October 4, 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, October 4, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Bopp Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Irons, Alternate for Mr. Bryan Mr. Treiber, Alternate for Mr. Hayes Messrs. Leach, Allen, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson and Deming, Presidents of the Federal Reserve Banks of Boston and Minneapolis, respectively Mr. Young, Secretary Assistant Secretary Mr. Sherman, Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Hostetler, Marget, Noyes Messrs. Brandt, Eastburn, Tow, Associate Economists Roosa, and Open Market Account Manager, System Mr. Rouse, to the Board of Governors Mr. Molony, Assistant of Research and Adviser, Division Mr. Koch, Board of Governors Statistics, Board of to the Chairman, Mr. Knipe, Consultant Governors Finance Section, Keir, Chief, Government Mr. Board and Statistics, of Research Division of Governors Federal Vice President, First Mr. Patterson, Bank of Atlanta Reserve
Messrs. Ellis, Ratchford, and Mitchell, Vice Presidents of the Federal Reserve Banks of Boston, Richmond, and Chicago, respectively Messrs. Parsons and Coldwell, Directors of Research of the Federal Reserve Banks of Minneapolis and Dallas, respectively Messrs. Arlt and Lynn, Assistant Vice Presidents of the Federal Reserve Banks of St. Louis and San Francisco, respectively Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on September 13, 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 September 13 through September 28, 1960, and a supplementary report covering the period September 29 through October 3, 1960. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Rouse commented as follows: As the Committee has instructed, we have been operating the market rather than on the basis of primarily on the feel of this has involved the insertion of over reserve statistics, and $400 million of reserves into the market since the last meeting. have been helpful at all, it has been to point If the statistics least, higher levels of that for the time being, at up the fact reserve availability have been needed to achieve the same degree existed earlier. A primary in the money market that of ease use of a heavy volume of credit reason for this is the continued continue at dealers, whose inventories by Government securities have come to regard as than twice as large as we levels more that banks are addition, there are indications normal. In
putting the reserves supplied by the System to good use. Loans have been moving upward, and at the same time banks have been able to add somewhat to their investments. These results, which indicate that the money supply is continuing to grow, have taken place without any further downward pressure on interest rates. Between now and the end of the year the Treasury will be involved in almost continuous financing operations. First, the schedule tentatively calls for a refunding of the one-year bills maturing October 17. This would presumably be through an auction, possibly with a paydown of $500 million, so that the amount to be bid for would be limited to $1.5 billion. The second operation would be a borrowing of about $3 to $3.5 billion of new cash around the third week in October, probably largely through the auction of a June tax anticipation bill, some of the proceeds of which could be used to make a paydown on the October 17 bills. In the first two weeks of November, there will have to be a refunding of the $10.8 billion maturing bonds and certificates, of which the System Account owns $5 billion. Whether this refunding will be done on a cash or exchange basis will depend on the state of the market at the time of the refunding. On top of all these activities, the Treasury is considering whether to have another advance refunding in the first part of December to extend some of the one-to-five year debt into the five-to-ten-year area. A final possibility is that the Treasury may wish to refinance part of the Series F and G Savings Bonds maturing in early 1961 through an exchange offering before the year-end. There are about $750 million of these obligations maturing next year. prospects for the Treasury's financing operations The the moment, since the market has not do not seem bright at underlying bullish influence of the behaved well despite the Speculative holders, as well as most economic situation. buyers, are now following a "wait and see" course potential Heavy schedules of the many current uncertainties. in view financing have also had a dampen of new corporate and municipal overhang of those issues along with a sizeable ing influence, securities in profes inventories of Government and the heavy plans is expected of Treasury Some announcement sional hands. made later this week. to be he would expect that Mr. Rouse said In reply to a question, of the one-year relate to the refunding announcement would the Treasury
bills maturing October 17 and to the cash financing, with no mention of the refunding of bonds and certificates maturing in November, an advance refunding, or a refinancing of Series F and G Savings Bonds. Thereupon, upon motion duly made and seconded, the open market transactions during the period September 13 through October 3, 1960, were approved, ratified, and confirmed. A staff memorandum on recent economic and financial developments in the United States and abroad had been distributed under date of September reference to economic developments, Mr. Noyes made 30, 1960. With further the following statement: At the mid-August meeting of the Committee, I suggested that one's conclusions from the information then becoming available depended heavily on the expectations which had gone before. This same observation seems to me to apply to most of the facts that have emerged in the last three weeks. The absence of a decisive movement in one direction or the other has left both the optimists and the pessimists without clear cut confirmation of their expectations. Perhaps this has been illustrated best by the rather violent movements in the stock market in both directions. On the plus side the increase in new orders for August attracted particular attention. The rise in orders received metal producers and electrical machinery manu by fabricated facturers was especially heartening. The very rapid increase in loans and investments at weekly and the strength in the business loan reporting member banks were also widely regarded as an encouraging signcomponent of the underlying facts would justify. perhaps more so than all comment on these developments more I am sure Mr. Thomas will of business develop the purpose of this analysis fully, but for expansion has at least be noted that the loan ments it should and has also demon psychological impact had some favorable is such as of monetary policy the present posture strated that demands without further to meet increased loan to permit banks sales from their investment portfolios. shortly after the last meeting News which was released of their July drop in starts regained almost all that housing
August, and more recently that new construction put in place in September was also up slightly, provides some reassurance. On the negative side, there is little doubt that the in formation on employment is the most discouraging news of recent weeks. After seasonal adjustment, both initial and continuing compensation claims showed a further rise in September to levels which have heralded or confirmed downturns in economic activity in the past. The fact, not yet generally known, that the gross national product was probably down slightly from the second to the third quarter will almost certainly have unfavorable repercussions. Continued operations in the steel industry at only a little more than half of capacity, even as assemblies of 1961 autos expanded, and the failure to get even a seasonal rise in ingot output from August to September have been depressing influences. Both the number and liabilities of business failures, as reported by Dun and Bradstreet, have been running at or close to their postwar highs. In the face of this mixed--but predominantly discouraginginformation, attention has been focused more closely than ever on final takings, especially by consumers, for clues to the future course of business activity. From the weekly data for department stores and the ten-day reports on sales by automobile dealers, it appears that seasonally adjusted retail sales may be off a little from August to September. However, the last half of September appears to have been somewhat stronger than the first half. reports of price concessions, espe There are continuing some recent evidence that these cially for durable goods, and may be generating a consumer response. It is noteworthy that Research Center found a large in its August survey the Survey felt this was a good time consumers who stated they number of of favorable price conditions. to buy durable goods because be no question but that over-all In summary, there can and is probably continuing to economic activity has declined the index of industrial pro It appears likely that decline. breaking out of another point in September, duction will drop it has maintained so far this year. the 109-111 range so far have been most of the declines On the other hand, it seems to than an even bet, it may be less moderate. While current downtrend that the still a possibility there is me that of credit that has the substantial easing be reversed by may confluence of seasonal factors, already been achieved, a favorable in the Government's fiscal operations, including the seasonal shift steel, which such as in some industries, activity and improved levels for several apparent consumption been producing below have
months. I might add, however, that I think this analysis suggests that the time within which such a reversal could occur is running out. If the downtrend is not arrested in the next few months--or at most before the first of the year--there would be much less chance that we shall avoid a deeper and more prolonged recession. Mr. Thomas presented the following statement with respect to financial developments: Bank credit developments in September were in some respects spectacular and apparently in contrast to other economic trends. Total loans and investments--at least of member banks in leading cities--increased more than in any other September of recent years. The increase began in the last week of August shortly following announcement of Federal Reserve action to supply additional reserves and to lower discount rates. At this stage, however, one cannot with certainty attribute these developments to an easier money policy, nor should a hasty conclusion be drawn that they are indicative of an upturn in economic activity, not yet shown by the economic indicators leading or coincident. Special factors can account for much, if not all, of the unusual increase in bank credit. It can definitely be said, nevertheless, that System policies in the period made possible the increase without severe pressures on money markets and interest rates, even though they did not the availability of credit under the spark it. Furthermore, circumstances avoided unnecessary restraints that might have activity. The longer-run significance from retarded economic the standpoint of economic activity and Federal Reserve policy will depend upon further developments in the weeks ahead. As to the facts, July and August were a period of moderate credit expansion. Bank loans to business declined although or slack usual for this period. New security issues by some increase is governments were larger than corporations and by State and local years. Mortgage loan smaller than in many other in 1959 but also less than in other recent years. expansion was evidently and was less than a credit slackened further Growth in consumer borrowing was, of course, much year ago. Federal Government banks increased their holdings of reduced from last year, but Government securities in contrast to a decline last year. at city banks business loans in contrast, During September, September. Bank as in any previous by fully as much increased more than in the same month loans on securities increased much
of previous years; and bank holdings of securities increased substantially whereas they usually decline in that month. New security issues were moderately large, although below previous high records. Total bank credit expansion, as previously stated, was larger than in any previous September. The increase was particularly large in the four weeks ending September 21. A greater than usual decrease occurred in the last week of Septem ber, but the record for the month still stands. Special factors that may account for the exceptional bank credit expansion in September were (1) large Federal tax collections, along with heavy dividend and other payments customary in that month; (2) the absence of tax antitipation securities maturing in September; and (3) a shift in the liquidity position of corporations and perhaps of other businesses that has been developing this year. Treasury receipts from all taxes were larger than in any pre vious September, reflecting principally heavy corporate income taxes payable in that month. In the previous two years, when corporations have been expected to pay one-fourth of estimated tax liabilities in September, not only were the amounts payable somewhat smaller, but also some of the payment could be made by turning in maturing securities. Corporate liquidity, moreover, has been reduced since early this year. Cash balances have been drawn down some and the large holdings of Government securities built up in 1959 have been con reduced since February. Businesses, therefore, to meet siderably and other payments due in September, had to borrow large tax from banks and also to reduce further their holdings of Govern The securities sold were purchased either by ment securities. banks or by dealers, who in turn borrowed from banks. Expansion in business loans at banks, as already indicated, was little if any greater than the seasonal increase usual for September, and analysis of the details indicates that the increase was largely Bank credit to cover tax and related to seasonal influences. provided through the securities channel. other payments was Most of the funds made available by this bank credit expan instance to swell U. S. Government sion have gone in the first in September to by over $2.4 billion deposits, which increased at the end of the month. Generally, Treasury nearly $7.5 billion demand deposits at banks decline in September. Private balances the month, then declined by in the first half of increased sharply It is still uncertain least at city banks. almost as much--at they maintained the usual seasonal pattern, but preliminary whether some further increase average basis indicate estimates on a daily any event the sharp increase adjusted figures. In in the seasonally
in Government deposits did not cause private demand deposits to decline. Total money supply, seasonally adjusted, is probably about 1 per cent above the low level of last June, though still nearly 2 per cent below the peak reached in the summer of 1959. The rate of turnover of deposits in August was 7 per cent higher than a year ago. In addition to the increase in Treasury deposits in September, time deposits increased further, continuing the marked upward trend evident since March. Such deposits at commercial banks have increased by over 5 per cent in the past seven months. For the year to date the accumulation of savings with the principal savings institutions has been somewhat less than a year ago. The decline, however, has not been as great as the decrease in direct investment of savings in credit and equity markets by businesses and individuals from the exceptionally high levels of last year. Since bank credit has expanded more this year than last, most of the decrease in the total flow of funds in credit and equity markets from the record $62 billion in 1959 to around $40 billion this year has occurred principally in direct investment by the nonfinancial sectorsconsumers, businesses, and governments. These shifts no doubt reflect to some extent the effect of high rates of interest last year and lower rates this year. One aspect of this change in the source of credit flows has been the weakness in the stock market during recent months. After reach ing a new high level in July 1959, stock price averages generally fluctuated within a range of 10 per cent until mid-September of this year. In the past two weeks they declined sharply to the lowest the range of fluctuation by about average level since 1958, extending growing realization that is related to a 5 per cent. This decline corporate profits are not likely to be as large as had been anticipated. Heavy demands for liquidity in recent weeks and the resulting markets resulted in some rise of pressures on banks and securities in August. This rise from the low levels reached interest rates the System to make reserves actions by has occurred notwithstanding bills rose in mid-September available. Rates on three-month readily the first time since June. Though they to over 2-5/8 per cent for they are still well below 2-1/2 per cent, since declined to have in August. Six-month low reached early the 2-1/8 per cent above more in yield to around 2-7/8 per cent, bills have risen somewhat Treasury bill rates low of 2-3/8 per cent. compared with a previous dealers built up in August, part the large positions that reflect in for them to absorb the pressure of selling which made it difficult that developed later. to obtain cash by other holders
Rises in long-term rates have reflected in part the effect of the Treasury advance refunding operation and in part the volume of new offerings in the capital markets and dealers' enlarged inventories of such issues. Increases in yields on outstanding corporate bonds have been quite small, and those on U. S. Government securities also moderate, while yields on State and local government issues, where there has been some what more market congestion, have risen somewhat more. Additional reserves to enable banks to meet the unexpectedly large credit and monetary demands in recent weeks have been liberally supplied by Federal Reserve operations. Reserves were made available in late August and early September through the release of vault cash and the reduction in requirements at central reserve city banks. These additions were partially offset by reductions in System holdings of securities, but on balance the total volume of reserves declined less than the seasonal decrease in reserve needs; not only did the money supply increase more than seasonally in August, but net free reserves also increased. From the week of September 7 (which covered the reserve additions and ended just before the previous meeting of this Committee) to the week ending September 28, total member bank reserves increased by about $320 million--somewhat more than had been projected three weeks ago. Required reserves increased by about $100 million more than had been projected, reflecting larger than expected increase in Treasury tax principally a and loan accounts and at least the normal increase in other deposits. Gold movements and foreign operations absorbed about $220 million of reserves--somewhat more than had been the difference was more than counterbalanced allowed for--but by reserves supplied in excess of anticipations through a factors. System operations flow of currency and other return on balance in the three-week period, actually absorbed reserves latest week and in the toward the end of the but heavy purchases $500 million, will result week, aggregating over course of this System holdings over the past net addition to in a substantial throughout the period reserves have continued four weeks. Free Estimates for the $400 million level. to or above the close a free reserve average ending tomorrow indicate current week or more. of $450 million market in the tight money of a relatively Continuance has been attributed reserve availability of the increased face of reserves, with substantial in part to the distribution banks and shortages at city banks. Country excesses in country
bank excess reserves did increase sharply in late August and the first half of September, and since mid-September country banks have reduced their borrowings. Excess reserves have also declined since mid-September and in the past week free reserves of country banks have been little above average amounts held in July and August. It appears that the reserves made available have been largely put to use. Probably a better explanation of the tightness at city banks is that the heavy demands for credit were largely con centrated upon those banks. They made use of all reserves available to them and also continued to be heavy purchasers of Federal funds from other banks. It is significant that city banks did not sell Government securities but added to their holdings, absorbing sales by other holders. Last week, operations in Federal funds were reduced; this was apparently because funds were less readily available for sale, as city banks temporarily increased their borrowings at the Reserve Banks. Whether this reduced supply of Federal funds indicates that other banks have been putting their excess reserves to use in loans or invest ments or is due to some other influence will not be clear until more complete data are available for the current period. In the period immediately ahead, the most important credit market factor will probably be the drawing down of the large Treasury tax and loan accounts. In the next three weeks, assuming new Treasury financing payable October 24, the reduction in Treasury balances will exceed $3 billion. The will be used as they pass to other question is how these funds hands. Will they go to increase private deposits? Will they pay off bank loans? Or will they be employed for be used to securities from banks? Their the purpose of buying Government will depend upon various uses impact on economic developments of the funds for spending or investment as that will be made they pass from one holder to another. increase in private demand deposits The normal seasonal around $2 billion and or four weeks is for the next three should not be expected allowance for growth with a liberal there can be some net contraction exceed $2.5 billion. Thus to in total reserve needs during the in bank credit and a decrease cash financing operation. the next Treasury three weeks until to supply reserves factors are expected In this period market and with a substantial weekly variations on balance, with gold outflow will a larger than assumed possibility that the net amount supplied. reduce
During the coming week, when currency demands increase and float declines, the supply of reserves will probably not be excessive and might even be augmented somewhat. In the subse quent two weeks some reserves might be absorbed by reduction in the System portfolio and still leave adequate amounts for any likely credit and monetary expansion. Retirement of outstand ing repurchase contracts will absorb only a portion of the redundant reserves likely to be available at that time. System operations will need to be regulated according to the state of the money market. After the week of October 26, the Treasury cash financing operation and then other seasonal influences will call for supplying additional reserves. If normal seasonal needs are met and free reserves maintained above $300 million, additional reserves to be supplied by System actions will at times need to be as much as $900 million, plus any sales made in the interim. Mr. Marget made the following statement concerning the United States balance of payments: When I last reported to this Committee, on September 13, I pointed out that on the basis of information then available, even if we were to receive no further orders with respect to during the rest of September, net gold purchases gold purchases would be "about as large as in by foreigners in September August." Actually, we did receive further gold orders, with that the gold figure for September, at $315 million, the result for the months of July and was equal to the total purchases August combined. the September figures for of course do not yet have We To the extent that we may take foreign-owned dollar balances. holdings at the Federal Reserve the figures for foreign dollar in foreign dollar as a guide, the increase Bank of New York to have been much smaller in September may turn out balances there can be no doubt and August. But than it was in July and the increase for the gold outflow the combined figure that the third quarter of dollar balances during in foreign-owned about $500 million a combined figure averaged this year--this August, as compared with a monthly average month in July and as to invite be such May and June--will million in of $280 on what will undoubtedly be generally widespread comments in our balance-of-payments as a deterioration characterized influential of that the more can only hope position. One will be well informed. these comments
It would not be well-informed, for example, to fail to observe that the "deterioration" in question can in no sense be interpreted as indicating a worsening in the trade account of the kind that, in 1958 and up to the middle of 1959, was the source of such widespread concern with respect to our balance of payments. In my last report to this Committee, in commenting on the July trade figures, I pointed out that our trade surplus had risen from around zero a little over a year ago to a figure of around $5 billion. This conclusion is not significantly changed by the latest figure, which we now have, giving a preliminary total of exports for August. This August figure, while it is below the July figure (the height of which reflected mainly a bunching, in that month, of jet aircraft shipments and large end-of-season exports of raw cotton), was still slightly above the relatively high average May-June rate. With imports remaining relatively steady, it is therefore quite clear that the cause of the "deterioration" in our over-all balance of payments that began in July has not been due to a deterioration of our trade position. It is equally clear, on the basis of other information at our disposal, that a major cause of the "deterioration" in short-term capital outflow, which in has been an increase been significantly affected by the differences in the turn has here and abroad. It is to be hoped level of interest rates the "deterioration" of our balance of that public comment on of this year will take adequate payments in the third quarter fact, and will not misread its implications. account of this that some countries, in presenting It is a fact, for example, not regard this kind results, would their balance-of-payments balance of payments at all, capital outflow as affecting the of claims on us which the increase in short-term on the ground that is matched by our equivalent by the capital outflow is created was borne in foreigners." (This "claims on item of short-term distinguished governor last week when the strikingly this on me also to be banks--who happens the European central of one of did in fact treat short-term me whether we an economist--asked deficit in affecting the over-all outflow as a factor capital that he then added I should add our balance of payments. that we should do so, that it was probably natural immediately is, a currency with a "key currency"--that since, as a country currency by other used as a reserve which is very widely as part of our but gold not regard anything did countries--we expect that the practice we might even though in reserves,
reserves "lost" as a result of an unfavorable international structure of interest rates could be expected to flow back when this structure of interest rates changes.) There is in fact no evidence, as yet, of any action by foreign monetary authorities with respect to their dollar balances which would indicate that they do not understand this fully. But this is not the same thing as saying that these authorities are necessarily fully convinced that we are close to a solution of our balance-of-payments problem as a whole. On the contrary, we may expect that renewed public discussion of the size of our balance-of-payments deficit, in conjunction with discussion of the continuing gold outflow, will lead to a renewed posing of this basic problem, which has far more serious implications than the particular matter that is now so much in the center of public discussion; namely, the intensification of gold outflow in relation to short-term capital movements induced by interest-rate differentials. It is possible, indeed, that this renewed public dis cussion of the basic problem may start with the citation of a passage, which has already attracted considerable attention, in a speech made a week ago yesterday by Per Jacobsson, the Managing Director of the International Monetary Fund, at the Annual Meeting of that organization here in Washington. "There is now," he said, in speaking of the U. S. balance of payments, "a substantial trade surplus, which for the whole of 1960 may exceed $4 billion and which, with net income from investments and other invisible receipts, to $6 billion." "This," he said, "would may well amount be sufficient to cover fully the present rate of U, S. Government expenditure abroad, including military expendi ture and economic grants and loans." This, to be sure, not only "the outflow of short-term would leave uncovered export of long-term capital on private funds" but also "the he said, "these movements--and account." "Nevertheless," government loans--have as their counter the same is true of of foreign assets, and in this way part the acquisition are somewhat different from an outflow of funds resulting on current account." from a deficit true; and it should provide something This is, of course, likening of the balance-of-payments corrective for any of a to that of countries which, of the United States position and acquiring no balance their current accounts unable to their reserve losses, as a counterpart for claims on foreigners
are in effect living on their capital. But there, one fears, the crumb of comfort ends. For the United States is in the position not only of a great trading nation and a great lend ing nation: it is also in the position of a banker. That is to say, it has to be concerned also with its liquidity position; and from this standpoint it is small comfort to be told that long-term claims are being built up against foreigners if a considerable part of these long-term claims are being matched, not by exports which would definitively discharge our obligation to deliver real resources to those to whom we lend, but by short-term claims against us held by those countries which did deliver the real resources. In contrast to the position created by the movement of short-term capital in which short-term claims on us are matched by our short-term claims on foreigners, we would be in a position of borrowing short and lending long, a process which, to put it mildly, has been shown to have limits, in international as well as in domestic finance. What this amounts to saying is, of course, that as long as the nontrade international commitments of the United States remain at their present level (to say nothing of their going as the result of new commitments for foreign aid), even higher our export performance, good as it is by comparison with the grinding decline in exports from 1958 to the middle of 1959, enough; and that it will not be good enough is still not good effectively in balance, so that until our over-all accounts are in order to settle our accounts with it will not be necessary, gold and dollars to them. One foreign countries, to transfer must underscore heavily, the must add to this, and indeed one himself added: "It must be caveat which Mr. Jacobsson further which has occurred in the borne in mind that the improvement while it is basically an U. S. current account this year, from some special factors, important development, results other industrial countries. the strong boom in particularly the United States' to conclude that therefore, too early It is, overcome, and continued have been fully payments difficulties vigilance is required." statement to which one a reasonable, balanced This is imply, that our and does not It does not say, can subscribe. serious, as of this moment, problem is so balance-of-payments in our efforts to cope deprive us of all flexibility as to domestic situation. It simply with the requiremnts of the be regarded as virtually which ought to states a proposition the requirement of flexibility namely, that self-evident; be interpreted as permitting in the current situation, cannot,
a range of action as unlimited as it might have been if our basic balance-of-payments position were different from what it is in fact. Mr. Treiber presented the following statement of his views on the business outlook and credit policy: Recent economic activity has been disappointing. The seasonal upswing customary at this time of the year lacks its usual vigor. On the other hand, there is no evidence of serious deterioration. With retail sales showing no increase and manufacturers' sales declining, business concerns are very cautious on their inventories. Surveys of business plant and equipment expendi tures point to a leveling off or decline in capital spending. On the other hand, some August developments hint at the possibility of an upswing in the home building sector. In addition, Federal Government defense spending is being stepped up slowly, and State and local governments are expanding their construction outlays. The hesitancy in consumer demand, the leveling tendencies in business demand, and increased domestic and foreign competition have been reflected in an unannounced easing of prices of many types of manufactures. There is little evidence as yet, however, of aggressive price reductions aimed at increasing volume. Economic activity in Europe is strong, although there are some signs that the expansion is moderating. Because of our balance-of-payments deficit, foreign official holdings of continue to rise. And there has been a further dollar assets outflow of gold reflecting the practices of foreign central to the portion of their reserves to be held banks with respect of foreign visitors has emphasized in gold. The recent stream United States fail to take adequate the concern abroad lest the correct its balance-of-payments deficit, and lest measures to it succumb to excessive monetary ease and fiscal laxity. of the Treasury's prospective Our most recent studies reduction in the estimated indicate some income and expenditures for the current fiscal year. Such a change would, cash surplus of course, reduce the contractive effects of a budgetary surplus. for bank credit. to be a good demand There continues mid-year has been business loans since the demand for Although than it was last year, the demand was strong in less vigorous
September. The poorer record in August reflected in part a shift from bank borrowing to financing through commercial paper to take advantage of a rate differential. The volume of commercial paper, finance paper, and bankers acceptances has increased substantially. The rise in member bank reserves in September suggests that a base has been provided for a further increase in the money supply. Short-term interest rates, as measured by the three-month United States Treasury bill, are nearly half of what they were at the beginning of the year. Other short-term rates have declined substantially, but not as greatly as the bill rate. Mortgage money is more readily available, but rates are sticky. I wonder to what extent a further decline in mortgage rates might stimulate construction, for I think we would not want to see additional construction held back because of inadequate credit. Although the Federal Reserve has contributed greatly to credit availability, the decline in long-term interest rates has been quite modest. This may be one of those times, arising once while, when it may be well for the Committee to consider in a reduction in long-term rates the extent to which a further contribute to economic activity. might abroad, particularly for money market Interest rates interest rates in the United are much higher than assets, is some attraction to investors, States. Therefore, there funds abroad. We must and American, to move both foreign the level of interest rates bear this in mind in considering the level of short-term the United States, particularly in rates. United States act promptly important that the It is balance-of-payments deficit. wisely to rectify its and more circumscribe the ability Failure to do so will more and a flexible monetary policy. of the Federal Reserve to pursue for the Federal Reserve may no longer be practicable Indeed, it reduction in long-term about a substantial to seek to bring bill rate and a very low Treasury helping to produce rates by rates. other short-term developments counsel business and credit In our opinion, ease. We should avoid, of the policy of credit a continuation to do so would much lower; rates driving short-term however, problems without promoting intensify our balance-of-payments for a change We see no reason advantage domestically. any real Later this discount rate. change in the or a in the directive
week the Treasury will announce its plans for refunding the one year Treasury bills maturing October 17, 1960, and for raising additional cash. This prospective Treasury financing counsels the maintenance of an even keel in the money market. While reserve requirements and margin requirements are not within the jurisdiction of the Committee, it seems to us that some time this fall it may be opportune to reduce further the reserve requirements applicable to central reserve city banks, bringing closer to fulfillment the Congressional mandate to abolish the differential between central reserve cities and reserve cities. As for margin requirements, we tend to think of a margin requirement of 50 per cent as a normal requirement. Recent events in the stock market would seem to indicate little need for continuing the present degree of restraint on the availability of credit for the purpose of purchasing and carry ing securities. As for open market operations, we believe that the Committee should seek to maintain a comfortable money market atmosphere. This would mean, for example, that the Federal funds rate should frequently be below the discount rate. On the other hand, it would seem important to avoid any substantial decline in the rate on three-month Treasury bills. We think that the Manager should be given wide latitude to supply reserves according to the tone of the market. Mr. Erickson reported that the sideways movement in the First District had continued, with no apparent strong tendencies either upward or downward. As he had reported earlier, the New England production index went up from 118 in May to 124 in June; in July it dropped to 122, the same as in July 1959. What the index would do in the future remained with 30 to 40 thousand people out of work in the to be seen, particularly a continuing strike. The Dodge figures on construction area because of contracts in August showed a gain of 19 per cent, the best since April contracts and 5 per was 64 per cent in nonresidential 1959. The increase increases in all categories except utility cent in residential, with
companies. The cumulative figure for the first eight months of the current year lagged 9 per cent behind the previous year, however, primarily due to a 40 per cent drop in public works and utilities. The gain in non agricultural employment from July to August was the same as last year, but the unemployment situation had worsened, as it had nationally; the volume of new and continued unemployment compensation claims was sub stantially higher than last year. For the first eight months of the year, the cumulative figure on department store sales was 3 per cent above the previous year. In July, new car registrations were up, whereas they were down nationally; for the first seven months of this year, regis trations were 18 per cent above 1959, this increase also being greater of mutual savings banks for September the national figure. The survey than August sales of Series F and G Savings had not yet been completed, but in redemptions decreased. The rate of redemptions Bonds increased over July and sales was the lowest since February. over less than in the previous in the District were Business failures were greater than in the same month of 1959. year, though in August they New England than nationally more favorable in incorporations had been New each month since March. in buyers of banks were substantial weeks District In the past three discount window at the said. Borrowings funds, Mr. Erickson Federal and averaged around on only four days, million or more amounted to $10
$6 million. The heavy borrowings were on days when the larger banks could not buy Federal funds. Mr. Erickson stated that he would favor no change in the policy directive or the discount rate. In his opinion the Desk had done an admirable job in supplying reserves aggressively, and he would favor issuing the same instructions as before. He would supply reserves as needed, and if the Desk should anticipate the need for reserves somewhat he would not object. He had been pleased to see the Federal funds rate below 3 per cent on a number of days, and he hoped that this would continue to be the case in the next three weeks. Mr. Irons reported that, broadly speaking, conditions in the Eleventh District were similar to those prevailing nationally. Activity was moving along in sideways fashion on a high plateau, with mixed forces underlying the total. On balance, however, there may have been some slight weakening during the past three weeks, and some indicators were a little less favorable. The index of production was down, and until recently department store sales were off somewhat. On the other hand, construction had improved substantially, as reflected by contract awards, and the agri by some spottiness, was good in total. cultural situation, although marked In Texas, unemployment had declined a bit. deposits of District banks said that demand and time Mr. Irons weeks, as were loans, and that reserve were up during the past three
positions were somewhat easier than several weeks ago. On balance, District banks had been sellers of Federal funds; only one large bank had been a persistent and substantial buyer of Federal funds. Borrowings at the Reserve Bank were comparatively light, averaging around $12 to $14 million, with practically all of the activity accounted for by smaller banks borrowing for seasonal reasons. The one large bank mentioned previously had come to the discount window on a few days when Federal funds were not available. Mr. Irons noted that there were some factors that might be considered neutral. Employment was just about the same as a year ago, and there had been no change recently in the petroleum situation. Psychologically, there did not appear to be an attitude of pessimism, an attitude of reconciliation to the point of view that there but more was not likely to be too much change one way or the other. the view that during the past three weeks Mr. Irons expressed out Comittee policy had been operations of the Desk in carrying the been favorable from the System's Developments had most satisfactory. expansion in bank credit There had been a substantial standpoint. so much desired was being achieved, the increase in the money supply and pressing down short possible to avoid time it had been while at the same the same like to see approximately He would term rates substantially. further ease aggressively. any attempt to force continued, without policy
10/4/6 He would meet seasonal requirements and, as best as could be determined by the feel of the market and other factors, the requirements for essential and reasonable loan expansion. However, he would avoid a degree of ease that would tend to push short-term rates substantially lower. In his opinion a market position reflected by a bill rate fluctuating from 2-1/4 to 2-1/2 per cent, a Federal funds rate from 2-1/2 to 3 per cent, and member bank borrowings in the area of $250 to $400 million would be appropriate in the present situation. He would not recommend any change in the directive or the discount rate at this time. Mr. Mangels said that the Twelfth District picture was somewhat mixed. In the West Coast States there had been a further decline in employment, and unemployment was at a rate close to 6.5 per cent. On the other hand, there was an increase in both residential and non residential building awards in August, which was somewhat unusual shows a decline. While both categories because that month normally nonresidential contract awards were were up 19 per cent from July and year ago, the residential figures were about 18 per cent higher than a had improved somewhat in below 1959. Steel production still somewhat 52 per cent to increasing from few weeks, with operations the past to a rather large been due in part this having per cent of capacity, line to Canada. There for a natural gas transmission order for pipe bars and demand for reinforcing in the been some improvement had also that the steel seemed to feel in the industry plate, and people tin
problem might be bottoming out. There appeared to be somewhat the same feeling in the lumber industry, although output was still down, inven tories were remaining constant, and orders had not increased. Fir prices had softened, but plywood prices had increased because of the rather substantial curtailment of production. Department store sales were about 3 per cent below a year ago in the four-week period ended September 21, and it appeared that sales for the month of September might show a 3 to 4 per cent decline from August. New car registrations in California were lower in August than in any other month this year, but information for September indicated a substantial pickup in sales as compared to 1959. The farm situation apparently was not as good as had appeared at mid-year, with some in estimates of crop output. Some reductions in market prices and having difficulties with the unions; farmers in California were still were being plowed under. that in some cases crops it was reported better; there were 24 per seemed to be a little The cattle situation than a year ago. on feed lots in California cent more cattle banks increased that loans of District Mr. Mangels reported mostly in the September 21, period ended in the four-week slightly Real estate for tax purposes. 14 due to borrowings week ended September were outstandings loans increased, although consumer declined and loans and time increased slightly Demand deposits below mid-year. somewhat savings deposits to find rather encouraging up. It was also were deposits
increasing, even though at a somewhat lower rate than at savings and loan associations. District banks increased their holdings of Government securities about $140 million in the past three weeks; they were net purchasers of Federal funds to the extent of about half a billion dollars in the past week and estimates for the current week were about the same. Borrowing from the Reserve Bank had been nominal; one sub stantial borrowing last week was reportedly due to inability to obtain Federal funds. In some areas, banks reported that they were in a rather tight position. Mr. Mangels said it was his feeling that a policy of ease should continue. The projection for free reserves of $480 million for the week about what he had in mind; that is, free reserves ending tomorrow was prospect of a further decline in the $500 million level. The around general business activity seemed to him to be greater than any possibility were taken in the early stages, it would do of an increase. If action waited until later, and if the situation more good than if the System quickly. The period was be quite easy to reverse should improve it would when the usual seasonal demand for loans could be expected, approaching Also, the time was approaching should be supplied freely. and reserves and an even keel would be in the market frequently when the Treasury As quickly as possible, therefore, he would policy would be required. basis. As he had indicated, reserves on a rather liberal supply additional
he would try to maintain free reserves of around $500 million or a little higher. The discount rate and the directive seemed to him to be quite proper. Mr. Deming reported that Ninth District economic developments were mixed, and that opinions also were mixed regarding the outlook. Viewing the picture broadly, agricultural conditions showed considerable improvement over a year earlier, trade and industry revealed some tendency to slacken, although this was not consistent from area to area, and bank liquidity positions had been eased. The District farm outlook seemed excellent, Mr. Deming said. Cash receipts in the 1960 crop year (from mid-1960 to mid-1961) should be about 5 per cent greater than in the preceding crop year, due largely to improved crop output, and it appeared that net farm income might increase as much as 20 per cent. If so, this would mean an increase of perhaps 2 per cent in total personal income in the District from this factor alone. The four weeks ended September 21 showed the largest gain in for any comparable period since 1950 while loans and bank deposits investments increased at a lesser rate, resulting in a reasonably good Purchases of Federal bank liquidity positions. improvement in member had declined quite sub at the Reserve Bank both funds and borrowings District appeared to have industrial activity in the stantially. While months, at least on a seasonally adjusted basis, slackened in recent manufacturing, mining activity compared both in durable and nondurable
favorably with a year ago, reflecting primarily the effects of strikes last year in both copper and iron ore. Construction activity seemed to be moving upward, but retail sales during September were disappointing. Mr. Deming said he saw no reason to change either the directive or the discount rate. As to open market operations, he wished to associate himself closely with the position of Mr. Irons. The Desk had done a good job in the past three weeks, and he would like to see the Desk allowed to continue to operate with wide latitude. He would meet seasonal requirements as they built up, but not press too aggressively for additional ease in the market. His summarizing comment was that "we are about where I would like to see us stay for at least the next three-week period." Mr. Allen noted that the Federal Reserve staff summary referred to diverse views on the business situation and said that such views of the Chicago Board of Directors last week. were expressed at the meeting Some saw signs of improvement while others, incidentally a majority, However, it might be representative could find no basis for optimism. the directors wanted to that not one of of an unrecognized confidence a few of them had whereas two weeks earlier the discount rate, reduce reduction might be in order. felt that another said that department store sales in the Seventh District, Mr. Allen the first part of September, were while making a poor showing during September 24. Steel year in the week ended per cent above last three
operating rates continued higher in the District than in the country as a whole. The mills in Chicago were doing better than 60 per cent of capacity and the rate in Detroit was about 70 per cent. Some of the machine tool industry's executives reported that the improvement in orders in August continued in September. Another promising note was that new business generated at the Machine Tool Exposition was not expected to show up until October and November. On the other hand, unemployment claims continued heavy. In the first three weeks of September such claims were 60 per cent over last year in the Seventh District, compared with 37 per cent for the country. Unemployment appeared to be heavily concentrated in the industrial areas; the Reserve Bank's Personnel Department and those of in Chicago had found no appreciable easing in the the commercial banks job market. Farm and construction machinery firms had been reducing pro Recently, International Harvester announced a temporary duction. lay-off of 17,000 workers in a number of plants throughout the country, Harvester reported inventories. However, being to reduce the purpose same report came and the had improved recently, that sales to farmers from Allis-Chalmers. but not increased gradually, was being Automobile production Although sales Mr. Allen said. originally scheduled, so rapidly as 400,000 cars, which estimated at about continued to be for September
would be an improvement of 14 per cent over September 1959, the aor source of concern continued to be the load of 1960 model cars still in dealers' hands, with the concentration in medium-priced lines. If production and sales estimates for September were realized, stocks on September 30 should have been about 900,000 units, including 440,000 1960 models and 460,000 1961 models. That number of unsold old models would be 100,000 higher than on the same date last year and would, it was generally believed, restrict 1961 model sales for several weeks. Mr. Allen went on to say that for what it might be worth as an indicator, the amount of space in Chicago newspapers utilized to advertise for help in September was 17 per cent below September of last year, and had shown a steady decline since March. The amount of advertising lineage was one-third below the relatively high level in the first quarter of 1960, but it was 50 per cent above the level reached during the first half of 1958. received from large Seventh District banks in Information interest rate survey indicated that the prime rate the quarterly followed by a significant decline in the rates actually cut was half of September. The loans during the first charged on business during this period dropped to 4.93 average rate for all loans made As would be expected, the 5.33 per cent last June. per cent, from to some but was reflected the largest loans, showed most for cut proportion of Moreover, a larger in all size categories. degree
the total number of loans reported in September was made at the prime rate than in the previous survey. For the most part, Seventh District banks continued to enjoy lessened reserve pressures. The basic position of the Chicago central reserve city banks had fluctuated between small surpluses and small deficits. In dollar amount, the bulk of borrowing at the discount window during the last month had been concentrated at a few large banks in Detroit and, to a lesser extent, Milwaukee. Borrowing by country banks had continued to decline in amount, frequency, and number of borrowers. Mr. Allen said it was his feeling that in the area of monetary policy the Committee should carry along as in the past three weeks. not change the discount rate or the directive, and he would He would degree of ease in the money and credit seek to maintain the current pending Treasury financing argued picture. He supposed that the three weeks, but he had suggested for the next for a policy such as he issue were not on the table. it even if a new Treasury would favor had been no new developments in the Mr. Leedy said there As had to warrant summarization. of enough significance Tenth District period would for the forthcoming times, policy mentioned several been program, which the Treasury financing largely by seem to be dictated Aside from that, however, an even keel. would call for maintaining both nationally and to him that economic considerations, it seemed
as far as the situation in the Tenth District was concerned, would indicate a continuation of the policy that had been followed during the past three weeks. He wished to associate himself with those who felt that the Desk had done a good job during this period. Some of the objectives of the Committee had been achieved, including increases in the money supply and in loans and investments. For the period immediately ahead, he saw no necessity for changing what had been done during the past period. Mr. Leach reported that business activity in the Fifth District continued to show only small changes, with perhaps a majority of them pointing downward. A gradual but steady decline in District man-hours in manufacturing, seasonally adjusted, had been in progress since May. Employment in trade remained steady, while in financial institutions, service industries, and government it had increased. Production in the textile industry, which was curtailed three or four weeks ago, had at the reduced level. Textile prices remained apparently stabilized soft but had not declined significantly, and leaders of the industry Furniture makers in as mildly favorable. to regard prospects continued seasonal strength, both in new and unfilled the District reported normal much change. Construction complete the year without and expected to orders, at or near its highest level, set in employment in the District remained and the volume of already made Construction awards May of this year.
construction currently in process were significantly higher than a year ago and probably assured the industry of a high level of activity for the remainder of the year. Farm income prospects remained good in spite of crop damage by hurricane Donna, which was severe in certain localities. Retail trade was fairly steady at a level slightly below that of a year ago. Mr. Leach commented that Fifth District banks were definitely in an easier position than at the time of the previous Committee meeting. Total loans of weekly reporting member banks rose more than during comparable weeks of any recent year, but the percentage increase in investments was twice as large. Deposits increased sharply and loan to-deposit ratios dropped from 54 per cent to 52 per cent. Average daily borrowings at the discount window had been quite low, and money market banks had been heavy net sellers of Federal funds. said he thought the Committee respect to policy, Mr. Leach With stand pat for the next the time being and should had eased enough for was now quite a bit position of member banks three weeks. The reserve nothing to be gained by had been earlier, and he saw easier than it existing levels. More interest rates down from driving short-term to the of material assistance would not be in his opinion, ease, and could of payments adversely affect the balance but would economy, in the future. In monetary policy more difficult make the task of he thought the Account degree of ease, determining the prevailing
Manager might give somewhat more than the usual attention to short-term rates. It seemed to him that the System was in a very good position to follow the even-keel policy that was called for by the Treasury financing. He saw no reason to change the directive or the discount rate. Mr. Mills commented that in the normal course of policy making the actions of the Open Market Committee had been governed by a cautious interpretation of, and alignment of policy actions with, statistical evidence of movements in the economy. However, since the best of statistics relate to past events and since the economy was unquestionably experiencing a rapid period of change, in his opinion there was a good case for taking a much more imaginative approach to policy actions that would speculate further into the future and move out of the realm of dead statistics. To implement a policy of that kind which would require adaptation to evidence that might be foreseeable but was a resourceful horizon, he wished to offer a statement not yet clearly visible on the not contemplate any major change in the supply of which in effect did of the commercial banking system reserves that was put at the disposal for supplying those reserves. the choice of a different vehicle but involved the following statement: Mr. Mills then presented volume of mem past experience, a minimum In the light of Banks and a low at the Federal Reserve ber bank borrowing have supported a marked free reserves would level of positive and brought about a sharp of commercial bank credit expansion been the case That not having interest rates. reduction in recessionary financial that the drag of leads to the conclusion effects of an expansionary to overcome the intended forces has tended Reserve System credit policy. Federal kind of situation that this striking indications The most of easy commercial in the midst tight money market exists are a
bank reserve positions, sluggish and falling markets for U. S. Government securities and other types of fixed interest obligations, and an abrupt increase in commercial bank time deposits. As regards the tight money market, the evidence suggests that slackening business activity has set up contractive fi nancial forces that are drawing funds into the major financial centers which are then employed by important borrowers to apply on their bank indebtedness, with the consequence that demand deposits, both from the outlying banks from which they have been withdrawn and from the main depository banks of such borrowers, are subjected to downward pressure. These financial movements may account for the tight condition of the money market. As regards the ragged market performance for U. S. Government securities, the evidence suggests that slackening business activity has reduced the turnover of inventory and accounts receivable investments of commercial and industrial concerns to the point of compelling a divestment of some proportion of their holdings of short-term U. S. Government securities in order to avoid having to compress their sales and inventory activities. The divestment of U. S. Government securities that has reflected these pressues on corporate liquidity positions has resulted in an outflow of such securities from corporate hands that, as it has been absorbed only partially into the commercial banking system, has lodged in the unusually heavy positions of the U. S. Government securities dealers. It would, therefore, appear that a direct relationship exists between the contractive financial forces that seem to account for tight money market conditions and the poor per formance of the U. S. Government securities market in the face of a nonrestrictive Federal Reserve System credit policy. As regards the increase in commercial bank commercial and deposits, the available evidence suggests that individual time this phenomenon is also attributable to slackening business of the holders of with a consequent unwillingness activity, such deposits to employ them more venturesomely. of a Federal Reserve System monetary and The determination credit policy that will constructively counteract the financially that have been discussed is difficult. depressing economic factors are coming onto the fact that U. S. Government securities The market in greater volume than the market's absorptive capacity, the chief vehicle used by the that time deposits have been and U. S. Government securities, gives commercial banks to acquire have been a that what might otherwise reassuring evidence disposal of the commercial placed at the superfluity of reserves date into a erupt at any foreseeable system will not banking
major expansion of bank credit that would force interest rates down to undesirably low levels. As a matter of fact, the real problem seems to be how to develop a Federal Reserve System monetary and credit policy that will counteract the contractive influences that are bearing down on commercial bank deposits. Inasmuch as these contractive forces will increasingly have their initial effects on the deposits of the country banks and the smaller reserve city banks, it would be logical to adopt policies that will sustain the deposit positions of these banks and prevent a spiraling contraction of deposits at all classes of banks. In the light of recent experience, open market policy actions supplying reserves have not induced a credit expansion at the outlying banks sufficient to offset the down pull on their deposits. More positive action seems necessary, and conceivably should take the form of a reduction in the reserve requirements for the country banks. Coming directly into the possession of additional reserves through this policy action the country banks might be expected to employ them in the acquisition of short-term U. S. Government securities, thus creating new deposits as a buffer against potential deposit losses arising from previously described circumstances at the same time that a modest strengthening of influence would have been thrown behind the U. S. Government securities market. Mr. Robertson said it seemed to him that the policy of providing reserves that the Committee was following had been working additional put to use, not only in the expansion of well. The reserves had been liquidity positions of the banks of bank loans but also to improve the loan expansion that would augured well for the further the country, which to believe that the there was good reason be needed. Consequently, should stay on that track. right track, and it had been on the Committee comment Mr. Noyes had was impressed by a Robertson said he Mr. a great deal was going to depend on what happened made to the effect that policy that had been Therefore, if the next two or three months. in the
followed was good up to this time, it would appear, in the absence of Treasury problems, that the Committee ought to enhance the degree to which reserves were made available. However, it seemed to him the Treasury position was one that bound the Committee and that it was necessary to maintain an even keel. Nevertheless, he would do everything possible to provide additional reserves within the concept of even keel. He would not permit tightness to develop in the market any more than it had been permitted to develop during the past three weeks. Mr. Robertson said that he would not recommend changing the policy directive, and that the discount rate could hardly be changed at this stage of the Treasury's financing plans. In the present circumstances, he would adhere as closely as possible to the policy that had been followed while doing as much in the way of further ease as could be done in the circumstances. Mr. Shepardson made several comments on the agricultural situation of his attendance at the recent fall meeting of the National in the light Agricultural Credit Committee. He noted, first, that the level of land be trending downward. In some districts prices appeared definitely to as yet, but in other districts no appreciable change there had been prices had fallen as much as 2 or 3 per cent, and for the country as down almost 2 per cent. In a few areas, particularly a whole they were drop. Second, all there had been a very perceptible in the corn belt, lack of city buyers for farm property. areas reported almost a complete
A constantly increasing percentage of farm purchases was for enlargement of existing units, and there was little in the way of entry of new farm owners. Third, the rate of expansion of farm mortgage debt was down significantly and the rate of expansion of other debt had slowed considerably, with a particular reaction in the amount of feeder loans. There had been some increase in delinquencies and in foreclosures, the latter representing mostly a closing out of inefficient operators. As previously indicated at the spring meeting of the same group, it appeared that more attention was being given to the earning capacity of the borrower and that less reliance was being placed on the security for the loan. Reports from the Department of Agriculture on farm income indicated that while there was some slackening in farm prices there had also been a slackening in farm costs, so the net return to farmers was anticipated to be fully as good or possibly a little better than last year. Turning to the general economic situation, Mr. Shepardson and trends. He was not sure that the noted the diversity of indicators balance-of-payments picture could be changed fast, one reason being that price adjustments do not come about quickly. The report on the price to him for it appeared that more and more situation was encouraging although list prices had adjustments were taking place; sharp-pencil He felt that those adjustments much, deals were being made. not changed was going to be an had to occur if there wholesome and that they were He did not feel that of current accounts. improvement in the balance
the situation with respect to the movement of capital or the expenditures of Government would change fast, but he hoped that there might be some what greater scrutiny of expenditures and appropriate restrictions placed upon the use of funds. Mr. Shepardson said he thought the unemployment situation was going to be relieved only as demand, not the credit situation, improved. He did not feel that the slack at the moment was due to a lack of credit but rather to a lack of demand at existing prices. Mr. Shepardson expressed the view that the System had followed a good program recently and that the results had been satisfactory. He thought the Committee should continue to maintain about the degree of ease that had prevailed and that reserves needed for seasonal purposes should be supplied willingly. However, he questioned whether reserves should be pressed on the market at this time. The time might be approach ing, if it was not already here, when in order to try to maintain a given free reserves the Committee would have to keep pressing to the level of there might be a recurrence of the situation that prevailed point where align himself with the For that reason he would a couple of years ago. He would supply needed Irons, and Deming. views of Messrs. Leach, press reserves on but he would not maintain an even keel, reserves and the $480 million average, fell from reserves, on market. If free the to $400 million or even $350 million, figure indicated by the projections would be serious. not think that that he did
Mr. King said that he would recommend no change in the discount rate or in the directive, which left for consideration the matter of instructions to the Desk. Before coming to that, however, he wished to make a comment on the price adjustments that were being mentioned. In his opinion they did not offer real hope for long-range adjustment because they were based on a desperate need to move goods rather than a reduction in manufacturing costs. Therefore, he got little comfort from the fact that some such price adjustments apparently were taking place. While they might afford a little relief to the general economy, he doubted whether they would provide any long-range correction of the basic problem. As he understood the discussion, Mr. King said, the Committee was in practically unanimous agreement that the atmosphere that had prevailed in the market should continue to prevail. It also seemed to it would not be desirable for bill rates to be fairly well agreed that Account Manager might find himself in a go lower. Accordingly, the to provide some guidance position, and it seemed appropriate difficult objectives produced an find that the conflicting if the Manager should he considered it more important not impossible situation. Personally, than to maintain the rates go substantially lower to let short-term He was doubtful as to of ease in the market. prevailing atmosphere very much, while he was fairly that ease was really accomplishing whether
well convinced that it would be undesirable for short-term rates to go lower. Therefore, if it became necessary to supply additional reserves in large quantity, he would consider the possibility of using other maturities, although he realized that this might ultimately affect short term rates. If the present policy could not be pursued without affecting short-term rates unduly, he felt that the Board perhaps should consider taking action through some means other than open market operations. Mr. Fulton reported that the trend in the Fourth District was slightly downward. Department store sales had not come up to expectations unemployment was up in some areas, particularly the steel and insured In other places, however, there had been some producing centers. in the unemployment situation due to the new model automobiles improvement seemed to be living on hopes, going into production. The steel industry last week. Although there rate this week would be below and the operating and nobody in the the pickup was slight, some pickup in orders, had been for any marked rise. whom he had spoken looked steel industry to doing about as well auto companies were Fulton said that the Mr. production because had cut back except that Chrysler as had been expected, Orders were the past few weeks. cars produced in number of of the large the large over knowledge of with full quite cautiously, being placed auto companies, however, it not for the 1960 models. Were hang of unsold other users orders from shape because be in bad mills would the steel orders for transmission no were practically There had been declining.
pipe and bars. Tin plate was also moving slowly; the can manufacturers had experienced a cutback in orders because the cool summer had delayed some crops. For this reason also, beer and soft drink cans had not been so much in demand. There was no forward buying of steel and orders were for immediate delivery, so the mills were forced to inventory for immediate delivery. It appeared that about 5 million tons of foreign steel would come in this year, and while exports of steel had increased, they were not going to reach 5 million tons. Projections for production in the fourth quarter were slightly above present levels and there did not seem to be too much joy in the outlook for next year, the forecast being that production would be about the same as this year, at least until quarter. If current projections for this year were about the fourth amount to somewhat less than 105 realized, production would probably being hurt, with some companies in the red million tons. Profits were year. Contractual wage increases wind up in the red for this and likely to unless prices could the profit squeeze further in December would tighten seemed highly unlikely. be raised, which that after the Mr. Fulton said machine tool industry, As to the both domestic and foreign, some good orders, exposition in Chicago recent the view that had expressed One machine toolmaker had been received. and therefore was getting becoming quite competitive the industry was abroad to previously sold machines not of the smaller for some orders any extent.
Mr. Fulton said that he would not favor reducing the discount rate or changing the policy directive, and that he thought the Desk had done a good job in the past three weeks. He would like to see the same degree of ease maintained, with emphasis not on free reserves but on the feel of the market, the level of short-term rates, and the Federal funds rate, since in his opinion these were the things that were most indicative of the condition of the market. He concurred in the view of Mr. Treiber that a reduction in margin requirements would do no violence at the present time and might be of help to the stock market from a psychological standpoint. Mr. Bopp stated that conditions in the Third District were approximately the same as in the country as a whole. In brief, develop A recent survey of housing and the real ments had been disappointing. considerable pessimism, and at a recent meeting estate market reflected Discussion Group the views were almost of the Philadelphia Economists' of 1960 and most of 1961. The gloomy regarding the remainder unanimously and there were few exceptions. not deep but it was widespread, gloom was significant increase there had been a went on to say that Mr. Bopp deposits, which was encouraging and also in in bank loans and investments, One bright trying to do recently. had been what the Committee in terms of although the steel had improved, rate in that the operating spot was to 62 per cent of capacity. improvement was only
As to policy, Mr. Bopp said he was concerned about the sluggish ness in the capital markets, where developments seemed somewhat similar to 1958. Although, for a variety of reasons, he felt that nothing should be done at this point, the movement of ease from short-term to long-term markets is not always as automatic as one might hope. He would keep reserve positions in continued ease and would hope that the Federal funds rate might be fairly frequently below the discount rate. However, this was qualified by realization that the Account Manager would have to walk a tight rope so that short-term rates would not be pushed lower. He would recommend no change in the discount rate or in the directive at this time. Patterson said that in August additional signs of weakness Mr. comparisons indicated that Sixth in economic activity and available District activity was no better and might be somewhat weaker. In that month nonfarm employment declined in all States of the District except Tennessee, where a slight rise occurred. Manufacturing employment, quite as much as in the nation as a whole. however, had not declined considerably in recent months, with Cotton textile activity had weakened about 6 per cent below consumption in August adjusted cotton seasonally of the relative because Georgia particularly This had affected January. a lesser extent Alabama there, and to of textile manufacturing importance and Tennessee.
Sixth District retail spending had been sluggish, Mr. Patterson said, just as in the nation. Department store sales, which had been showing greater strength than nationally, dropped 8 per cent in August compared with a national decline of 3 per cent. In September, District department store sales were unchanged. Bank debits, although up in August, had been trending downward somewhat more in the District since February than in the nation. The sales picture within the District had been spotty, with none of the States as a whole showing either general weak ness or strength. Automobile sales were apparently doing better than in the nation, judging from registration figures through July. For the first seven months, registrations in District States were nearly 10 per cent above the comparable period of last year compared with a national gain of just over 8 per cent. Continuing, Mr. Patterson said that residential building had been somewhat stronger in the District than in the nation, although Alabama, Louisiana, and Florida was off sharply from a activity in Mortgage funds were becoming more plentiful, but easier money year ago. upturn in residential construction. not yet resulted in the hoped-for had mixed trends, had not economy, although showing The District's farm Florida, where citrus and in recent weeks except in weakened materially Donna. Loans and investments were damaged by hurricane vegetable crops cities increased substantially during the at banks in leading District to System actions. showing response three weeks in September, first
Mr. Szymczak said that in light of the uncertainties that existed and would continue to exist, he thought that monetary policy had done a good job and that the present policy should be continued. He felt that the Manager of the System Open Market Account had done an excellent job in the market and that the Committee should continue to pursue the policy it had been following. He would favor deferment of any change in margin requirements or in reserve requirements at either central reserve city or country banks. Mr. Balderston said he was comforted by the fact that at long last the money supply seemed to have responded to monetary policy and by the fact that the seasonally adjusted money supply has risen about dollars between June and the middle of September. A related one billion fact was that turnover outside the financial centers was as high as in 7.5 per cent higher than a year ago. June and some Mr. Balderston said he shared the view expressed by many today that the economy had turned downward and that it was following the If one looked at Shiskin's that was to be expected. traditional course than the series con is more broadly based cycle series, which business of Economic Research, he of the National Bureau tained in publications beginning to turn laggards were even some of the find now that would this stage of the business cycle; it down. This was to be expected at present situation. grow out of the upsurge were to unusual if any would be
Therefore, Mr. Balderston said, he concluded that the System had been correct in taking action early. However, he felt that the System should not press its luck until the effects of what had already been done could be observed. The money supply appeared to be responding, and it would seem advisable to wait and see how great the response might be. Mr. Balderston said he would suggest a target of free reserves of about $400 million, realizing that the Committee had been on this target since about the first of September and that experience had demonstrated that there is a cumulative effect in keeping the same target week after week and month after month. Chairman Martin said he thought System policy had been effective and that it was a good policy. He wished only to emphasize the point been made that the Account Manager should operate on the feel that had and not the statistics. The dead hand of statistics and tone of the market for many of the System's difficulties. had been responsible could not seek to correct that monetary policy After commenting Chairman Martin said he continued to all of the problems of the world, from a long-range standpoint, than feel more hopeful about the economy, to some of these problems, but ago. A year ago he saw no answers a year the rolling adjustments coming in the answers were today he thought courage, intelli people had the we as a made. Whether that were being However, he was another matter. to accept them gence, and capacity have that capacity. the nation did have a feeling that continued to
Chairman Martin said that the consensus today seemed clear. There should be no change in policy, in the directive, or in the discount rate. Also, it had been suggested that the Board consider certain questions that were within its jurisdiction. In reply to a question by the Chairman, Mr. Rouse said that he had no comments. The Chairman then inquired whether others had anything further that they would like to say, and no comments were heard. Thereupon, upon motion duly made and seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allow ing 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, vith a view (a) to relating the in the market to the needs of commerce and supply of funds (b) to encouraging monetary expansion for the business, of fostering sustainable growth in economic purpose activity and employment, and (c) to the practical of the Account; provided that the aggregate administration securities held in the System Account (including amount of for the purchase or sale of securities for the commitments other than special the close of this date, Account) at purchased from certificates of indebtedness short-term for the temporary accommodation of the time to time or decreased by more than Treasury, shall not be increased $1 billion. Treasury for the direct from the (2) To purchase Reserve Bank of New York (with account of the Federal desirable, to issue cases where it seems discretion, in Banks) such more Federal Reserve to one or participations
amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Chairman Martin noted that pursuant to the understanding at the meeting on September 13, 1960, there appeared on the agenda for this meeting further discussion of the memorandum from the Federal Reserve Bank of New York dated September 8, 1960, recommending that the Bank's Market Statistics Department be authorized to furnish to the Securities Department quarterly statistics on the trading volume of individual Government securities dealers. If there was no objection, however, he over until another meeting. Two Comittee would like to hold this topic members and one other President were absent today, and he was quite sure them, at least, would like to comment on the matter. that one of to Chairman Martin's suggestion was indicated. No objection of the Federal Open Market agreed that the next meeting It was Committee would be held in Washington on Tuesday, October 25, 1960, the Committee would be succeeding meetings of at 10:00 a.m., and that 22, 1960, and December 13, 1960. scheduled tentatively for November The meeting then adjourned. Secretary
Also: Record of Policy Actions