August 16, 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, August 16, 1960, at 10:00 a.m. PRESENT: Mr. Balderston, presiding Mr. Bopp Mr. Bryan Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Mr. Allen, Alternate for Mr. Fulton Messrs. Irons, Leach, and Mangels, Alternate Members of the Federal Open Market Committee Johns, and Deming, Presidents Messrs. Erickson, Banks of Boston, St. of the Federal Reserve Louis, and Minneapolis, respectively Mr. Young, Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Hostetler, Marget, Noyes, Messrs. Brandt, and Tow, Associate Economists Open Market Account Rouse, Manager, System Mr. the Board of Governors Assistant to Mr. Molony, Finance Section, Keir, Chief, Government Mr. Statistics, Board of Research and Division of Governors Chairman, Board to the Mr. Knipe, Consultant of Governors and Einzig, Vice Ratchford, Mitchell, Messrs. Banks of the Federal Reserve Presidents of Chicago, and San Francisco, Richmond, respectively Federal Vice President, Gaines, Assistant Mr. Reserve Bank of New York Federal Reserve Economic Adviser, Mr. Anderson, Bank of Philadelphia
Mr. Coldell, Director of Research, Federal Reserve Bank of Dallas Mr. Stone, Manager, Securities Department, and Assistant Secretary, Federal Reserve Bank of New York Mr. Bowsher, Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, Mr. Balderston was elected to preside at this meeting in the absence of the Chairman and Vice Chairman. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on July 26, 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 26 through August 10, 1960, and supplementary report covering the period August 11 through August 15, 1960. Copies of both reports have been placed in the files of the Committee. of the written reports, Mr. Rouse made the In supplementation following comments: rate at five of the Reserve The lowering of the discount and Friday had only a moderate impact on Banks last Thursday was also the case after securities, as the market for Treasury in Regulation D. To be sure, the Board announced the changes higher on were marked notes and bonds prices of Government These movements, however, and bill rates moved lower. Friday on Thursday when note and just about offset the developments rates had risen. On Monday bond prices had declined and bill in prices of notes and no very significant changes there were higher. In yesterday's rates again moved bonds, but bill of 2.278 and 2.621 per cent average issuing rates auction,
were established for the new threeand six-month bills, and 16 basis points higher, respectively, than a week ago. As the written reports point out, this development is mainly a reflection of the heavy inventories of Government securi ties--particularly the longer-dated bills--that Government securities dealers had built up partly in anticipation of the large reinvestment demand expected to stem from the Treasury's August financing operation. The first part of this payoff took place only yesterday, and the remainder will occur on August 23 when the FNMA issue matures. Nevertheless, dealers have been disappointed in the volume of demand they have seen in the market and have had some difficulties and expense in financing their positions. The split discount rate was, of course, reflected in the Federal funds market, which, for all practicable purposes, has been two markets since last Friday. The demand for funds in districts where the discount rate has remained unchanged has been apparently great enough to keep the supply of excess reserves in such districts from spilling over into 3 per cent districts in any volume. With the New York banks under pressure and unwilling to pay 3-1/2 per cent for funds, borrowing at the New York Bank jumped from $17 million on Thursday night to $340 million at the close of business yesterday. Banks in other 3 per cent districts may also have shifted from the funds market to the discount window to meet their reserve needs. There are certain problems that loom on the horizon to which I should like to call the Committee's attention. The first has to do with the changes in the amount of vault cash that can be counted for reserve purposes on August 25 and September 1. While this will bring about a more or less instantaneous change in bank reserve statistics, it is by no means clear how soon this will be reflected in the actual of funds in the money market. As you will recall, availability uncertainty that surrounded there was a period of considerable and that experience would sug the last change in Regulation D, more than usual caution statistics be treated with gest that special attention be paid to the actual developments and that money market over the period ahead. in the Committee's attention to I should like to call the Also, the spread sheet that accompanies the supplementary report a very substantial bulge to $920 million in which indicates the week ending September position in banks' free reserve the This bulge can of a rise in float. 21, mainly in reflection as our operations are factor as far represent a complicating
concerned inasmuch as a further estimate now suggests a drop to under $500 million the following week. I hope that we can deal with this mainly through repurchase agree ments, since at the present time the Account holds only $51 million of the September 15 bills. Yesterday was the payment date for the Treasury's August financing operations. While there was little doubt about the success of this operation from the financial standpoint, a careful analysis will have to be undertaken before any final judgment can be made on the relative advantages or disadvantages of the cash refinancing technique that was used for the first time. There were a good number of complaints from large corpo rations and other investors who held the maturing issue and who were unable to continue their investment as they Treasury has received quite a number of desired. The objecting letters, most of which have been answered directly, and in this same connection we understand they are planning to publish the text of a reply made to the Iowa Bankers Association. A number of these complaints with the 100 per cent allotment to the Federal have to do and to foreign central banks and foreign Reserve System also a number of problems in governments. There were may be necessary to take a making allotments, and it of subscribers who were entitled second look at the list to full allotment on the certificates. to report that dealer holdings of Finally, I wish about twice as large as Treasury securities are currently think of as their usual position, what we have come to to the dealer list. The even allowing for additions securities. A considerable weighting is in short-term no way of measuring it--of longer amount--although we have other investment dealers, are in the hands of Treasuries been sizable amounts of all high-grade and there have corporates--bought for municipals, and bonds--Treasuries, including their houses and others, cash by stock exchange the excess dealer holdings, These purchases, like customers. on the conviction speculation based represent a large-scale still easier money. will continue to promote that the System although without quite reminiscent of 1958, It is somewhat "rights" provided. & Co. and Garvin, Bantel the flavor that
The swollen positions of the dealers are, as suggested in the supplementary report, probably mainly responsible for the tightness in the money market. Thereupon, upon motion duly made and seconded, the open market transactions during the period July 26 through August 15, 1960, were approved, ratified, and confirmed. Mr. Noyes presented substantially the following statement with respect to the economic situation, the credit situation, and the money supply: The information which has become available since the last meeting of the Committee reflects very little change in the over-all economic situation. Sometimes little over-all change is the result of fairly sub stantial counterbalancing movements in various sectors, as it was in the summer of 1957, but in the present instance, the over-all sideways movement reflects very little change in any of the important components. Little or no change in industrial production, construction activity, employment, retail trade, and prices--and, for the period as a whole, in the stock market--all support the generalization that economic activity has been going forward at a rate which is about the same as that which prevailed at the end of the second quarter. this sort of sideways movement has favorable Whether to a large extent on the or unfavorable overtones depends Those who anticipated the expectations which preceded it. beginnings of a strong upward push in the second half, spurred by an increasing volume of investment expenditures, find the past six weeks disappointing. On could certainly that many lead who were concerned other hand, analysts the down may feel reassured, both ing indicators were pointing and by upward revisions course of actual developments by the figures for June. in a number of preliminary
Perhaps the most disappointing information which has become available in recent weeks relates to the second-quarter performance of corporate profits. Not only is our current estimate down from the very high year-ago level and from the first quarter, but the decline appears to have been quite general, rather than concentrated, as might have been expected, in metal and metal-processing industries. This dis appointing profits picture will undoubtedly dampen the enthusiasm of many companies for capital expansion in the period ahead. On the positive side, final takings appear to be holding up very well, and the general observations which Mr. Koch made at the last meeting regarding the inventory situation seem to be equally pertinent today. The available data do not suggest excessive inventory accumulation at any stage in the process of manufacturing and distribution, and in some lines--especially steelinventories have been reduced further. An important element in the continuation of the relatively high level of activity which has prevailed has been the maintenance of consumer demand. There have been some doubts expressed as to the likelihood that consumer purchases will continue at this level, and these doubts have been supported to some extent by recently published reports of two surveys taken around midyear. Both the University of Michigan and the National Industrial Conference Board survey results were generally interpreted as reflecting a decline in consumers' intentions to pur chase major durable goods, although the NICB survey did show some increase for new automobile purchases. We have preliminary results from the quarterly survey just received for us by the Bureau of the of buying intentions conducted Census, which was in the field during the week of July 17 as pessimistic as results are not In general, these surveys, although they do suggest those of the two earlier the previous survey in April. They do some decline from on the part of the any substantial concern not indicate economic outlook, as indicated generally toward the public of consumers expecting the fact that the proportion by twelve months is somewhat increases over the next income as in April of this ago, and the same higher than a year survey results would face value, the Taken at their year. be close to the is likely to consumer demand suggest that
levels of recent months, but is unlikely to provide any additional stimulus to economic activity. In credit markets, the most noteworthy developments of the past few weeks have been the success of the first test of the Treasury's cash refunding technique and the two steps taken by the Federal Reserve System last week. In July, bank credit expanded by about $2 billion as net acquisitions of Government securities overbalanced considerably a $700 million decline in business loans. A business loan decline is not unusual in July, but the magnitude this year was larger than any other for which comparable data are available. In early August this fall off in lending appears to have been reversed, at least for the time being. On balance, market interest rates have shown substantial further declines since the last Open Market Committee meeting. There has been some backing up of rates since early August, particularly in the Government securities market, but most yield series are nevertheless still close to their lows for the year. Yield declines since midyear have been most pronounced in medium-term Treasury issues, which are currently nearly half a percentage point below end-of-June levels; while yields on long-term bonds have dropped about one-eighth to one-fifth of a percentage point over the same period. Although Treasury bill yields also declined sharply from mid-July to early August, much of this change represented a reversal of the advance that had occurred earlier in July at the Treasury cash financing. This is illustrated the time of that the average rate of 2.28 per cent resulting by the fact of 90-day Treasury bills was almost in yesterday's auction in the second week of June, while identical to that resulting average of 2.62 per cent was 12 yesterday the 6-month bill above the second week in June. basis points us to the money supply, and I would like to This brings the chart entitled "active money supply" call your attention to The black line shows the which has been distributed. series by which we have measured money familiar end-of-month above is the new The red line in the past. supply movements figures which has been developed semimonthly average of daily will supplant the old and which we expect in recent months, You will note that brief period of testing. series after a in the direction or amplitude there is very little difference periods, but that the new series brings of change over longer
out some significant movements that were lost in the end-of month series and reduces the magnitude of other fluctuations that was attributable to the single date character of the old series. The data on which this chart are based and a brief description of some of the technical changes will be circu lated within the System in the forthcoming issue of Banking Developments, and we hope to publish the back data and release current figures regularly on the new basis some time this fall. I should add that we are especially grateful to Mr. Abbott of the Federal Reserve Bank of St. Louis for his work on this project. As I am sure you have already noted, in terms of the familiar series the seasonally adjusted money supply increased $300 million in July, on top of the $600 million increase in June. This increase is especially noteworthy in that it occurred in a period when the Treasury balance was being main tained at higher levels than usual. As is apparent from the chart, the new series showed both a smaller decline in the preceding months and a smaller increase since the end of June. In the period since the last meeting--or to be more specific, for the three weeks ended August 10--free reserves about $170 million. In the same period total reserves averaged fell from $18,762 million to $18,509 million--a drop of about that a decline of about $340 million $250 million. We estimate in total reserves, after allowing for changes in the Treasury's tax and loan balance and for seasonal factors, would have permitted the maintenance of the same seasonally adjusted money supply as prevailed at the beginning of the period. active effect of all factors affecting bank In other words, the net reserves, including the System's operations, was to supply million more reserves than would have been needed to about $90 seasonally adjusted money supply at the July 20 maintain the from this that in the circumstances level. We can conclude period, the maintenance of which prevailed in this particular $170 million resulted in the a free reserve level of around to permit an expansion of reserves sufficient net availability supply of somewhat more adjusted active money in the seasonally than half a billion dollars. column which has been added If you will look at the last you will see similar figures pro to the reserve projections, projections indicate that the period ahead. These jected for the Treasury's tax and loan account moves as expected, if in the next three weeks will have to increase required reserves difference between $200 million (the more than by a little
$18,428 million and $18,638 million) to support the same seasonally adjusted level of active money supply which could have been supported, but which may or may not have actually prevailed, in the week ended August 10. The projections would also indicate that to bring about this level of total reserves for the week ended August 31, the System would presumably have to absorb on balance approximately $100 million of reserves during the coming three weeks after allowing for expected changes in other factors affecting member bank reserves. The highly tenuous nature of the estimates of both the total reserve target and the volume of System operations is obvious. In the first place, if the behavior of the Treasury's tax and loan account is not as projected, or the implicit seasonal adjustment of the money supply, on a weekly basis, is not accurate, then the total reserve target itself could be wide of the mark in either direction--by much more than $200 million. The System operations needed to accomplish the appropriate change in total reserves are subject to even greater margins of error in projection--the net amount of gold flows, the timing and amplitude of fluctuations in float, and many similar factors can result in large differences between the actual figures and projections prepared in advance, as the period progresses. In other words, it is literally impossible to quantify in advance either the change in total reserves or the volume of System operations which would be necessary to maintain the existing level of the seasonally adjusted money supply or to increase or decrease it by a specified amount. On the other hand, it does appear possible, in retrospect, to determine with reasonable accuracy whether the net effect of all factors affecting member bank reserves, including System operations, was such as to provide more or less reserves were needed to support the level of the seasonally adjusted than money supply which prevailed at the beginning of the period. analysis adds substantially to the However, whether such an be gained from observation of the movements insight which can basis is at least supply itself on a semimonthly of the money open to question. After spending considerable time working that an appraisal of the data, my own judgment is over the supply of levels of reserve availability impact on the money past can be made best in terms have prevailed in the recent that rather than the the money supply itself, of the behavior of the level of free or to support it. If reserve base available has produced changes reserves which has prevailed net borrowed
in the money supply other than those intended by the Committee, then it should be adjusted in the direction indicated. While the level of total reserves is a logical link between the two, it does not seem practical to use it directly as a guide for current operations, on the one hand, nor does it seem to shed light on the impact of past policy actions which is not revealed by an examination of the course of the money supply itself. I should add that this is a highly tentative conclusion, which I come to somewhat reluctantly, and only very recently, and which I might well wish to modify after further study. There ensued an exchange of comments between Mr. Bryan and Mr. Noyes with a view to clarifying some of the points covered in the con cluding portion of the latter's statement. Mr. Marget then presented the following statement: One of the main concerns these days of most of the headline on international finance seems to be the matter of gold writers outflow from the United States. Gold outflow is not a matter to be silent about, necessarily. But one would like to see dis cussion of the matter kept in perspective; and, whatever else of much of the recent public discussion on this may be said point, it can hardly be said to have distinguished itself as sense of either perspective or pro having retained a proper portion. gold flow out of a country such as the United Why does speaking, for one of two reasons. States? Broadly outflow could be the result of In one group of cases, gold a holder of an existing dollar balance a decision on the part of into gold because he has lost to convert that dollar balance of the dollar in relation to confidence in the future value this is the only case conceivable; gold. To the uninstructed, was a gold outflow from why, in 1958, when there and this is represented for billion, it was country of some $2.3 this sometimes described, in it is still months (and, unhappily, from the dollar." The only retrospect) as a kind of "flight is supposed to have of what with that description trouble know, it doesn't happen is that, as we all happened in 1958 that in 1958, instead the facts show is fit the facts. What to of $2.3 billion of exist having been a net conversion of there there was an into gold, dollar balances ing foreign-owned
actual increase in the total of foreign-owned dollar balances of over $1 billion. This notion of gold outflow as the result of the conversion of existing dollar balances into gold because of a general preference for gold over dollars fitted the facts even less well in 1959. In that year, the total gold outflow (exclusive of the United States contribution to the International Monetary Fund) was just under $700 million. Instead of existing foreign owned dollar balances declining by that amount, these balances actually increased by $2.8 billion. What of 1960? The total of gold outflow from January to June of this year was very small: $125 million in all. Again, moreover, there was an increase--not a decrease--in the amount of foreign-held dollar balances, this time by something over a billion dollars over the six months. Quite obviously, then, during this whole period of gold outflow from 1958 through June of this year, there was no net conversion of existing foreign-held dollar balances into gold. There simply was no "flight from the dollar," or anything resembling it. What about July and thus far in August of this year? There has been, undoubtedly, a very sharp step-up in the rate of gold outflow. In July alone the gold outflow amounted to and for August thus far the figure is $110 over $175 million, million. Since the first of July, then, a total of $285 million, as against only $125 million for the first six months of the year. Has this intensified gold outflow since the first of July been matched by a corresponding decline in the foreign-held dollar balances? The fact is total of existing that we do not yet know the answer to this question even with to the month of July, the figures for which we should respect But surely a reasonable sense of have in a week or two. suggest that, after two and a half years of perspective would outflow without the corresponding decline in foreign gold that would indicate a wide-scale con owned dollar balances balances into gold as the result version of existing dollar dollars, some other kind of a preference for gold over of thing may be happening. happending during the period for which we do have What was dollar balances increased showing that foreign-owned figures was, as we now see was flowing out same time that gold at the we were having a balance-of-payments quite clearly, that
deficit which had somehow to be met. It was met partly by the payment of gold, but also partly by the transfer into foreign ownership of dollar balances. Since, we now know, there was no concerted effort to convert existing foreign-owned dollar balances into gold, it follows that if we had not had a balance-of-payments deficit there would probably have been no net gold outflow. The basic moral, then, ought to be very clear: the surest way to avoid having to worry about losing gold is to see to it that our foreign accounts are in balance. I have put these simple considerations forward because they seem to me to provide the background against which one has to judge the significance, for policy purposes, of the intensified gold outflow that we have been witnessing in July and thus far in August. Let us assume, for the sake of argument--though it is anything but clear that the assumption corresponds strictly with the facts--that the whole of such changes in capital movements as have occurred since June is attributable to the intensification of a divergence in the level of interest rates as between this country and abroad. Would it automatically follow that we must expect every such divergence in the levels of interest rates to lead to a corresponding increase in the volume of gold outflow plus an increase in foreign-owned dollar balances? The answer, obviously, is no: that it depends, to begin with, on what is happening to the items other than capital movements that make up our total balance of payments. The point can be illustrated by the balance-of-payments estimates for the second quarter of this year that were released some days ago by the Commerce Department. Disappointment has been expressed, in some quarters, that the over-all deficit for the quarter, at an annual rate of close to $3 billion, different from the over-all deficit during the was not much But I suggest that quite a different light first quarter. is cast on this result if we recognize a further fact; the first and second quarters of this namely, that as between year there was an increase in capital outflows of around $1 why this did not result in an billion; and that the reason our over-all balance-of-payments deficit for the increase in improvement in our trade balance quarter was that there was an of nearly $1 billion (annual rate). And if we take the past the improvement in our balance as a whole--beginning with year that set in around the middle of last of-payments position find that an increase of around $2 billion in capital year--we has been prevented from being outflows and other payments in our over-all balance in a corresponding deficit registered improvement in our trade position of payments because the
(particularly as the result of the increase in our exports by around $4 billion, annual rate) has been about twice as large as the increase in capital outflow. It is this type of consideration which helps to explain why, while of course we must pay close attention to inter national capital movements, and to the effect which monetary policy may be expected to have on such movements, in many ways the more basic question is whether the monetary policy being pursued is such as to affect adversely the movements in our trade account. At a time when inflationary pressures are strong and the trade account is seriously deteriorating, a policy of monetary ease would obviously represent the height of irresponsibility. But, equally obviously, the situation is entirely different when inflationary pressures are not strong, when there is widespread evidence of the existence of the kind of competitive pressures which we need to maintain if we are to maintain our international trade position, and when we find in the trade account itself evidence, not of steady deterioration--of the kind that we had up to the middle of last year, for example--but of steady improvement. The net of the argument, then, is that a country in a strong reserve position which is giving evidence not only of a sensitiveness to the competitive forces which may be expected to bring about steady improvement in its trade position, but also of actual and sustained improvement in the trade position, can afford to take steps in the direction of monetary ease countries less favorably situated in these respects which cannot afford to take. This proposition holds with equal even when--as may very well be the case in the period force ahead--the geographical distribution of the immediately on the United States economy is such recipients of new claims it likely that a larger percentage of these new as to make in the form of gold than in the claims on us will be taken balances. The one kind of gold out form of increased dollar is the kind which, as I suggested flow that we could not stand at the outset, so many people have assumed was occurring, which would be namely, a gold outflow particularly in 1958; of a loss of confidence by the foreign primarily the result the soundness of the dollar balances in holders of existing is to say, in the of the United States--which currency by the fiscal and monetary of the policies pursued soundness foreign holders of United States. These authorities of the trends in our basic so act when the balances did not dollar internal fiscal position respect both to the situation, with
and the external trade position, were much less favorable than they are as of now. If, contrary to present expectation, they were so to act, this country would be confronted with a policy dilemma which would be very serious indeed. But it would not be fair to say that that kind of policy dilemma is before us as of now. Mr. Allen raised the question of having Mr. Marget's statement available for presentation at the next meeting of the directors of the Chicago Reserve Bank, and other Presidents likewise expressed an interest in having the statement. No objection being seen with regard to the use of the statement in such manner, if desired, it was understood that copies would be sent to all of the Presidents following the meeting. With respect to a further suggestion, relating to the possibility of making the statement available for wider reading, perhaps in the form Bulletin, certain points were raised of an article in the Federal Reserve by Messrs. Marget and Young which sug by members of the Committee and consideration should be given to questions of timing as gested that due in converting a statement prepared well as to the problems involved of the Open Market Committee presentation at a meeting specifically for general public consumption. article suitable for into an of his views the following statement Treiber then presented Mr. the business outlook and credit policy: on has done business situation on the Recent information direction the as to which the uncertainties to resolve little prices are is high and Business activity may take. economy
relatively stable. While the economy continues to produce at a record level, there are divergent movements in modest amounts in the various factors that make up total demand. Employment and unemployment statistics for July show a slight improvement over June. There is, however, little reason to expect any sub stantial reduction in unemployment. While wholesale prices have not changed significantly during the last year, the consumers' price index has been slowly moving upward; this movement is bothersome. The strong demand for bank loans during the first half of the year appears to have tapered off. The decline of business loans in July was importantly influenced by repayments by metal and metal-products firms--the same group that borrowed so heavily earlier in the year. Yet total loans and investments were up in July because the banks increased their investments at a much greater rate than in pre vious years. The banks were able to do this because the Federal Reserve made the reserves available. The shift away from loans toward investments has improved bank liquidity positions. The rise in total loans and investments in July was accompanied by a $300 million rise in the seasonally adjusted money supply; this is the second consecutive month in which the money supply Government deposits at the end of has increased. The large a potential for a further increase in the money July provide from any increase in total bank credit. Thus a supply, aside in the money supply in August is probable. further increase nonborrowed reserves, and required reserves Total reserves, in the last three months. have risen substantially developments is an especially diffi Forecasting business time, but such forecasting is not necessary cult job at this policy. There is no of current credit for the determination on prices, of inflationary of inflationary pressure evidence The absence or of inflationary psychology. credit expansion, of the business outlook and the unclearness of such prospects Federal Reserve has been credit policy. The counsel a relaxed over the last six of increasing relaxation following a policy a number of steps. Viewing To this end it has taken months. impressive list of they constitute an these steps as a whole, is still marked by high in a period that relaxing measures open market operations seems to us that activity. It business supplying reserves be directed toward continue to should ease. This trend on the side of resolving doubts readily, and not aggressive. be gradual, however, further ease should toward
Such a policy would be symbolized by free reserves in the neighborhood of the level of last week, with further expansion in total reserves and total nonborrowed reserves. As seasonal pressures develop in the central money markets in the next few weeks and as reserves are released through the reduction of reserve requirements and the use of more vault cash for reserve purposes, the Manager should rely principally on the feel of the market in order to achieve a steadily easy tone. Such reliance on the feel of the market is particularly important in view of the uncertainty, in the light of our experience with the vault cash release last December, as to the extent to which banks will use vault cash to meet their reserve requirements. At the last meeting of the Committee Mr. Balderston suggested of deleting the word "moderate" from that part of the possibility the present directive that calls for "providing reserves needed for moderate credit expansion." We think that it would be appropriate to change the directive in this way.1/ commented that Mr. Johns had made available to him Mr. Balderston revision of clause (b) of the policy prior to this meeting a possible that the latter intended to suggest. directive that he would have no objection, copies Mr. Johns having indicated The suggestion contemplated revision were distributed. of the proposed operations would be conducted clause (b), that open market providing, in activity and employment by stimulating growth in economic with a view "to needed for bank credit expansion." providing reserves had not been much change in Mr. Erickson reported that there index had New England production District. The in the First conditions and could find Bank had checked to 124; the Reserve up from 118 gone The New parts had increased. all of the component wrong because nothing for moderate needed reserves read: "providing should 1/ Quotation bank credit expansion."
England purchasing agents' survey in July showed them slightly more optimistic than the national figures. Construction was still lagging, but there was a suggestion of an upward trend because the Engineering News Record showed engineering contracts in July up 19 per cent from last year. The seasonal gains in employment continued, primarily in the nonmanufacturing field. Manufacturing employment was still going down. Department store sales and automobile registrations continued good, while the vacation business this year was excellent. There was still a strong demand for consumer and real estate loans; less so at the moment for business loans. In the past three weeks District banks had been sellers of Federal funds except on two days, and the banks had rarely used the discount window. Average borrowings were less than $10 million per day during the three-week period. said he was pleased by the Board's recent actions on Mr. Erickson vault cash and reserve requirements. As to the directive, he felt that he would prefer the suggestion made by Mr. Balderston at the July 26 clause (b). As to the the word "moderate" from meeting, namely, to omit discount rate, the Boston directors were scheduled to meet next Monday, time to reduce the would act at that that the directors and he anticipated rate to 3 per cent. said that in Mr. Erickson open market operations, With regard to holdings of Government regarding dealer of Mr. Rouse's comments view
securities, and also in the light of the comments by Mr. Noyes, he felt the Committee must leave it in the hands of the Account Manager to main tain the same degree of ease as had prevailed, with free reserves in the neighborhood of $200 million. If it should become necessary, he would resolve doubts on the side of greater ease. As he saw it, the forthcoming period would be a difficult one in view of all the factors that were to come into play. Mr. Irons reported that conditions in the Eleventh District had not shown much change in the past three weeks. There were mixed trends, but the over-all level of economic activity was about as it had been. In some sectors, increases had been recorded. Industrial production in and thus stood within 2 points of the all-time high, Texas was up a point while construction contract awards moved upward in the latest month for were available. The agricultural picture was favorable; which figures be larger than last year, which was it looked as though production would substantial change in the petroleum a good year. There had been no allowable basis, and it in August was on an 8-day situation. Production Employment in July was at about that rate. likely to continue appeared in early August showed insurance claims a little, but unemployment down a declining tendency. said that loans Mr. Irons banking situation, to the With reference period and that the past three-week both down over deposits were and
unquestionably there had been some relaxation in the pressure on bank reserve positions. District banks were not borrowing heavily from the Reserve Bank; borrowing, which had been averaging around $14 to $16 million, was on the part of smaller banks for seasonal purposes. The major city banks had not been borrowing nor had they been using Federal funds so extensively. On the whole, Mr. Irons said, conditions were good in the Eleventh District. He sensed no real pessimism but, on the other hand, no greater exuberance as yet. The general psychological reaction was that this was a time of uncertainty, not only because of the summer season but because of and other things now in the picture. Therefore, the forthcoming election the general attitude was one of caution. that the operations of the Desk As to credit policy, Mr. Irons said satisfactory to him. The actions the past period had been quite during seemed to him to cash and reserve requirements by the Board on vault taken toward ease. He viewed to an impressive move that would add up be actions trend tends to feed because such a with a little reluctance that trend did not mean to however, he In saying this, and build up. upon itself favored a reasonable been done. He favor what had he did not infer that the situation of caution because injected a note ease but simply amount of was not careful. if the System would be liked up more than could build
With regard to the discount rate, Mr. Irons explained that at the Dallas Bank no meeting of the Board of Directors is held in August except on special call. Further, it is not the practice for the Executive Com mittee to act to change the discount rate. The next meeting of the Board of Directors was scheduled for September 8, with an Executive Committee meeting to be held on August 25. If enough directors were available, the meeting on August 25 might be converted into a meeting of the Board of Directors and action perhaps would be taken on the discount rate. Other wise, the rate might not be changed prior to the September 8 meeting. As to policy for the next three weeks, Mr. Irons said that be was still a little concerned about the possibility of additional rate declines. He would prefer to maintain about the degree of firmness that had prevailed, although he would not object to erring on the side of ease if necessary. In general, he felt that it might be well to take stock of what had been done and to give the actions already taken an opportunity to take effect continuing to move in the direction of ease. Of the alternatives before he would prefer just to delete the suggested with regard to the directive, "moderate" from clause (b). word three weeks not too much new Mr. Mangels said that in the past The information made information had become available. Twelfth District on the side of weakness. rather mixed, leaning somewhat available was while the declines in employment, in the District showed Three States July was at about with the result that States showed increases, other
the same level as June. The unemployment figures reflected a somewhat more difficult situation. In the State of Washington, unemployment was at the rate of 8.6 per cent in July against 7.8 per cent in June. There had been declines in lumber, shipbuilding, and metals manufacturing, with a slight increase at aircraft production plants. The aircraft increase was contrary to the experience in southern California, where employment was at an 8-year low. However, electronic manufacturing industries in California were now picking up. Continuing, Mr. Mangels reported that lumber prices were down, with inventories high at the mills. Nevertheless, two large plywood manufacturers had announced small price increases. Construction in June but down from a year ago. Most of the increase was higher than in May, public works, while there was only a modest increase in in June was in which stood 17 per cent below a year ago. residential construction, on the part of builders that the remainder There were some expectations in residential construction. On of the year would see an improvement all Western States; the rates had increased in the other hand, vacancy 1 per cent from the quarter was up cent for the second rate of 10.6 per all-time high. Steel production represented almost an first quarter and half of August found in July, and the first continued to move downward less than the of capacity, somewhat at 48 per cent the mills operating per cent below a year ago, store sales were 3 national rate. Department that automobile sales were picking up. but there were some indications
In agriculture, smaller wheat and deciduous fruit crops were anticipated, and there were still labor difficulties having to do with picketing of the orchards in California. However, the cotton crop apparently would be at a record level. Livestock people in California were somewhat con cerned about the substantial increase in mutton and lamb imports, with the first third of 1960 showing an increase of 113 per cent over 1959. In 1956 about one million pounds of mutton and lamb were imported, while in 1959 the figure increased to 58 million pounds. Oregon lamb prices were now 16 cents a pound compared with 20 cents a year ago. Mr. Mangels reported that demand deposits were down in the three week period ended August 3, while there was a moderate increase in time deposits, including savings accounts. Loans and Government security holdings both were down. Borrowings from the Reserve Bank had been nominal, averaging about $10 million a day over the past two weeks. Turning to policy for the period ahead, Mr. Mangels said he agreed the Account Manager should be given more that this was a period in which of the general uncertainties in the business than the usual leeway because changes in reserve requirements and the fact that the recent situation some revisions in the projections allowances might require and vault cash he would lean toward the positions. In any event, however, of bank reserve side of ease.
As to the directive, Mr. Mangels said that he would suggest changing clause (b) so as to provide for operations with a view "to encouraging monetary expansion to foster sustainable economic growth." In response to a question, he added the words "and expanding employment opportunities." Mr. Mangels went on to say, however, that he had no strong feeling in regard to the language he had suggested. With respect to the discount rate, Mr. Mangels explained that the situation of the San Francisco Bank was somewhat similar to that of the Dallas Bank. The next meeting of the Board of Directors was scheduled for the first of September, with an Executive Committee meeting to be held this Thursday. Depending upon the views of those directors attending, it might be decided to poll the remaining directors by telephone; other wise, consideration would be given to the rate at the meeting on the first of September. Mr. Deming reported that the Ninth District banking picture had of ease and liquidity. Bank deposits at both improved somewhat in terms were about where they should be seasonally city and country banks now an improvement since of last year. This represented relative to the end level; but they still remained running below their normal they had been was smaller than a Loan growth in July level of a year ago. below the result was an banks, and the net city and country earlier at both year in a sharp reduction had been reflected This banking situation. easier cash action would The recent vault from the Reserve Bank. of borrowing
release some reserves in the District; however, due to the fact that Ninth District vault cash relative to demand deposits tends to run below the national average, relatively fewer District banks would be affected than nationally and a relatively smaller amount of reserves would be released. In agriculture, Mr. Deming said, the outlook was for a slightly less favorable crop than forecast a month earlier. Thus, while agri cultural prospects were substantially better than a year ago, they had deteriorated somewhat in the past month due to overly hot and dry weather. Iron ore shipments from the Lake Superior region this year were now expected to total about 70 million tons. While this would be much better than in 1959, shipments would be smaller than in any other years of 1949, 1954, and 1958, and postwar years except the recession those years when shipments were affected by strikes. picture, Mr. Deming said there seemed to Turning to the national developments that were emphasize all of the unfavorable be a tendency to looked favorable. As a result to gloss over anything that occurring and was one of more Ninth District and elsewhere, atmosphere, both in the the thought the facts warranted. pessimism than he policy had been good and, expressed the view that System Mr. Deming included the recent this comment he timed, and in whole, quite well on the He suggested and reserve requirements. vault cash allowances move on or restraint, that same degree of ease, to maintain about the continuing
had prevailed. Due to the obscurity of the outlook over the next four weeks, he agreed that the Manager of the Account should be given somewhat more latitude for the exercise of discretion than would normally be the case. As he understood it, the problem was not so much the statistics themselves as the problem of interpreting their meaning in terms of ease or restraint. A major problem, it appeared, would come after the next Committee meeting. With respect to the directive, Mr. Deming said that he would prefer the suggestion of Mr. Balderston. He also raised the question whether the word "needed" was necessary in clause (b) of the directive. Mr. Allen said that the Seventh District business picture seemed to include both favorable and unfavorable signs. Consumer buying had become somewhat less vigorous. On the other hand, some business economists and business leaders who had been expecting continued deterioration only a in order trends, modest in most or two ago now reported improvement month Thus, whereas in the spring but an improvement nevertheless. instances, about current trends and consumers many businessmen were disturbed the present time. The lines the reverse was true at appeared confident, been a noticeable improvement heard that there had recently in which it was aluminum extrusions, tool and die shops, in orders included copper products, and stereophonic equip paper boxes, television metal fasteners, folding products used in industry. homes, and various wood ment, electronics, mobile
Airline travel was at a high level, and there had been a substantial growth in air express business. The Illinois Bell Telephone Company had advised that new installations were stronger in July and August than expected and that toll calls continued to run 5 to 6 per cent above last year, this being about the long-term growth rate. On the other side, Mr. Allen said, retail sales of all stores in the country in July were 1 per cent below June, and in the last two weeks department store sales in both the Seventh District and the United States ran slightly behind last year. Recent nationwide surveys of consumer buying intentions showed a substantial drop in anticipations to buy major items other than automobiles. Automobile sales slipped year for the first time in July, when they were off 2 per below last cent. The car inventory remained near the million level, about the same as last year, but at that time dealers' stocks had been built up in anticipation of the steel strike. of bank credit, Mr. Allen reported that Seventh In the field stronger picture than all banks in District banks showed a slightly in the last two weeks had been some loan expansion the country. There In this same period since midyear. increase for the and a small net but it should strong rise, was an unusually last summer there period and in relation to both in dollar amount that loan levels, be noted than a year ago. The effects now substantially higher deposits, were
of progressively greater credit ease had shown up among all three classes of Seventh District member banks. The basic deficit shown by Chicago central reserve city banks was heavily concentrated at one dealer bank, and the reserve position of other large Chicago banks had improved. Both reserve city banks and country banks sharply reduced their use of the discount window in the past two weeks. Mr. Allen said he presumed that the Chicago Board of Directors would vote for a 3 per cent discount rate at its meeting on August 18. The several moves in the field of monetary and credit policy toward greater ease, some of which would not become effective for a couple of weeks, seemed to him to be enough for now, and he would favor resting He would suggest trying to keep net free on the oars for the present. area of $200 to $300 million until the next meeting. reserves in the seem appropriate to remove the Mr. Allen agreed that it would from clause (b) of the directive, as suggested by word "moderate" and he also agreed with Mr. Balderston at the last meeting, Mr. Deming that the word "needed" was not necessary. conditions in the Tenth Leedy reported that agricultural Mr. had been ex good. Expectations to be exceptionally District continued crop. The August 1 report with regard to the wheat ceeded, especially conditions for showed very favorable Department of Agriculture of the Figures that had the country generally. as it did for the District, receipts from farm marketings available indicated that cash recently become
in the Tenth District during June were 22 per cent larger than in June last year; crop receipts were 37 per cent higher and livestock receipts 10 per cent higher. The June increase caused cash receipts to be about 1.5 per cent higher for the first six months of this year than for the same period last year, while the comparable comparison for the nation was slightly on the minus side. Excluding the State of Colorado, District employment in June was slightly below the level of last year but this decline could be more than accounted for by the serious and widespread construction strike in the metropolitan Kansas City area. For the four weeks ended August department store sales showed a 1 per cent increase, although for the year sales were down about 1 per cent compared to the national increase of about 2 per cent. Mr. Leedy commented that bank deposits continued to move upward during July. For the week ended July 27 reserve city member banks showed daily avarage deposits $143 million higher than a month earlier, of which about $72 million represented interbank deposits. Over the same period daily average deposits at country member banks increased $121 million, the unusually large wheat crop which was then being harvested. reflecting Loan demands continued to be moderate and borrowing from the Reserve Bank level, reflecting generally easier money market con had been at a lower some increased use of Federal funds due to the ditions and undoubtedly more attractive rate.
As to policy, Mr. Leedy said it seemed to him that the System should be moving--trending a little further--in the direction in which it had been moving in recent weeks. Certainly there should be an avoidance of tight ening reserves through using statistics and not taking account of the uncertainties involved in the counting of additional vault cash as part of required reserves. As he understood it, for the past period it was felt that a level of free reserves of around $200 million would be appro priate. For the month ahead, it was his view that a figure of perhaps indicative of the proper objective. $300 million would be more nearly Mr. Leedy expressed the view that actions taken since the July 26 It seemed to him that a gotten policy ahead of the directive. meeting had change such as Mr. Balderston had suggested would be appropriate, along with leaving out the word "needed." However, he would be inclined personally to further in order to indicate that policy was now moving actively go a little the economy by making bank reserves more avail in the direction of promoting the suggestion made by Mr. Johns would be agreeable to him, able. While that would call for providing reserves to encourage he would prefer language the availability of bank expansion, or perhaps for "increasing bank credit bank credit expansion." Such a change, reserves with a view to encouraging of the concern of the afford a needed indication it seemed to him, would stimulate, the growth or attempting to encouraging actively, Committee about bank reserves more available. of the economy by making
Mr. Leach said that although prospects were clouded by scattered weaknesses and indecisive trends, the current volume of business in the Fifth District continued on a high level. There had been no large changes in economic activity in the Fifth District over the past month, but nearly all the changes that had occurred were downward. The characteristic picture of recent industrial activity appeared to be one of declines in unfilled orders and rises in inventories; this was particularly true in the cotton textile industry. The volume of orders received by furniture factories last month declined more than had been anticipated, and no improvement was expected until the next important market in late October. The easing situation in general in manufacturing was evidenced by the latest reports on man-hours and employment, both of which had slight but widespread declines. The seasonally adjusted index of debits fell 4 per cent during July--the second straight monthly drop--and July was the first month this year that debits had fallen below those of the corresponding month last year. Mr. Leach went on to say that the past three weeks had brought though the banks were slow to signs of easing at District banks, even at the discount window were light. Average out admit it. Borrowings weeks as compared with $20 million in the past three standings were only 1959. Reserve city banks had in the corresponding period of $67 million time during the past two Reserve Bank most of the been out of debt to the Federal funds market. selling side in the and had been on the weeks
Mr. Leach said he was well pleased with recent actions of the System and did not think there was need to do anything exciting in the immediate future. He would continue to maintain a comfortable atmosphere in the money market. Because of scheduled actions with respect to vault cash and reserve requirements, he would expect greater than usual variations in free reserves, but he hoped they would average at least $200 million in the period ahead. Mr. Leach said it was his view that the Committee should not go too long at any time without changing the directive. In his opinion the directive should be modified when economic conditions changed and when Committee policy changed. Thus, he felt the Committee was at least six late in changing to the present directive. At present, however, weeks too seemed about in line with what it appeared that the Com this directive to do, that is, to foster substantial growth in economic mittee proposed activity and employment by providing reserves needed for moderate bank the table regarding the next In the discussion around credit expansion. going much beyond providing no one had suggested a policy four weeks, If the word "moderate" were eliminated reserves to meet seasonal needs. be in terms of free reserves then the discussion should from clause (b), million. On the other hand, $400 million rather than $200 of $300 or the directive should of substantial ease, thinking was in terms unless the was actually contemplated. policy easier than to indicate a not be changed
Mr. Mills said he admitted to being more pessimistic about the business outlook than others who had discussed conditions as they saw them. He sensed that in the future economic historians were going to look back at this period as one in which the earlier absence of a dynamic monetary policy contributed to a loss in forward economic momentum at a time when a major downward movement in the business cycle was brewing. Against that reasoning he wished to address himself to the two factors that he regarded as being of most importance to the Committee at this time. One was the money supply, while the other was the position of the United States Government securities dealers. Mr. Mills then presented the following statement: Since midyear, the "Condition of Weekly Reporting Member Banks in Leading Cities" statements provide increasing evidence of a contraseasonal reduction in bank loans, which trend again raises puzzling questions about the money supply. The continued failure of a Federal Reserve System monetary policy to obtain an increase in the money supply in response to overt actions taken to inject additional reserves into the commercial banking system superficially would suggest more aggressive policy actions along similar lines. The arguments in favor of using the leverage of monetary and credit policy to induce an expansion in the money persuasive if the contraction in bank loans had supply would be come about through a forced liquidation of credit. If that had an effort to stimulate an expansion of bank de been the case, monetary and credit policy actions would be in posits through order so as to offset the current shrinkage of deposits that is consequent upon a contraction in bank loans which is especially cities. However, there are apparent in the central reserve that the contraction that is reasonable grounds to believe bank loans and deposits is a reflection occurring in commercial activity and is in no wise the general slackening in economic of of bank credit except as that a result of any forced liquidation of banks who are applied to the policies term might be loosely
unwilling to permit the level of their loans to rise higher, and in order to forestall such a happening are curtailing their outstanding loan commitments in some areas. Under such con ditions indicating that the contraction of bank loans and deposits is the result of the conscious actions taken by borrowers to repay their loans rather than actions taken by the banks to de mand loan repayments, it follows that aggressive actions taken by the Federal Reserve System,and intended to produce a bolster ing influence on the sagging money supply, would have only a minimum effect in that direction, but could have a devastating effect in forcing down the level of short-term interest rates. The question, therefore, becomes whether it is better policywise to attempt to stimulate an increase in the money supply at the expense of producing an artificially low level of interest rates carrying an inflationary bias, or whether it would be wiser to recognize the downtrend in the money supply as a combination of reluctant lender and reluctant borrower attitudes which should not be interefered with. In the light of current credit developments, Federal Reserve System policy makers would be well advised to avoid actions that would aggressively attempt to force an expansion of the money supply that would have the harmful effect of exerting unduly heavy downward pressure on interest rates to the detriment of commercial bank earnings at a time when their retention is necessary in order to strengthen bank capital positions. Every thing considered, and particularly as an overly easy Federal Reserve System monetary and credit policy could be expected to produce only minimum effects toward expanding the money supply, it is essential that policy actions skirt the pitfalls that The kind of monetary and credit policy have been described. continue to maintain a moderate called for is one that will now volume of free reserves, with the free reserve level partly to of interest rates, to the end that be gauged by the movement will be brought down on supply of positive free reserves the that monetary and credit occasions as there are indications such rates to fall unduly. actions may be causing interest policy previous Federal Reserve due to the fact that Furthermore, member banks to reduce policy actions have permitted System at the Federal Reserve Banks to a low level, their discounts low level of positive effects of a relatively the expansive when the member than at times are now greater free reserves Federal Reserve Banks. heavily indebted to the banks were more aggressively force any urgency to there is no longer Therefore, commercial banking system. new reserves into the
Continuing, Mr. Mills said it was an impressive fact to him that the volume of Government securities currently held in dealer positions represented, percentagewise, a very considerable proportion of the expan sion that had occurred in member bank holdings of Government securities since the time that the Federal Reserve System commenced to supply reserves more freely. He would judge that the dealer positions might represent perhaps one-third of the $6 billion increase. In a sense the dealer positions seemed to be both an overhang in the market and also an element of stability in the market, in that the dealers had outdone themselves in creating a market having breadth and depth. At a time like this it would seem to be the self-interest of the dealers to protect their investments and pro their positions. Their investment in United States Government tect real sense tended to aid and abet at this very high level in a securities would wish to retain those intentions in that the dealers System policy funds into the market reached until the flow of investment investments into permanent hands. move their securities point where they could a were in a dealer positions in that reasoning, If there was rationality and would con interest rate structure maintaining the important in sense a degree. This brought were lowered to be until those positions tinue to objective combining a monetary policy thesis that back to his original him level of free reserves, and a fluctuating level of free reserves both a lower would have in order and would be or thereabouts, $100 million say around of the dealers the position coming from outside assistance the concomitant securities. in Government
In reply to a question, Mr. Mills said that he would perhaps drop the word "moderate" from the directive, but that otherwise he would be inclined to leave the directive in its present form. Asked what he would suggest with regard to reserves coming into the market through the actions on vault cash and reserve requirements, Mr. Mills said he agreed with Mr. Rouse that the reserves provided through a release of vault cash tend to work themselves through the banking system slowly enough that there might not be any immediate impact. If there was some seasonal increase in bank loans, this would tend to absorb a portion of those reserves. In his opinion the reserves supplied to the central reserve city banks through the forthcoming reduction in reserve require have a much greater impact at the time it occurred. If reserves ments would superfluous, they could be more easily withdrawn from the money should be position of central reserve city banks market when they had gone into the than any other market area. if free reserves for the whether he would sell securities Asked proportions than $250 or $300 system as a whole reached larger banking so inclined. Here again, how Mills said that he might be million, Mr. and dealer positions in interest rates would follow movements ever, he closely. had bought and many dealers apparently noted that Mr. Szymczak time they would prices, at which a rise in looking toward held securities That was the larger free reserves. there would be the basis that sell on
time they would start unloading. In his opinion the holdings today were based on the expectation of a rise in prices. Mr. Mills commented that the dealers must have a market and that the market in a sense would reflect the supply of reserves. By careful handling, he hoped that the interest rate structure might be maintained. Mr. Szymczak then noted that many dealers apparently expected a greater demand than had come forth, and Mr. Mills commented that the dealers would not want to sell at a loss if they could help it. Mr. Rouse commented that the dealers would try not to sell at a loss; they would endeavor to protect themselves. Thus far they had had year, and they had quite a cushion on which to an extremely profitable operate. He also noted that bidding on bills comes up every week. Some where, if they were not able to reduce their dealers would get to a point holdings, they could not bid for new bills. Thus there would be a higher the securities. The dealers could not go far bill rate in order to move about $2 billion of were now. In addition to carrying beyond where they $500 or $600 million of credit in the securities, they were using another agreement called an investment repurchase form of a type of repurchase not included that in the figures he used. Only a agreement. He had been provided by nonbank the largest amount having fraction was bank credit, sources. Committee would not that he hoped the Mr. Robertson commented dealers. As to trying to outguess the on the basis of formulate policy
the economy, he felt that the country was not on a marked downslide at the moment. However, the economy appeared to be on a fairly even level with perhaps a little sliding-down. Consequently, in the next month the System could afford to permit the actions that had been taken thus far to work in the direction of providing a relaxation that would enhance the growth of the money supply. As he saw it, there would be a fall upturn, and the System would not want to go so far that it could not switch the other way. In all the circumstances, he would recommend that the Desk not endeavor to offset all of the additional reserves that would come into the market through the actions that had been taken, but rather that it permit those actions to support the current trend to some extent without getting greatly easier. This would involve providing a greater latitude discretion on the part of the Manager than would be for the exercise of ordinarily the case, particularly in view of the statistical picture presented. He would not let that statistical picture that would be Rather, he would try to hold the overbalance the feel of the market. amount of ease to develop market, while permitting a moderate feel of the over the next month. said he would carry this out by amending the policy Mr. Robertson merely take out or insert a word, for directive in a way that would not the particular word. the importance of would tend to overemphasize that expressed in a the policy directive prefer to see Instead, he would
different set of words, such as "to encouraging monetary expansion to foster sustainable growth in economic activity and employment." This would carry out the view of Mr. Mangels and also that of Mr. Leedy, he believed. He was fully aware that the Committee probably would want to change this directive a month hence, or at least not too far in the future, because he expected the Committee to be swinging in the other direction. If he was wrong, however, that would not hurt anything. At this particular period the Committee could afford to be easy in view of the state of the economy and the lack of inflationary pressures at the moment. In reply to a question, Mr. Robertson said he would prefer to use "encouraging" rather than "stimulating" in the directive at this particular juncture. In hindsight the word "stimulating" would have been fine if it could have been used two months ago. Mr. Shepardson said he concurred with those who viewed the picture as one of fairly level activity with no widely divergent offsetting trends. There were some divergent trends, it was true, but in general the economy was moving along at a good level. The future was somewhat clouded by the factors, including uncertainty as to the fall upturn. impact of various However, with a high level of activity and the economy continuing on a there was no reason for any marked the moment, it seemed to him plateau for pursuing. Current Committee that the System had been shift in the policy appeared to be in line set forth in the present directive, policy, as for some expansion in the table about providing with the comments around
the money supply. This, he thought, was desirable. Expansion should be permitted to take place at a rate that would not create an unduly easy condition and would not have a further depressing effect on rates. With uncertainty existing as to the timing of the effects of the vault cash release, he thought there was much to be said for giving a good deal of leeway to the Manager of the Account in appraising the effects of the released reserves as they came into the market. For that reason it was difficult to set a statistical free reserve target, whether it be $100 million, $200 million, or some other figure. In all the circumstances, he felt the Committee should ask the Manager to try to maintain about the in the market--whether it be called restraint or easesame condition taking into account the delayed effectiveness of the that now prevailed, on vault cash. He agreed with reserves released through the action about increasing ease too the Committee should be cautious Mr. Irons that fast at the present time. Shepardson said that he would to the directive, Mr. With respect and "needed" from the words "moderate" seriously to removing not object the directive as it stood, he would prefer to leave clause (b). However, what most of more nearly expressed the present language since he felt that regard as the appropriate today seemed to around the table the comments objective. his comments most expressed in Mr. Allen had King said that Mr. that the economy had have said. He believed he (Mr. King) would of what
been in a dip of some kind, but that this may have bottomed out and the economy was now rebounding. Thus, he was little a more optimistic today than he had been in some time. His contacts with small businessmen and small communities indicated that the economy may have bottomed out within the past two weeks. As to open market operations, Mr. King said he thought that any effort to try to fix a target within a certain range of numbers would be rather hopeless and would not serve any purpose at the present time. He could not see that trying to work within a certain bracket of free reserves would necessarily produce any certain results. The situation would require discretion on the part of the Account Management, but in his view the situation also called for minimum action on the part of the Desk. The policy actions taken recently would have their effect in due course; seemed to him that a procedure of absorbing and supplying reserves and it Accordingly, his views were on alternatively would be rather fruitless. open market operations, although he would the side of a minimum amount of in motion all kinds of to such a point as to set not want ease to develop was informed of errors in his thinking, To summarize, unless he worries. amount of open market operations, leaving his preference would be a minimum view of the fact that on its own. In fluctuate pretty much the market to it seemed to him in injecting reserves, actions would result recent policy reserves and then to put in those questionable wisdom it would be of that through open market operations. withdraw them
Mr. King went on to say that he could not work up enthusiasm for changing three or four words in clause (b) of the directive periodically. In his view, the important thing was the consensus for open market operations developed at the respective Open Market meetings. Be would be inclined to agree with any of the proposals made thus far, but he did not think there was a great deal of difference between them. While he was not stating this as a suggestion, his inclination would be to go so far as to leave clause (b) in a permanent form calling for open market operations with a view to fostering sustainable growth in economic activity and employment. He recognized that it had been the practice of the Committee to change clause this context, however, he did not see a (b) periodically. Even within deal of need for any change at this time. great 1960 probably had been a greater Mr. Hostetler said that the year than to people in any people in the Fourth District disappointment to a certain recent policy action This might explain why other district. in the Fourth District. discount rate) was initiated (reduction of the of industrial economists end of July a meeting the other hand, at the On at the Reserve Bank District was held industries in the representing leading in expecting economic activity were nearly unanimous and the participants in terms of the a new record high year to reach the end of the before production index. industrial
Mr. Bopp said he did not have too much to report on Third District business developments and would say simply that there was nothing too encouraging in the picture. However, the reserve positions of member banks had eased significantly. The basic reserve position of Philadelphia banks had moved from roughly $75 million net borrowed reserves to roughly $30-$35 million. In the past three weeks only one Philadelphia bank had borrowed from the Reserve Bank, and then only for one day. Although he agreed with the thought that open market policy should not be changed significantly and that a change in the directive might not make much sense when one looked to the period ahead, Mr. Bopp recalled that three weeks ago the Committee felt that a change in the directive might not be appropriate in view of the Treasury financing. up therefore might make a change appropriate at The theory of catching this time. He was not too much concerned as to the precise wording, but on balance he would prefer something along the lines suggested by Mr. Robertson. rate, Mr. Bopp said that he and his Turning to the discount to read on the ticker Bank were surprised associates at the Philadelphia discount rate be had moved on the some Reserve Banks on August 11 that Board's wire had on the ticker the time the news appeared cause at the directors of the that in all probability He felt yet been received. not rate at their reduce the discount would act to Bank the Philadelphia meeting this Thursday.
With regard to open market operations in the forthcoming four-week period, Mr. Bopp suggested that present conditions be maintained to the extent possible, with any doubts resolved on the side of ease. He agreed that the circumstances would require giving a great deal of leeway to the Account Manager. In view of the dealer positions and other matters that had led Mr. Rouse to say that the situation was perhaps reminiscent somewhat of the summer of 1958, it might be that the Account Management would have its work cut out and that sympathy for the Account Manager would be needed. Mr. Bryan said he did not see anything in the economic situation in the Sixth District that required a report today. Neither did he he had any comments on the general economic situation that would believe One could make important arguments add significantly to the discussion. was bottoming out of its dip, or on the general thesis that the economy the present plateau or whatever one that it was going to move upward from make important arguments one could also want to call it. However, might going into a downslide. that the economy was doing anything in out that he had never favored Mr. Bryan pointed base for providing a reserve the idea of that went beyond recent months to leave the policy If the Committee wished credit expansion. moderate to omit think it appropriate he would unaltered, directive essentially would then directive, which (b) of the from clause the word "moderate" should decide the Committee If, however, his own feeling. fully express
to alter the directive further, he believed that it ought to change the linguistic approach. On the matter of giving a directive in terms of free or total reserves, or on the basis of any other concept, it seemed to him that this would be extraordinarily difficult at present because the market repercussions of recent actions taken by the Board were not yet known. Mr. Bryan said he wished to point out that in August of last year daily average reserves were $18,613 million. Thus far this August, daily average reserves were about $18,500 million. Further, on the basis of the Board's staff projections circulated this morning, it appeared that the daily average for the full month of August would be well under $18,500 million. If so, the banking system of the country had less reserves with which to support credit expansion this August than last August and the policy was not one of ease as far as total reserves were concerned. This illustrated the difficulty in giving reserves. Looking at the projections for directions in terms of free 31, one noted some rather radical ending August 24 and August the weeks A free reserve projection of $455 million for shifts in the components. in an average of $18,373 million the week ended August 24, would result ended August 31, free reserves reserves; however, for the week of total rise in total would produce a substantial projected at $305 million for the month well under would be an average The net result reserves. expected to pro if the Manager was for last year. Therefore, the figure per month of say $50 million and some provision, for moderate easing vide
8/16/6 total reserves, was to be made for secular expansion of the economy, then in the week ending August 24 the Manager would have to let free reserves run well above the figure of $455 million, and in the week ending August 31, he would have to allow another variation from the free reserve projection if he was to average out with anything remotely comparable to what he (Mr. Bryan) felt the result should be in terms of total reserves. One thing obvious was that the free reserve figure, if it had been projected at all accurately, would have to fluctuate radically to produce what, in his judgment, would be an appropriate total reserve figure. Mr. Bryan said be would favor a direction to the Account Manager in terms of giving him latitude for the exercise of discretion; that is, telling him to manage free reserves, depending on the components, so as to provide for a moderate growth in total reserves. Mr. Rouse noted that the daily average figure of total reserves through August 12 was $18,503 million. Mr. Johns presented a statement substantially as follows: Without engaging in debate on the question whether the of recession, it is in recession or on the brink economy is agreed, I think, that production is substantially generally and that inflation is not an immedi below practical capacity approximately the level activity is at ate problem. Economic months ago. The current posture of monetary policy, of 15 of stimulating rather than restraining, which I take to be one and worthy of con in my opinion, appropriate is therefore, tinuance. It seems to me that recent policy actions by the Board of Governors in its exclusive jurisdiction, along with carrying out the policy discount rate actions and operations of May 24, all Committee in its directive adopted by this is faced in the right that the System indicate clearly direction.
With respect to the total reserves of the member banks, and for the purpose of arriving at a conclusion as to the size of desirable increments in the immediate future, I observe that in the period April through July of this year the increase in the supply of reserves, seasonally adjusted according to the Board's series, was at the annual rate of 5.6 per cent (the July figure is still preliminary). Our own figures indicate that this rate persisted in the first ten days of August. In my view such a rate of growth in reserves is appropriate, and I suggest it as our approximate objective, subject to review, of course, at the Committee's frequent meetings. I would again protest against permitting a free reserve target to divert us from this objective or distract us. I would urge that a free reserve target or range, if such there must be, should be appreciated and used as a means to an end and not as the definitive guide to open market operations. Free reserves should be caused or permitted to vary and fluctuate as needed in order to bring about the desired growth in total reserves. As to the directive, I might point out that one of the disadvantages of having a suggestion for a change distributed at an early stage of the meeting is that this permits the sug be shot at before there is an opportunity for the gestion to making the suggestion to state his reasons. person the last meeting it was suggested that Be that as it may, at from clause (b) of the directive. the word "moderate" be removed between that word and recent developments I see no inconsistency I do not think bank credit and bank credit because in reserves However, I support the has been more than moderate. expansion It is not a very for removal of the word "moderate." suggestion are, in present circum I think its connotations precise word, but I would prefer not to side. At this time stances, on the wrong I would prefer seems to suggest illiberality. use a word which to connote generosity. merit scrutiny, I think. in clause (b) also Two other words and for the reason that for present purposes, First, I suggest is a better word than "fostering." just mentioned, "stimulating" it seems to word. Second, say it is a stronger Perhaps I should puts the time the word "sustainable" me that at this particular a bit out of focus. activity and employment of growth in objective in the long run, but we want growth to be sustainable Of course worry about too appears for situation no cause in the present concerned--or perhaps We are now unsustainable growth. rapid or or possible contraction lack of growth say I am--about I should I suggest deletion For these reasons and employment. in activity a revised clause (b) and in final result of the word "sustainable" distributed. in the form previously
I think I agree with Mr. Deming that the word "needed" is not required, and I would agree to its deletion. Also, I would not object to Mr. Leedy's suggestion for use of the word "encourag ing," unless it should be considered redundant to the idea we suggested by use of the word "stimulating." I am in favor of a discount rate reduction, of course. How ever, I must confess to some unsettled feeling about the current actions. If it is true, as I have read, that the reduction to 3 per cent is only a technical adjustment to the market, I think it has to be said that less than the indicated technical adjustment has been made, unless we wish to imply that market rates are lower than we think they ought to be. If we do not intend such impli cation, why do we underadjust? I, myself, have argued in recent days--and I feel sure others must have--that to do more would flash a "scare signal." In the cold, gray dawn of the morning after, I wonder whether this is right. I wonder whether we tend to take ourselves too seriously and to overestimate our power to determine the attitudes of people who have attitudes about things like this. I wonder how good our conjectural attempts to psycho analyze the public are. I wonder whether it might be altogether reasonable to assume that the public would take comfort and assurance from Federal Reserve action which is resolute and all that is indicated by facts visible to everyone. I wonder whether more frightening to lower the rate a whole point at it would be one time when such is indicated and the public is expecting rate or to take smaller steps in fairly rapid succession. reduction, The latter course, perhaps, could be nervously interpreted as the Federal Reserve sees or thinks it sees progressive meaning that Parenthetically, if degeneration should unhappily degneration. bold action, and we have deferred action to catch come, requiring up besides, we could find our difficulties compounded. Be all this as it may, I think the discount rate ought to be under 3 per cent, and I wish it were. has been called of the St. Louis directors A special meeting the Bank yesterday, it of this week. When I left for Thursday These matters I a quorum would be present. seemed assured that of the questions I may form the substance have just presented the directors meet. have to answer when will had expressed the with the others who said that, along Mr. Szymczak Manager should be given a time when the Account he felt this was thought, of the policy actions This was because he had ever had. all of the leeway
taken recently and the question of their effects over the next four weeks. He agreed with Mr. Mills that a problem was created by the holdings of securities on the part of the Government securities dealers. He would not favor any sudden or abrupt change in interest rates; if a change should come, it should develop gradually and slowly. Mr. Szymczak noted that the actions taken by the Board of Governors recently were announced as a further implementation of the law so far as the additional release of vault cash was concerned and as a first step in implementing the law so far as the reduction of reserve requirements at central reserve city banks was concerned. As announced, these actions were taken at a time when, in the opinion of the Board, there would be a seasonal need for credit. In other words, the Board was implementing the a time when it felt that the law could appropriately be implemented. law at course, that the actions would supply more reserves than It might be, of should have been provided. brought out that the change in the dis Continuing, Mr. Szymczak by Mr. Johns, primarily as a count rate was announced, as indicated was not quite at the point to Perhaps the new rate technical adjustment. it was a step in that been made, but adjustment should have which the the System was said officially that far no one had direction. Thus ideas as might have different each person its policy, although changing should take. actions the System and as to what the actions meant to what
In his opinion this was a time when the Manager should follow the same pattern. Therefore, if the total reserve pattern or the reserve position of the banking system was such as to affect the rate structure too greatly, this should be taken into account. On the other hand, if the vault cash release did not affect the money market excessively, that should be taken into account. The Account Manager should feel his way along until he could see the entire picture. Mr. Szymczak added that when the System formulates monetary policy it does not want to disturb the financial structure of the country unduly. No one could know what was going to happen to the economy after early fall. Personally he felt that it would move upward, that it had gone down and would firm up somewhat, and that there would be some positive change upward if for no other reason than seasonal factors. Further, there would be Governmental expenditures for defense, and perhaps there were other things that could not be foreseen at the moment. Accordingly, Mr. Szymczak said, it was his opinion that the System and watch the situation from day to day. should feel its way at this time New York Bank on the recently from the that the paper distributed He felt than bills was a good one, and he hoped use of short-term securities other the matter further at would be possible to discuss that at some point it meeting. He also felt that the actions taken by an Open Market Committee been good. On the to this point had on reserve requirements the Board
question of their effect on the whole structure of reserves, one would have to wait. Mr. Szymczak noted that the Board had been endeavoring to formulate a basis for the classification of reserve cities pursuant to the law enacted in 1959. When the Presidents received material bearing on this matter, he hoped they would review it seriously and give the Board the benefit of their thinking because this was something that also would affect the structure of the banking system. At some point, of course, it would be necessary for the Board to do something. It must move forward to eliminate the differential between the central reserve city and the reserve city banks, and to provide bases for the classification of reserve cities and the exemption of individual banks from reserve city requirements. when talking about the possible reserve picture he In summary, it would be necessary for the System wished to say again that he thought way along. In his opinion, free reserves anywhere in a range to feel its all right. However, whether to $250 million would be from $100 million $300 million, he felt $250 million, or even figure was $100 million, the much by the effect must be guided pretty that open market operations rather than the figure. the directive as it he would prefer to leave Mr. Szymczak said stood. by Mr. Marget earlier to the presentation Mr. Balderston referred as far as the was one of comfort and said his reaction in the meeting
prudence of the actions taken by the System over the past week was con cerned but one of no comfort as to the longer-run future as long as a favorable trade balance of around $4 billion failed to wipe out the unfavorable balance of payments. He saw no long-run solution until a decision was made to bring home the soldiers and their dependents who were being supported abroad, thus leaving to others, to the extent possible, the financial burden of supporting troops, particularly in their respective countries. This country might have to provide the hardware, but it did not have to provide the men and their dependents and still pay for the burden of their upkeep. He merely threw this out as a word of caution in connection with the distribution of the explanatory statement presented by Mr. Marget this morning. Turning to corporate profits, Mr. Balderston suggested that the to by Mr. Noyes, were significant second-quarter reports, as referred influences business deci a change in profits and expectations because inventory policies, and other things. sions regarding plant expansion, that the second quarter of last year was exceptional, the He recognized that quarter during by corporations profits recorded billion of $51.7 largest in history. He also recognized that the drop having been the quarter of 1960 was only of 1959 to the second from the second quarter very large in the this was not $5 billion. While the order of about in having no conceivable was that corporations impressed him aggregate, what
link with steel found that cost pressures had made it difficult to earn as much in the second quarter of this year as the comparable quarter of last year. Some TO per cent of manufacturing corporations earned less in this quarter than in the same quarter last year, and in looking over figures provided by Miss Stockwell of the Board's staff he found that only four types of businesses had done better this year. Despite the fact that the second quarter of 1959 was an exceptional period, it gave him some concern that all of the other categories found it harder to make profits during the second quarter of this year than a year ago. Statistically, there was yet another unusual aspect of the matter. Only in three other postwar years--1947, 1949, and 1951--had manufacturing corporations failed to make a better showing in the second quarter of the year than in the first quarter. With regard to the consensus of this meeting, Mr. Balderston said he gathered that the Committee favored a continuance of the current policy, giving to the Account Manager more than the usual freedom to follow the feel of the market because of the changes in reserve requirements that were to occur in the near future. Mr. Balderston noted that the views expressed As to the directive, had been mixed. Of the members of the Committee, it appeared that six, to make a change and that four were other than himself, were inclined attending this meet change. Of the other Presidents inclined to make no would not favor a a change and that one appeared that five favored ing, it
change, He had the feeling that, of those who wished to make a change, the sentiment early in the meeting was simply to drop the two words "moderate" and "needed," but that later in the meeting, after there had been the benefit of further discussion, there was increasing sentiment for the adoption of wording along lines such as Messrs. Mangels, Leedy, and Robertson had suggested. More specifically, he sensed that perhaps there was some feeling toward going along with the language suggested by Mr. Robertson. He then inquired whether those who had spoken early in the meeting now would deem it preferable, after hearing the subsequent discussion and suggestions, to go further than merely to eliminate the two words he had mentioned. Mr. Treiber said that this would be agreeable to him, while Mr. Erickson said although he had no fixed feeling his preference would be words "moderate" and "needed." Mr. Irons said he had simply to omit the no strong feeling and would be willing to accept the suggestion of Mr. Robertson, and Mr. Mangels indicated to the same effect. Mr. Deming similar to those of Mr. Erickson. Mr. Allen stated that his views were willing to omit the two words, but that otherwise stated that he would be that he would accept the while Mr. Leedy stated he would favor no change, said that he would favor no change; if a Robertson proposal. Mr. Leach it would be better to adopt be made, however, he thought change were to than just to had suggested, rather the lines Mr. Robertson something along would accept the Robertson Mr. Mills said that he omit the word "moderate." proposal.
Mr. Shepardson said that he would favor no change. If a change were to be made, however, he would do something other than just omit the word "moderate." With reference to the suggestion of Mr. Robertson, Mr. Shepardson proposed that clause (b) might read more smoothly if it provided for operations with a view "to encouraging monetary expansion for the purpose of fostering sustainable growth in economic activity and employment." Mr. King stated that he would prefer to leave the directive un changed, and Mr. Bopp indicated that he would favor the Robertson proposal as modified by Mr. Shepardson. Mr. Bryan expressed a preference for leaving the directive unchanged but added that if a change were made he would prefer the Robertson proposal to the others that had been that the Robertson suggestion would be agree mentioned. Mr. Johns said be would favor no change in the to him, and Mr. Szymczak said able directive. of the discussion, it was made that, in the light The suggestion the language for clause (b) be possible to accept by acclamation might of Mr. Shepardson. by the suggestion Robertson, as modified suggested by Mr. one of the members the part of at least an indication on there was However, it would be the directive that no change in Committee who favored of the and in the policy in the minutes have the votes recorded desirable to record of the Committee.
Thereupon, upon motion duly made and seconded, it was voted, with Messrs. King, Shepardson, Szymczak, and Allen voting "no," 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 securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to encouraging monetary expansion for the purpose of fostering sustainable growth in economic activity and employment, and (c) to the practical adminis tration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; To purchase direct from the Treasury for the account (2) of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short term certificates of indebtedness as may be necessary from time for the temporary accommodation of the Treasury; time to the total amount of such certificates held at provided that the Federal Reserve Banks shall not exceed in any one time by the aggregate $500 million. were any comments on inquired whether there Mr. Balderston then forthcoming period as during the for open market operations the consensus stated by him earlier during the meeting. the question whether point, Mr. King raised In discussion of this it had been following in continue the policy that the Committee could the policy directive. agreed upon in view of the change
Mr. Robertson said he sensed that many of those at the meeting felt that the Desk should not endeavor to offset the whole amount of reserves that would be released through the action of the Board relating to vault cash and reserve requirements. Then, after noting that the record of the July 26 meeting indicated that the Committee was aiming at a given figure of free reserves, he asked whether the consensus today did not mean that the Desk would look more to the total picture. The figure of free reserves might rise, but this still might not represent any further easing. Mr. Rouse noted that the figure might rise or that it might go down. Mr. Balderston said he gathered from listening to the discussion the Committee desired to carry over the goals discussed at today that the July 26 meeting. The same goals would be carried over, but in view the Committee desired to give the Account of the shifting situation Manager more freedom. Mr. Robertson suggested that the goals today included a quali make errors on the side of ease. fication that the Desk would of resolving doubts on the stated the matter in terms Mr. Rouse Robertson expressed agreement. a revision with which Mr. side of ease, it, the goal was also said that, as he understood Mr. Shepardson growth in the money supply. to provide for some moderate for although, as Mr. this was to be hoped Mr. Rouse stated that to figure on. Mr. it was a little difficult had pointed out, Noyes
Balderston commented that this was particularly true in view of the Treasury tax and loan account balance at the moment being larger than customary, to which Mr. Rouse added that the Desk should have an assist in that respect in view of the prospective payments by the Treasury. Mr. Balderston then inquired of Mr. Rouse whether the general instruction was what he thought he needed for the next few weeks, to which Mr. Rouse replied that it sounded like a vote of confidence but that he was still a little fearful. He then stated that he had no questions. It was agreed that the next meeting of the Federal Open Market Committee would be held in Washington on Tuesday, September 13, 1960. Mr. Johns, speaking as Chairman of the Presidents' Conference, said he had been interested in the indication that material might be coming out to the Presidents at some point with respect to the study of the classification of reserve cities. In view of the fact that the would be meting on September 12, he inquired Presidents' Conference could do to prepare for dis there was anything the Presidents whether of the Board and the Presidents the Board at the joint meeting cussion with have discussion at that it was intended to following day, if in fact the to be helpful to have time it was frequently found time. He noted that study such a matter the Conference to Subcommittee of a Committee or for to the Presidents. and present suggstions
It was indicated that material on the subject probably would be distributed to the Presidents within a week. Mr. Balderston commented in this connection that the material to be sent represented tentative sug gestions based on tentative assumptions. The Board did not wish to send out just a blank piece of paper, and it would therefore send what was available with a request for criticism and ideas. commented that the Board had taken no position and Mr. Szymczak to be sent out was in the nature of a collection of that the material working papers. it might be appropriate to refer the Mr. Johns suggested that the Subcommittee on Committee, and that perhaps material to a Conference off in the latter part of pick up where it had left Legislation might last year. would be one the matter of procedure replied that Mr. Balderston to decide. In and the other Presidents of the Conference for the Chairman it could get. all of the help Board would appreciate however, the any event, then adjourned. The meeting Secretary
Also: Record of Policy Actions