized, and the date when it might materialize was being pushed further ahead into the year. In fact, it appeared that the year might end before any real improvement actually got under way. Buying on the part of the auto industry had not made its appearance as yet. An increasing variety of quality steel was being shipped abroad, but on the other hand imports of the garden variety were still running at the rate of 4.5 to 5 million tons a year. The outlook for use of steel by the auto industry in 1961 was not too heartening on the basis of confidential estimates of production and in the light of the anticipated higher proportion of compact cars. Steel prices had begun to soften in terms of discounts to distributors and charges for extras being waived. One manufacturer of steel pipe had notified its customers that it would carry substantial inventories of all sizes and types and would promise delivery in four days. Wage costs in the steel industry were to go up 11 cents an hour in December, and probably there would be between 10 and so the effect on profits would be increase in prices at that time, no substantial. Mr. Fulton went on to say that shipments of the machine tool now in excess of the volume of new orders, which suggested industry were being taken by many of those who had contemplated that a new look was The stock market decline had had an effect plant and equipment expansion. on the decisions of businessmen, and there were indications that plant
and equipment expenditures were being postponed, or at least scaled down, in the light of adequate capacity at the present time. Mr. Fulton said that the unemployment situation in the District had worsened. Insured unemployment had increased sharply and contraseasonally in the past few weeks, while total employment had increased less than expected. Electric power output for industrial use had slipped further below a year ago. New car sales, which were running well earlier in the year, had continued to slip back in comparison with a year ago. Department store sales were well maintained, but sales of consumer durables were in the doldrums. Summarizing, Mr. Fulton said there seemed to be little about which to be heartened. In his view, there had been an actual deterioration in the economy that must be faced by the Open Market Committee. There expand the reserve base, and he felt that this seemed every reason to possible. In his opinion, the easing of should be done as quickly as should come more through reduction of reserve the banking situation bills in the open market because than through purchases of requirements be put on bill rates. Also, the of the pressure that would otherwise the less would be the prospect bank reserve positions were eased, sooner later in the year because of having of having to make massive moves of pressure on the to reducing the amount waited. He would be favorable quantity than the to them reserves in greater banks by making available to reduce it would be appropriate He thought had been providing. Desk rate and had with the bill was out of touch rate, which the discount
been for some time. This might also have a favorable effect on bringing down other money rates. Mr. Shepardson noted the comments that had been made about the low visibility at the present time. He suggested that this was inherent in the season of the year and that the situation was aggravated in an election year. Thus, the difficulty of trying to estimate what might happen in the future was compounded. Some factors admittedly were not too favorable, for example, the underemployment of both manpower and material, and everyone would like to see some improvement in that situation. Mr. Shepardson said he had been concerned over a period of time that when there was some easing of inflationary pressures and movements there had been a failure to obtain desirable corrections. However, in the present situation he felt that some corrections were being achieved. For instance, Mr. Fulton had mentioned certain unofficial price adjust there had not been much change in list prices, he (Mr. ments. While accounts of fringe adjustments in prices, Shepardson) had seen several to market forces of supply and he felt this indication of response and Thomas had mentioned adjustments in was constructive. Also, Mr. demand relationships, and this the stock market in terms of price-earnings run. Such factors tended to dampen might not be a bad thing in the long the foreseeable future. pressures in of further inflationary the prospect provide for some the System could properly it seemed to him that Thus, The question of the availability of reserves. growth in the further a matter of concern. was, of course, appropriate method most
As to the discount rate, Mr. Shepardson said it had been correctly stated that the rate was technically considerably out of line. However, it seemed to him that it would be well to defer any discount rate action until after the Treasury financing, at which time it might be desirable to consider a change. The directive seemed appropriate and he would not favor any change in it. Mr. Robertson said it seemed to him that in the light of the economic picture System policy had been about right recently. However, since it seemed fairly evident that inflationary tendencies were dormant for the most part, he agreed with those who suggested that the System could afford to move further in the direction of ease without untoward results. He thought it advisable to do so through open market operations, of other System actions to provide reserves, to a point in the absence system as a whole could show a free reserve position where the banking neighborhood of $200 or even $250 million during the next three in the be done on a gradual basis and not week period. He hoped that this would and filling without rhyme or way that would seem to indicate backing in a was moving steadily toward an easier, but reason; rather that the System would seem to be in line with the moderately easier position. This would not need to be and therefore the directive outstanding directive, changed. should be that serious consideration Mr. Robertson suggested so that it would be more nearly moving the discount rate down given to of reluctance on any sense and thus preclude with the bill rate, in line
the part of banks in borrowing to meet loan demands. Since the discount rate was out of line with other market rates, there was an encouragement for banks to meet their needs through other means, with less desirable effects than would flow from use of the discount mechanism. Then too, if the economy, which now seemed to be moving on a high plateau, should begin to move forward in the fall on a basis which indicated a resumption of inflationary tendencies, the System should have the discount rate in such a position at that time as to permit upward adjustments to be made not only rapidly but, if necessary, in quite large jumps so as to be effective in resisting inflationary pressures. In other words, this would seem to be a time in which the System could get into a position from which it could effectively use adjustments of the discount rate. However, since Treasury financing plans involved an announcement on Thursday of this week, with payment on August 15, it was unlikely that any discount rate then. Accordingly, it would appear that the action could be taken before after the financing had been completed and move System should wait until on the rate at the appropriate time thereafter. believed the Committee could take reasonable Mr. Mills said he actions in recent weeks. Those satisfaction from the results of policy been through the open market and, such being the actions had, of course, market banks. Those effects on the money had focused their case, they the picture of the central particularly evident in effects had been substantially their who had been able to expand reserve city banks,
holdings of United States Government securities and to increase their loans to a degree, while at the same time experiencing an increase in their deposits. An important collateral effect of recent policy actions had been to bring back as participants in the Government securities market a considerable number of banks who, due to tightness of their positions, previously had been foreclosed from that type of participation. Now they were again factors in the market, and they were a stimulating and stabilizing market influence at a time when such influences were needed. The question that arose, Mr. Mills said, was whether, in moving toward a further injection of reserves into the commercial banking system, it would be inadvisable to be too aggressive in moving in that direction through the open market. The question was whether, as had happened in the past, the injection of reserves through open market purchases at a time like this would not reflect itself too largely in an interest rate reduction rather than in an expansion of bank loans. With apparently sliding off from earlier levels, and with banks the economy continuing to have high loan-deposit ratios and obviously having become until they have worked themselves into a position of reluctant lenders investments in Government securities improved liquidity both by adding was quite probable that further curtailing loan commitments, it and stimulating injections of reserves through the open market could, drive short-term interest rates down to an unrealistically undesirably,
low level. This would perhaps hold back the adjustment which would come through more moderate actions and which, in due course, might be expected to work into a lower rate structure in the long end of the market and bring about whatever stimulus might come from long-term borrowing at lover rates. Question had been raised, Mr. Mills noted, whether the actions taken to this point in supplying reserves could be expected to permeate from the money market banks into the reserve city and country bank categories and serve as a stimulus to the expansion of loan and investment positions. There was persuasive logic in the point that had been raised that when the Treasury comes into a surplus position, this has a centrifugal influence on the money supply and tends to draw funds out remote areas to the central areas. This logic could be of the more light of recent experience, to conditions where, with extended, in the there is a tendency toward reduction a slackening of business activity, more important industrial and commercial of borrowings on the part of the their loans--and there was If those entities should reduce entities. the effect in the occurring--very probably that this was some indication be to draw funds out of been in the past, would near future, as it had banks. If there the money market of the country into more remote areas the a permeation of one could not expect that reasoning and was substance to by open market operations brought about a movement of deposits reserves and bank areas in the same way into the reserve city and country to flower out
that beneficial effects were induced by actions in past weeks to inject reserves into the money market, with effective results on money market banks, the application of that same kind of reasoning would give at least a foundation for arguing that action in supplying reserves to reserve city and country banks should preferably take the form of some type of adjustment in their reserve requirements. Mr. Leedy said there had been one important local development in the Tenth District in the past three weeks; namely, settlement of the paralyzing construction strike in the Kansas City metropolitan area. As he had previously reported, about 17,000 workers were involved. During total District residential and non the first five months of the year, awards were down about 20 per cent from last year, residential construction strike. However, public works and of this having been due to the some of about 50 per cent over construction showed an increase public utility the same period last year. wheat harvest had about on to say that the winter Mr. Leedy went was estimated to be forecast earlier, production completed. As been deposits had been year. Country bank greater than last about 20 per cent banks for the Figures of the country by the harvest. affected materially deposits at weekly reporting not yet available, but interbank period were 13, and were about weeks ended July during the two rose $130 million banks demands had in June. Loan Wednesday figure the peak million above $100 consumer loans estate and weeks; real the past three moderate in remained
showed little change, and a slight increase in business loans was counter balanced by a reduction in loans to nonbank financial institutions. Borrowings of weekly reporting member banks had declined sharply with the pickup in their deposits and had reached the lowest level on a reporting date since January. Department store sales during the four weeks ended July 16 showed a 3 per cent increase, perhaps reflecting the harvest in some part, but sales since the first of the year continued under the same period last year, the cumulative figure being 1 per cent. Mr. Leedy said he assumed that for the period between now and the next meeting the so-called even-keel policy would be required in view of the Treasury financing. However, he subscribed to the view that, to the extent it could be done, additional reserves should be injected into In view of the fact that free reserves had reached the banking system. $200 million, he would surmise that some figure in that a level around regarded as maintenance of an even keel. He subscribed to area might be Mills had said about the matter of injecting reserves through what Mr. opinion, this should be reserve requirements. In his an adjustment of adjustment in the along with some further given serious consideration, it seemed to him that no change use of vault cash. For the time being, would assume that unless for, although he rate was called in the discount want later to give some change the System would the picture should downward adjustment. to a further consideration store sales District department that Seventh Mr. Allen reported than a year ago, 16 were 2 per cent higher four weeks ended July in the
compared with one per cent for the nation. This showing was regarded as favorable because sales of last year were at a high level and thus far the summer had been relatively cool. The higher temperatures of the past week were said to have provided a strong stimulus to sales. Prospects for crop production were not as favorable as in other recent years because of cold, wet weather. The only exception was Indiana, where the corn prospects were excellent. On the other hand, cash receipts for farm marketings in May were substantially higher than last year and brought total cash receipts for the first five months to slightly above last year's figures in each State in the District. New claims for unemployment compensation in the six weeks ended July 9 were 48 per cent above last year in Seventh District States, compared with 24 per cent for the nation. With respect to automobiles, Mr. Allen said that a few assembly lines had stopped the 1960 model run. Most lines would be down by August 15, of 1961 models would start shortly thereafter. On July 10, and production 1,056,000 cars, not far below the record high in June. inventories were cars and, based on sales clean up the stocks of 1960 The drive now was to hoped that inventories on in Detroit, it was and production forecasts 255,000 in 1960 models to 780,000 cars, divided October 1 would be down in new models. and 525,000 loans in the rates on home mortgage Allen commented that Mr. Two of the easing in June. signs of to show definite market began Chicago their rate schedules reductions in 1/4 point lenders reported largest
toward the end of the month. Loans equal to 80 per cent of appraised value were being offered at 6 per cent, 75 per cent loans at 5-3/4 per cent, and 50 to 60 per cent loans at 5-1/2 per cent. The most active demands, however, were in the low down payment categories. The trend toward lower rates might act as a stimulus to home build ing, Mr. Allen noted. For the first five months of 1960, home building permits were below last year by 21 per cent in the Chicago area, 23 per cent in Detroit, 5 per cent in Indianapolis, and 32 per cent in Des Moines. Milwaukee reported a 6 per cent increase. Business loans had again shown three consecutive weeks of decline in the weekly reporting banks. Chicago banks reported a net decline of $46 million by business borrowers in the period ended last Wednesday, the biggest single week's drop since the fall of 1958. The large banks as a group continued to show a substantial basic deficit position, but the group figures are heavily affected by a large increase of bill holdings by one dealer bank. he would not favor changing either Mr. Allen said that although time, he would suggest that rate or the directive at this the discount the next three weeks trend in an easier direction, with monetary policy in area of $200 to $300 million. for net free reserves in the the goal the Ninth District added contrasting trends in Mr. Deming said that in relation to a average picture, particularly up to a somwhat better year ago and in relation to the country as a whole. In both cases, however,
these developments must be viewed as favorable only when qualified by recognition that the District entered a weakened economic situation about this time last year and that the rate of expansion nationally had weakened somewhat. The District had about caught up with the nation, partly because the national picture was not as exuberant, and showed gains against last year partly because last year in the District was not so good. At the same time, the favorable developments should not be mini mized, Mr. Deming said. As of July 1, the official estimates for the 1960 District small grain crop were excellent. Much of the winter wheat had since been harvested or was in process of being harvested. Spring wheat production might be cut back by a developing drouthy situation since July 1, but total wheat production should be at near-record levels in most wheat crop on July 1 was estimated at 3 per cent areas. The 1960 District above that of last year, with oats and flax production up an estimated 48 along with favorable livestock marketings this per cent. This situation, might soon, if it had not already, push farm income to the summer and fall, statistics. This would be a stimulus plus side compared with the year-ago fact, some of the economic data just becoming to business generally. In showed modest improvement. Department available for June and early July in the four weeks ended July 9, store sales in Minneapolis, for example, period a year earlier. For the were up 6 per cent from the comparable a plus 2 per cent. States, the figure was United
District employment in June also showed a healthy improvement, and the number of insured unemployed dropped from 35,134 in May to 25,527 in June. This latter comparison represented a greater improvement from May to June than for the country as a whole. Personal income in Minnesota during June showed a 4.4 per cent gain from a year earlier, and farm income in May was only about 5 per cent less than a year ago. In previous months of 1960 the decline from year-ago levels was substantially larger, ranging up to a minus 15 per cent in February. The major depressing developments of recent weeks were associated with iron ore mining. A Reserve Bank visitor who had just returned from extensive calling in the iron range reported greater pessimism than he had encountered in a long time, and the reasons were not hard to find. Ore shipments in June were smaller than in May for the first time since prewar there was a strike. They were likely to be down days, except for 1952 when there were 45 ore carriers laid up, out of in July and August. Presently, a total fleet of 232. to be getting somewhat easier banking picture seemed The District at last. The seasonal deposit upswing finally seemed to be developing, fallen fairly sharply, and loan-deposit from the Reserve Bank had borrowing quite a welcome development. This was some slight improvement. ratios showed to him that the Deming said it seemed credit policy, Mr. Turning to he felt that the a bit too long. Thus, had been with us summer doldrums
weight of evidence argued for further ease in monetary policy. Perhaps this might be accomplished, as had been suggested, by attempting to anticipate some of the seasonal needs and supplying reserves more freely through open market operations. Perhaps it would be well to prepare to take some action via further release of vault cash. In any event, he would like to see further ease--accomplished undramatically but accomplished effectively. As to the discount rate, Mr. Deming stated that he had mixed feel ings. It was as much as, or more, out of touch with the bill rate now than when action last was taen to reduce it. He felt the current rate did exercise a more restrictive effect than he would like, and he could argue that it should be reduced now. At the same time, with the Treasury finane ing coming up, he had some question about action now, and on balance he believed he would prefer to wait for a bit. He saw no reason to change the directive at this time. Mr. Mangels said there was little evidence of an increase in business activity in the past three weeks, while there Twelfth District were some signs of a slackening pace in several areas. The unemployment not very good, with unemployment at the highest level since picture was into the labor large influx of teenagers was due to the 1958. Perhaps this force and the situation was temporary, but in June unemployment figures per cent in Oregon, and 7.8 7 per cent in cent in California, were 5.6 per
Washington. Lumber production was down further, and steel production was at the rate of 57 per cent of capacity in the second week of July, although one mill in Utah was operating at 95 per cent. Turning to the banking picture, Mr. Mangels reported that loans declined in the three-week period ended July 13 and that, while the total decline was not large, there were decreases in all categories except for modest increases in agricultural loans, loans to sales finance companies, and loans to Government securities dealers. Holdings of securities increased about $166 million. Bank deposits had gone up for seasonal also had been some unexpected increases because of the reasons, and there were redeemed at maturity. For run-off of bills held by customers which about $39 million. The expected the District, savings deposits increased did not materialize to deposits in California apparently loss of savings it might. For the first six days of the extent that the bankers thought half as large as those about $200 million, approximately July, losses were were net sellers District banks same period in January. suffered in the borrowings at the amount, while funds in rather substantial of Federal the average for the two weeks ended July 19 Reserve Bank were nominal, under $2 million per day. being indicated, he could others had that for reasons Mr. Mangels said period. Free ease in the coming of further along with extension go million would be or even $300 million, $250 million, reserves of $200 rate should not in the discount felt that a change to him. He acceptable
be made at the present time because of the Treasury financing, but that at the first clear period consideration should be given to a reduction in the rate. He regarded the directive as satisfactory. Mr. Irons said there had been little change in the Eleventh Dis trict during the past three weeks. The pattern was not too dissimilar from the national pattern, except that the factors affecting the District might be somewhat different from those affecting other parts of the country. In general, economic activity was moving along sideways at a high level. There was, of course, some question as to how long a side ways movement might prevail, but at the moment most of the major economic indicators except those directly associated with petroleum were within a couple of percentage points, plus or minus, from record levels. evidence of less restraint on the position of Mr. Irons reported District banks than had prevailed a few periods back. During the most recent period there was a decrease in loans, an increase of holdings of in bank credit. Borrowings from securities, and a net increase Government $25 million, a bit lower than Bank had been averaging about the Reserve by large city banks was con been. The use of Federal funds they had than it had been running earlier. siderably lower part of banks to reluctance on the he did not detect Mr. Irons said needing to borrow were borrowing, window. The country banks use the discount banks that were using Some large city he had heard of no reluctance. and
the Federal funds market might be doing so to protect their position at the discount window. Mr. Irons went on to say that the psychology and attitude of bankers and businessmen with whom he had had contact recently was certainly not one of pessimism. It was a sort of acceptance of an attitude that during times like these, with all of the various factors that are at play, there is a period of watchful waiting and cautiousness. The general feeling was that there would be a slight increase over the months ahead, perhaps in the fourth quarter. There was no attitude of rank optimism or real pessimism. Turning to policy, Mr. Irons said he came out a little differently those who had spoken thus far. He was quite satisfied with in degree than during the past three weeks. The Desk had made open market operations a moderate and cautious approach. some reserves available and had followed during this period of prefer to continue in that manner He would much outlook insofar as forecasting was concerned. The visibility unsatisfactory when visibility was low he of many factors, and at a time was low because direction. Instead, he would inclined to take off in either would not be had been followed, permitting a to follow the basic policy that prefer increase in bank reserves. bank credit and a moderate increase in moderate no change in the discount ahead, he would favor For the period immediately free reserves of of going to When one talked or in the directive. rate was more than to him (Mr. Irons) million, that or even $300 $200 million
a moderate and cautious approach, and he would rather stay around $100 million. He would prefer to permit funds to move into reserves cautiously and moderately, while meeting seasonal requirements. While errors might be on the side of ease, he certainly would avoid anything in the nature of aggressiveness. If free reserves should be moved up to $250 million or this would be taken by the market as a clear $300 million, he felt that change in policy. In summary, Mr. Irons said his thinking was in terms of a cautious reserve pressures, and that he would avoid being aggressive. relaxation of He would meet seasonal requirements, and if it seemed desirable to err a little on the side of ease he would be agreeable to that. However, the be in the picture during the next three weeks; August 15 Treasury would was attempting a new form settlement date, and the Treasury would be the being, he would be careful and financing. Therefore, for the time of needs, if necessary, would be To go a little beyond seasonal cautious. that could be construed as a but he would not favor anything all right, basic change in policy. had been used around noted that several expressions Mr. Erickson and that Mr. Ellis, at to describe the current situation the table Bank, had used the directors of the Boston meeting of the yesterday's the situation in the First uphill" in referring to phrase "coasting were still many favorable to say that there Erickson went on District. Mr. index, which New England production picture. The in the District factors
held at 117 in February, March, and April, rose to 119 in May, while every week this year electric power production had been ahead of last year, when allowance was made for weeks with holidays. Department store sales in June were 4 per cent above last year; in the four weeks ended July 16, they were 5 per cent ahead. New car registrations in May were 18 per cent ahead of last year. As to nonagricultural employment, the monthly year-to-year comparison had narrowed since the first of this year, but the situation was still fairly close to the national picture. Insured unemployment in July was higher than last year, but not as high as nationally. Construction contracts through May were lower than nationally, but residential construction was better than nationally. Turning to the June survey of mutual savings banks, Mr. Erickson said that year-to-year comparisons of deposits are made monthly. The year-to-year improvement reached a high point of 6.5 per cent in February this year, when it stood until May of and the figure then decreased was 4.5 per cent. While the at 4.4 per cent. In June the improvement figure for this one month might not be too significant, it did mark the first turnaround. District banks were Mr. Erickson said, the past three weeks, In loans were higher, both at of Federal funds. Commercial net purchasers Boston and country banks, than at the first of the year. The loan-deposit at the first of the year had risen from 60 per cent ratio for Boston banks
to 63 per cent in July, and for country banks the ratio had risen from 56 to 58 per cent. In July to date, District banks had used the discount window less than in other months, the average being less than $10 million. It would have been even lower if there had not been one or two days when Boston banks could not get Federal funds. In this connection, Mr. Erickson said he had found the same sort of situation as Mr. Irons, that is, no real reluctance to come to the discount window if the banks needed funds. Businessmen also appeared to have about the same point of view as described by Mr. Irons; all seemed to feel that the fourth quarter of the year was going to be on the upside. As to policy, Mr. Erickson said that he considered the directive entirely satisfactory. In view of the fact that the Treasury was in the market, he would favor no change in the discount rate at this time. By the time of the next meeting, however, the situation might be more favor He felt that the Desk should supply reserves able to a change in the rate. the Desk should,not be too aggressive. for seasonal requirements, but that around $200 million. Mr. Erickson He would favor free reserves somewhere necessary to provide reserves that, since it would be expressed the hope available through adjustment some part could be made later in the year, a change in the reserve to vault cash and through of provisions relating reserve city banks. applicable to central requirements Committee meeting him that at the it seemed to Balderston said Mr. represented merely the summer slackness 6 the question was whether on July
a pause to refresh the economy or fatigue of greater duration. The answer now seemed more clear, despite one's fear of deception on account of the seasonal summer doldrums. In his view the decline that one might expect at this phase of the cycle was now evident and should be countered actively by such means as were available to the System. There were fundamental domestic trends affecting the state of business which might have an effect for a long time to come. First, there was the price decline stimulated by excess productive capacity. It would tend to bring about continued re duction in the rate of inventory building, which he suspected by this time had dwindled to zero. And very soon there might be an actual decline in inventories, if that had not occurred already. Then there was the profit squeeze stemming from inability to pass cost advances along to the customer. This, he found, was worrying not only chemical and other manufacturers but The profit squeeze would induce more labor saving, even utility executives. thus aggravating the unemployment problem. In the face of this situation, which he now believed to be long lasting and not seasonal, Mr. Balderston said he would favor the following remove the word "moderate" from clause (b) of actions. First, he would draft of policy record entry for the policy directive. In the preliminary the July 6 meeting of the Committee, the Board's Annual Report covering a phrase he did not time", and this was found the phrase "marking he had believe that the Committee's record. He did not like to see in the like waiting for the time. This sounded policy was one of marking
inevitable, and it was not something he would relish. Since he did not believe that the present posture of the Committee was one of trying to bring about a moderate increase in bank reserves, but rather that the Committee had been struggling to do better, he would eliminate the word "moderate" from clause (b) of the directive. Second, he would adopt a free reserve target of $250 million, as suggested by some others. Third, he would reduce the discount rate to 3 per cent. In this connection, he raised the question how long after the close of the books next week on the pending Treasury financing it would be necessary for the System to wait if it desired to take action on the discount rate. He did not think anyone would be injured by a decrease in the discount rate as they would by an increase. He then asked Mr. Rouse whether dealers might be likely to receive a windfall if a change in the discount rate were made within a week or so after the closing of the books. Mr. Rouse replied that he thought this would depend on the terms on which the dealers would be allowed to subscribe. It could be that what had referred to might happen. Ordinarily, one would think Mr. Balderston in terms of a little time after the delivery date, in this case August 15, on the discount rate. before making a move he did not propose to cover in his comments Chairan Martin said covered. He wished, however, to make the the ground that had already been been needed and going on had long the adjustents now observation that revival of business and any if there was to be any real were necessary
real improvement in prospect. Price adjustments, and adjustments such as now taking place in business thinking and speculative psychology, are always painful, he noted. For example, reference had been made at this meeting to the price-earnings ratios of common stocks. It was fine to say that the adjustment was a good thing, but anybody who was caught in those stocks certainly felt terrible today. From personal experience, he could say that it is a painful period when adjustments long deferred come about. However, these adjustments were going on in an orderly way. It might be that the summer doldrums had been exceeded but, particularly in view of the long-deferred adjustments, he was by no means convinced that the situation was serious. The Chairman said he was inclined somewhat toward the approach of Mr. Irons, although not to the same degree. This approach suggested that the System be cautious in what it was doing and not show any sign of panic. The discount rate had been out of touch with market rates, technically, for some time; the situation was not new at this meeting. The Treasury right on top of us, a situation which always creates a financing was now Assuming, hypothetically, that it was possible to problem for the System. having to go through the twelve Federal change the discount rate without and if it had been decided to act Banks and the Board of Governors, Reserve morning. However, it would the proper time would be tomorrow on the rate, tomorrow, even if it wanted to be feasible for the System to act by not of thing, the Chairman in this type is caught constantly act. The System
noted, and one should not worry about it unduly. Since it was general policy to take into account Treasury operations, obviously the even-keel approach was the correct one at the present time. The Chairman noted that, as Mr. Leedy brought out, free reserves had already been up to a $200 million average. If they ran somewhere in that area, he continued, no one would think that the even keel was being changed substantially. It appeared that the Committee unanimously wanted to trend toward an easier reserve position, Chairman Martin commented, whether by Mr. Bryan's formula or some other formula. He went on to suggest supplying reserves in an orderly way and maintaining a posture of ease, adding that when the appropriate time came he felt that the System should not hesitate to lower the discount rate. cautioned about projecting too far into the future Chairman Martin and about being influenced unduly by such things as conversations. However, that projections were involved and that one must be careful, after noting was going to adjust the discount the view that if the System he expressed better to do so before September. rate, it might be requirements, saying first then commented on reserve The Chairman Thus far, he had study the problem actively. that he hoped all would he did not think there was any confused. As to vault cash, found himself in terms of reserves. area would do action in that of measuring what real way requirements of equalize the reserve a mandate to the Board was under Also,
central reserve and reserve city banks, and this was complicated by the fact that at the moment, at least, the greater pressure appeared to be in the reserve city and country bank sector. If it was simply a matter of trying to supply reserves to the economy, one would look there first. The problem, the Chairman said, was not easy to handle on a piece meal basis. A schedule of actions over a period of time would be desirable, and the Board had spent some time on this, but the problem was not easy. The Board had not come up with anything as yet that it would want to try to sell. A general impression outside the System seemed to be that this was something that could be turned on and off like a faucet, but it was not that simple a problem. The Board must continue to wrestle with it, and he did not know whether it would be possible to work out a package operation. Chairman Martin said he did not think he would want to change the that was something for the Committee directive at this meeting, although to continue trend in the As he saw it, the Committee ought to consider. direction in which it had been moving. Its posture ought to be clear, and present situation continued, the the first opportunity, assuming the at That would be several weeks away, System should lower the discount rate. and he did not think greater in the interim, visibility might become the of fact, he did not done now. As a matter should be anything precipitate standpoint. The earliest be feasible from a practical think action would the Treasury announced would be when be Thursday, which date would possible
its financing, and action would not be appropriate at that particular juncture. The payment date would be August 15, he noted, and there would be a meeting of the Open Market Committee the following day. These were dangerous things to talk about in a large group, but at the August 16 meeting there would be an opportunity to consider whether a move on the discount rate would seem desirable. In the meantime, the Chairman said, it was his view that the System should be supplying reserves at every opportunity. Certainly, the odds were in favor of trending toward ease. There was nothing to lose, and the trend could be reversed quickly. If there should be a big upswing in the fall, the problem could be met when it came. The Chairman said that he felt the Committee was remarkably unanimous in its thinking this morning. He then referred again to the matter of the directive and asked Mr. Balderston whether the latter had any further comments. Mr. Balderston said he now thought that perhaps the next meeting an appropriate time to change the directive. He did not believe would be that switching from net borrowed reserves of $200 million to free reserves represented a moderate increase. However, he was sensitive of $200 million to the fact that this was a week of Treasury financing. Chairman Martin commented that this was one of the things in his a reason for continuing the present directive. mind as he had now concluded that a Balderston then repeated that Mr. might be more appropriate. at the next meeting change in the directive
Accordingly, the Chairman stated that if there was no objection the directive would be renewed without change. He went on to say that it seemed difficult to provide much more guidance for the Desk on the volume of reserves than was available from the go-around at this meeting. He then inquired whether there were other comments regarding the discussion, and no disposition toward further discussion was indicated. 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 Committee: (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 securi ties, 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 employment by providing reserves needed economic activity and expansion, and (c) to the practical for moderate bank credit administration of the Account; provided that the aggregate held in the System Account (including amount of securities or sale of securities for the commitments for the purchase of this date, other than special short Account) at the close purchased from time to time term certificates of indebtedness Treasury, shall not be accommodation of the for the temporary or decreased by more than $1 billion. increased from the Treasury for the account (2) To purchase direct York (with discretion, in the Federal Reserve Bank of New of participations to one it seems desirable, to issue cases where such amounts of special short or more Federal Reserve Banks) as may be necessary from time term certificates of indebtedness for the temporary accommodation of the Treasury; to time held at amount of such certificates that the total provided Banks shall not exceed by the Federal Reserve any one time in the aggregate $500 million.
It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, August 16, 1960, and that the succeeding meeting would be scheduled for Tuesday, September 13, 1960. The meeting then adjourned. Assistant Secretary
Also: Record of Policy Actions