October 25, 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 25, 1960, at 10:00 a.m. PRESENT: Mr, Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Irons, Alternate for Mr. Bryan Leach, Allen, and Mangels, Alternate Members Messrs. of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presidents of Reserve Banks of Boston, St. Louis, the Federal and Minneapolis, respectively Assistant Secretary Mr. Sherman, Mr. Kenyon, Assistant Secretary General Counsel Mr. Hackley, Mr. Thomas, Economist Eastburn, Marget, Noyes, Roosa, Messrs. Brandt, Associate Economists and Tow, 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, Chief, Government Mr. Keir, Statistics, Board of Research and Division of Governors
Mr. Patterson, First Vice President, Federal Reserve Bank of Atlanta Mr. Hickman, Senior Vice President, Federal Reserve Bank of Cleveland Messrs. Ratchford, Baughman, Jones, Fossum, and Einzig, Vice Presidents of the Federal Reserve Banks of Richmond, Chicago, St. Louis, Minneapolis, and San Francisco, respectively Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Financial Economist, Federal Reserve Bank of Boston Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on October 4, 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 October 4 through October 19, 1960, and a supplementary report covering the period October 20 through October 24, 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: Since the last meeting of the Committee, open market been generally successful in fostering a operations have reasonable degree of ease in the money market without upsetting the securities market for the Treasury's financing operations or creating unduly low short-term rates. These policy objectives are not entirely compatible and of course the results have not been perfect. In the middle of the period reserve availability increased high levels as float rose well beyond normal mid-month to very While the System Account acted to mop up almost proportions, from October 14 through October 19, $475 million of reserves the money market became extremely easy as the excesses lodged New York banks, which found it impossible and accumulated in the
to dispose of all of their surpluses. The reduction of System Account holdings was accomplished largely through redemptions of bills and sales of the shortest maturities of bills so that there was a minimum of interference with the current Treasury financing, which might have suffered from more drastic action. A good demand for bills following the successful completion of the Treasury's two special bill auctions arose in part from the extremely easy reserve situation which in turn produced strong bank buying of the shortest maturities at sharply lower rates. Thus, the effects of the temporary and "sloppy" reserve situation were not inconsistent with the System's objectives so far as the money market and the Treasury were concerned. Bank loans and investments as well as total and nonborrowed reserves have continued to increase. Now, however, we must face the problem of how to deal with the prospective decrease in reserve availability which is certain to result from the decline in float and from the additional reserve requirement arising out of the Treasury's cash borrowing without putting more downward pressure on bill rates. Repurchase agreements will of course be useful and purchases of longer-term bills can probably be made in some size, but at some point soon the size of the prospective operations, coupled with continued bank and nonbank demand, will cause further marked decline in bill rates. To minimize this, the Management would expect to augment bill purchases by purchasing moderate amounts of other short-term issues to the extent the circumstances warrant. Before this is done initially, the intention to do so will be commented on in the morning conference call. Conceivably, the tightening of the money market, if it is permitted to develop, will help keep bill rates up, but the question may come down to whether we, in supplying enough reserves to keep the money market reasonably easy, can do so without depressing rates, especially if substantial central bank demand for bills continues. nonbank and foreign The capital market has behaved about as might have been calendar of new financing and the expected in the face of the hands. Long-term rates have large supply already in dealer due to the technical situation in continued somewhat sticky markets which reflects buyers' the corporate and municipal in a situation of major uncertainties. In the past caution improved somewhat and dealers have few days the atmosphere has issues at higher rates in clearing up unsold made some progress to cope with the American to be in a better position in order issue being sold today. This Telephone & Telegraph debenture crucial point in the long-term seems to represent a offering priced it should go well, and the market; if it is attractively long-term market could then clear itself reasonably promptly.
The Treasury's October financing operations were reasonably successful. The secondary market for the new issues has been good, apparently because banks which took sizable amounts of bill issues have been able to hold on to their awards longer than they normally do. The next Treasury operation will be the refunding of the November 15 maturities amounting to about $10.8 billion, of which the System owns $5 billion in 4-3/4 per cent certificates. The Treasury has announced that this will be a normal exchange operation, which seems wise in view of the market uncertainties. The main question to be resolved is how far the Treasury should go in trying to extend maturities through offering an option to exchange into an intermediate issue. Current market views are that a moderate amount of intermediate bonds could be sold in addition to an anchor issue in the one-year range. With respect to the System's holdings of $5 billion of certificates, the Treasury's plans for an optional offering are sometimes clear by this time, but on this occasion the thinking about the issues to be offered has not yet jelled. After the terms are known, the Manager of the Account will make a recommendation on the exchange of the System's holdings and will ask the Secretary to poll the Committee. In reply to a question by Mr. Balderston regarding the prospect for disposing of securities in the Open Market Account other than bills, Mr. Rouse said he thought it might be possible to sell blocks of such on a negotiated basis. Also, if the Treasury securities in certain periods technique further, that would give the should employ the cash refunding off some of its large hold time to time to run an opportunity from Account matured. In addition, the Account could sometimes break up ings as they although this meant that through exchange operations, its large holdings some longer securities at least temporarily. the Account would have to take bids for notes or certificates. the Account had no substantial In September, the Management concluded or $3 million, and bid was around $2 The largest the market the Account in that sector of in view of the situation that of those bids. not avail itself should
Mr. Hayes suggested that there might be more bids for securities other than bills if the market got accustomed to the idea that the System was willing to sell in that area, and Mr. Rouse agreed. Mr. Leach asked Mr. Rouse to what he would attribute, in the present circumstances, the continuing foreign demand for United States Treasury bills, to which the latter replied that there had been quite a large outflow of funds to certain Western European countries whose central banks were content to keep part of their funds invested in dollar securities. As private sources converted their dollar holdings, central banks were buying dollars and selling local currencies, and the central banks then wanted to invest their dollars in varying percentages in relation to their holdings of gold. As long as the flow of capital out of the United States continued, a demand for bills might be expected unless there was complete loss of confidence in the dollar, which seemed unlikely. Thereupon, upon motion duly made and seconded, the open market transactions during the period October 4 through October 25, 1960, were approved, ratified, and confirmed. memrandum on recent economic and financial developments A staff distributed under date of States and abroad had been in the United reference to economic developments, October 21, 1960. With further Noyes made the following statement: Mr. we had only a few early At the time of the last meeting September, Now we performance in of the economy's estimates know that the downward drift continued and that, if anyting, This is also quickened a little. the pace of the decline quarter as a whole. estimates for the third confirmed by
Gross national product was only down by a fraction of one per cent, but it must be remembered that the level is well below even the more conservative projections at the beginning of the period. Estimating the preliminary figure for the September index of industrial production presented some unusual difficulties because the sharp decline in manhours may have been attributable in part to the overlap between the week in which the data were collected and the Pennsylvania Railroad strike. However, other information, as it has become available, tends to confirm that the over-all decline from July to September was in the neighbor hood of the 3 per cent suggested by the preliminary index. In view of the critical position of consumer acceptance and purchases of autos and new housing, which I shall discuss further in a moment, special attention has been directed toward auto sales and housing starts. Some of you may have more information than we have here on the industry's estimates of consumer response to the 1961 model autos and the success achieved to date in liquidating the relatively large inventory of 1960 models that was carried over into the new model year. Figures for the end of September and the first ten days of October do not provide one way or the other, since comparisons with a clear indication earlier periods are affected by the earlier change-over this making some rough allowance for this, and for year. After to move 1960 models at substantial discounts, the sales pressure performance so far appears satisfactory but not spectacular. Housing starts for September were definitely disappointing. At a seasonally adjusted annual rate of 1,077,000 units on the new series, they were down 17 per cent from August and one-third from last year's high. There have been considerable efforts to deter mine whether this large decline can be attributed to some aberra tion in the statistics, but no basis for discounting the significance of the data has emerged so far, except that the new series has generally tended to be somewhat more volatile than its Thus we find starts at an all-time low for the new predecessor. series and, after making allowance for the changes in the series, at a point not much above the depressed 1957 level. of materials prices also The further downward adjustment Copper, steel scrap, and other scrap deserves special mention. in recent weeks. The index of sensitive metals have all declined prices has dropped over 5 per cent since the beginning materials the 1953-54 average. It is and is now back close to of the year, commodity component of the also noteworthy that the industrial index registered a further slight decline in wholesale price that occurred in the last wiping out the increase September, half of 1959.
Department store sales improved in late September and early October, but the most recent data have been running a little below strong year-ago figures. The month as a whole will probably show some improvement over September, however, if present rates are maintained. I would like to turn now, briefly, to a few comments on same underlying factors which seem to me to merit your consideration. Studies in the 1930's led some observers to conclude that individuals' expenditures--even for such postponable items as durable goods and housing--were determined by the current level of personal income, and that it was, therefore, highly unlikely that changes in consumer expenditures would ever be an autonomous force in either recession or revival. So far as housing was concerned, there was considerable reason to question this thesis, even at the time, but it was widely accepted that durable goods expenditures were closely tied to current income, and that the initiating force in cycli cal change was almost certain to come from the business sector. A few critics of this point of view felt that the growing availability of consumer instalment credit to finance durable goods purchases might break the close link that had existed in the past between aggregate consumer income and expenditures. At the end of the World War II, the large accumulation of liquid assets in the hands of consumers and the reduced volume of consumer indebtedness-both mortgate and instalment--raised further question as to the validity of projecting into the future the rigid relationships between consumer income and expenditure that had apparently prevailed in the past. In fact, this sort of concern that led the System to it was primarily the Survey of Consumer Finances, to lend its support undertake to the efforts of Professor Copeland to measure moneyflows, and of the present flow of to carry through with the development funds accounts. While the big backlog of demand for housing and durables of consumers have been important and the strong financial position elements throughout the postwar period, we seem to have just instance in which an autonomous decline in encountered the first may have played a for "capital goods" consumers' expenditures On two previous postwar critical role in business fluctuations. for durables and housing have occasions, consumer expenditures well maintained. The when incomes were declined in periods the Korean War and the impact was offset by a first was during expenditures. The second, in rapidly rising volume of defense for plant and by burgeoning expenditures 1956, was offset Recent quarter-to-quarter by private business. equipment anticipations and repercussions are clouded by the movements
of the steel strike, but the broad movements over the past few years are interesting, and I think revealing. Expenditures for durable goods and residential construction went up sharply in the 1958 recovery, increasing from $53 billion in the second quarter of 1958 to $60 billion by the fourth quarter. By the second quarter of 1959 these expenditures hit an all-time record of $68 billion-up $10 billion from the prerecession high in the third quarter of 1957. This peak in the spring of 1959 in expenditures for durables and new housing brought them to 18 per cent of disposable personal income. By the third quarter of 1960 15 months later--the dollar volume of expenditures for these purposes declined to $63.5 billion, and the percentage of disposable income to about 15 per cent. This time neither business capital spending nor Government purchases of goods and services was moving up aggressively to fill the gap. The impact of lessened demand for durables and residential construction has not been offset, but is reflected in a reduced gross national product. In saying that the recent decline in purchases of durables and housing is autonomous of changes in income, I do not mean to suggest that it was either arbitrary or capricious. There is no doubt that the congestion in the capital market in the last half of 1959 restricted the flow of funds for real estate lending, especially under the Government-aided programs with prescribed maximum rates, and that this situation is not yet fully relieved. Vacancies have increased and the strength of the underlying demand for more relatively high-priced new housing has come into question. Perhaps, as Mr. Levitt suggested recently in an interview here in Washington, the market has been "value starved." Certainly the stimulus of lower downpayments and longer maturities has not been available to the same extent as in previous periods. Somewhat similar observations might be made with regard to durables. Consumers undertook substantial instalment debt in a high level in relation obligations are at 1959, and repayment to income. The judgment of manufacturers in their styling and subject to serious question. There are even pricing has been whether types and varieties of new products have doubts as to been developed which will stimulate the same consumer response ones at or near the point of market saturation. as the as to the future In these circumstances, prognostications more than expressions of economic events can be little course of in the postwar period than at any other time fear or hope, More to depend on the future decisions of millions the outcome appears to purchase or not to purchase houses, of individual consumers dryers, boats, and the air conditioners, washers, automobiles, resumption of spending or voluntary Any surge in business like. signs of revived consumer accumulation must await inventory "just around the Whether this is in end products. interest
corner" or some distance in the future can only be guessed from the current trend of retail sales, surveys of consumer intentions and, as always, a winnowing of hundreds of word of-mouth reports. Staff memoranda on the outlook for member bank reserve positions and on the Treasury cash outlook had been distributed under date of October 21, 1960. With further regard to financial developments, Mr. Thomas presented the following statement: Bank credit developments in the past four weeks indicate that the record-breaking expansion that occurred in the preceding four weeks was due to temporary factors and did not represent a basic change in the economic climate. A subsequent decline in loans and investments at city banks offset a large portion of the preceding increase, and left a net change for the eight weeks that was probably close to the customary seasonal pattern. The credit expansion was evidently needed to provide for the large build-up in U. S. Government deposits. The subsequent contraction balances has had as a counterpart some decline in in Treasury bank loans and investments and some increase in private deposits. The decrease in loans and investments was practically all at New York City banks and most of the increase in private deposits, which was largely seasonal, was at banks outside New York City. For over ten weeks now, Federal Reserve policy has been "encouraging monetary expansion for the purpose directed toward sustainable growth in economic activity and employ of fostering toward the attainment of this objective ment, " Actions directed Have they been sufficient? Has have been overt and substantial. of reducing interest rates and encouraging accelerated the fear more restrained than might gold outflow made System operations on the basis of domestic appropriately been adopted have safely or considerations alone? developments indicates that economic The review of economic show signs of grown, but rather employment have not activity and little evidence of monetary expansion, declining. There is even growth was to be fostered. which that desired the medium through have actually risen during of declining, interest rates Instead new directive, and credit the adoption of the the period since of tightness, not ease, generally have had a feeling markets objectives have included: to achieve its System actions of vault cash of over $500 million the release to reserves (1) requirements at (2) reduction in reserve held by member banks;
central reserve city banks in the amount of $125 million; and (3) substantial open market operations designed to relieve member banks of the need to borrow reserves and to keep them provided with excess reserves so as to encourage credit expansion. These operations entailed, first, a decline of over $500 million in the System portfolio as reserves were supplied through the other means, then an increase that exceeded $800 million, followed by another reduction of over $600 million largely to offset a substantial increase in float. The net result has been a reduction of over $300 million in the port folio since early August. These various System actions, together with an increase of about $500 million in float, have supplied a net amount of about $900 million in reserves since early August. These have provided for a gold outflow of over $500 million, a reduction of about $200 million in member bank borrowing to a minimal figure, and a $200 million increase in required reserves to cover a deposit expansion at member banks. After adjustment for the usual seasonal growth, the money supply expansion in the period has been at an annual rate of about 2 per cent or less, seasonally adjusted. On the basis of the new series of semi-monthly daily average figures, this increase occurred largely in September. Preliminary estimates for the first half of October indicate some decline on a season ally adjusted basis. The money supply is less than $1 billion above the low level reached in June and over $3 billion, or 2 per cent, below the peak reached in July 1959. Since last spring, moreover, there has been little change in the turnover of demand deposits at banks outside New York City. At this level, velocity has continued to be about 6 per than a year ago, when economic activity was held cent larger back by the steel strike. actions accomplished has been to provide What the System's offset the large gold outflow and to take care of reserves to credit demands incident to tax and exceptionally heavy temporary in September. These demands were unexpectedly other payments policy of ease made helpful that the System's large, and it was excessively harmful strains on it possible to meet them without markets. The objective, however, was to accomplish the money to hold ground against diversionary difficulties; more than simply that overcoming these desired. It is possible some advance,was and a feeling of accomplishment obstacles provided extraneous to achieve the real aims. concealed the failure has been not to induce objective often stated One collateral This has turned interest rates. a decline in short-term too great rose above the interest .rates a problem. In fact, out not to be for this were August. Reasons early in levels reached low
elaborated at the previous meeting of this Committee. They included the heavy demands on credit markets from tax borrowing at banks, a substantial volume of new capital issues, and a build-up in inventories by dealers in securities; the concentration of excess reserves at country banks; the flow of available funds into Treasury deposits instead of into private hands; and the effect of the gold outflow in drawing funds from the money centers. City banks were called upon to supply the bulk of credit demands, but at the same time showed little gain in deposits. Although they reduced borrowings at the Reserve Banks, they purchased Federal funds from others. Recently there have been some indications of an increase in interbank deposits at city banks, perhaps reflecting an increase in funds available to country banks, but such a movement is at least partly seasonal. Recently short-term rates have tended to decline again to near the low levels of August. Medium and long-term rates, however, continue sticky. In part this reflects the large volume of new capital issues by corporations and by State and local governments, and perhaps also the effect of the extension of debt maturities through Treasury advance refunding operations. The likelihood that the Treasury will continue to use every opportunity to tap the long-term market in its future financing may also be a factor in causing long-term investors to be reluctant about bidding up the prices of bonds. Some governmental bodies have withdrawn offerings in the hope of obtaining lower rates later. After completion of the American Telephone & Telegraph flotation being offered today, the calendar of new issues both by corporations and by State and local governments is much smaller than it has been. This may relieve some pressures on capital markets, The suggestion has been made that the System, by purchasing aid in bringing about a desirable longer-term securities, could in long-term interest rates and stimulate downward adjustment borrowing in that area, and at the same time avoid reducing short-term rates and encouraging the flow of funds abroad. Any the purposes for more than likely defeat such operation would which it was intended. operations on interest impact of System By far the main the indirect multiple expansion process, rates is exerted through effect upon the particular through their immediate rather than recipients of the funds purchased. The eventual types of issues for investors to What is desired is how they are used. determine issues, not simply for the place their funds in longer-term Reserve to buy them. Federal
One reason why investors hesitate to do so is that the existing margin between short-term and long-term rates is not wide enough to induce them to undergo the risk of a possible reversal in the trend of interest rates. To narrow that margin by arbitrary intervention would add to their reluctance. In particular, there would be even less confidence in the existing level of bond prices and yields if it were recognized that they were being artificially influenced by Federal Reserve operations that would at some stage be reversed, It is doubtful that monetary expansion can be encouraged and economic activity stimulated if System operations are conducted with a view to avoiding a decline in short-term rates, or by artificial action designed to bring about a decrease in long-term rates. It is normal and necessary in a period of slack credit demands that a wide spread between short-term and long-term rates develop as a result of the play of market forces. During the immediate period ahead, the System faces a task of considerable magnitude in meeting the very large seasonal variations in reserve needs. In the next two statement weeks the needs for reserves will aggregate nearly $900 million. In the subsequent two weeks there may be a reverse movement of million, followed by another two-week drain of close to $500 Except for a relatively small variation due over $900 million. float increase, this level of reserve to the large mid-December the beginning of January. In that needs will continue until million of reserves will have to be absorbed. month close to $900 are of such large magnitude as to permit the use These needs doses of reserves through methods other than current of massive sales, and perhaps at times operations. Open market open market at times to smooth out the some purchases, will be needed also massive instruments. In view of the effect of the use of the more the large liquidity demands of the economy and uncertain state be no worry about hav ahead, there should customary in the period for brief periods. free reserves, particularly ing large amounts of Mr. Thomas had touched he was glad that commented that Mr. Hayes long-term rates. He did not agree spread between short-term and upon the was a real one but the problem Thomas had presented, the thesis Mr. with serious consideration. give the matter everyone would and he hoped regarding recent develop made the following statement Mr. Marget ments in the London gold market: last week to given this headline space the amount of From it is gold market, in the London developments the spectacular
clear that those developments are regarded by the financial journalists as something which is, or should be, of very great concern to the monetary authorities of the United States. The general reaction seems to have been one of initial shock, with some passing away of the initial shock effects as the London gold market calmed down a bit. But there has unfortunately also been a widespread lack of understanding as to just why one should have been shocked by these developments, and apparently just as little understanding of the issues involved in a weighing of the alternative courses of action to be taken in the face of developments of this kind. If one is to judge by the newspaper accounts, and the kind of inquiries directed to us by the writers of those accounts, the shock derived from the apparent conviction that the emergence of a premium in the free gold market above the official price at which the U. S. Government is prepared to buy and sell gold freely to foreign monetary authorities "for the settlement of international balances or for other legitimate monetary purposes" may fairly be regarded not only as ipso facto proof of a large scale flight from the dollar but also as an inevitable prelude to a raising of the official dollar price of gold (that is, a devaluation of the dollar). On this, one can only wonder whether the shock would not have been less, and the conviction apparently underlying that shock might not have been shaken, if the journalists had taken the pains to point out that this is not the first time in the post-war period that gold has sold in the at a substantial premium above the official U. S. free market that in the previous periods this kind of dollar price; and situation neither reflected a large-scale flight from the dollar nor was followed by a devaluation of the dollar. Specifically: gold market in Switzerland (Zurich), for the greater in the free years 1948 and 1949, the price of gold part of the calendar $50 an ounce; and in the free gold market ranged between $40 and in Paris, during the same period, the price ranged between $45 whatever of a "flight from an ounce. There is no evidence and $55 dollar" during this period, On the contrary, the "flight," the as much into dollars as into there was one, was just to the extent necessary to labor the point that, among gold; and it is hardly the U. S, dollar was were devalued in 199, the currencies that not included. commentators on of shock that seized The second element have derived from past week seems to developments of the the say indignation, that the U. S. monetary astonishment, not to in the eyes of a situation which, confronted by authorities, necessarily suggested an impending these commentators,
devaluation of the dollar, did not rush in to sell gold in London, if necessary in massive quantities, in order to wipe out the premium above the official U. S. price, and thereby discourage all speculation on the dollar's future. Here again, one can only wonder whether the shock and indignation at this "passivity" of the U. S. authorities would have been so great if memories had carried back to the earlier period to which I have referred. For there was at that time no such selling action by the U. S. authorities, on even a modest-to say nothing of a massive--scale; the price in the free gold market remained quite high, as I have reported, for an extended period; it fell sharply toward the end of 1949; it rose again, in both Paris and Zurich, in 1950 and 1951, to a level between $40 and $45, and then declined fairly steadily until, in 1954, the premium virtually disappeared altogether. And all this, I emphasize again, without any selling, massive or otherwise, in the free gold market by the monetary authorities of the United States. I need not take the time here to emphasize further what the critics of our "passivity" in the face of the developments in the London gold market seem to have carefully refrained from even mentioning; namely, that if there are risks to the U. S. dollar in the existence of a free market premium over the official U.S. price of gold, there are also very great risks, of a material as well as a "psychological" kind, in the taking of a commitment to supply a speculative market-currently, perhaps, very narrow, but potentially of much broader dimensions--with whateveramounts of gold may be necessary to keep a premium from emerging. It is much more to the point to look more closely at the probable policy of non-intervention, on the consequences of a continued may or may not be realized in fact--that a assumption--which significant premium over the official U, S. price will continue the free gold markets, and even to increase in to prevail in the $50-$55 range we saw with the price of gold reaching amount, in the late forties, and possibly even higher levels. the consequences of this kind should be quite clear that It nothing in common with the of development have virtually consequences that would face a country which--like Canada, say has a flexible exchange rate, if that flexible rate were suddenly currencies and the monetary in terms of foreign to depreciate to prevent or to intervene in order were unwilling authorities that case, all export and import such a depreciation. In moderate effects on the and the immediately affected, prices would be trade, and therefore country's foreign of the economic structure indeed. In the case might be very great on its whole economy,
of a premium on gold in free gold markets above the U, S. official price, on the other hand, there is literally no effect "whatever on our commodity price structure, and therefore none whatever on our foreign trade. The only consequences that are involved here are possible consequences in the field of capital movements. It is possible, that is to say, that the existence of a high, and even rising, premium on gold in the free gold markets might encourage speculators to move their dollars abroad into the countries in which these gold markets are located. Just how long such a movement, if it started, would continue, of course no one can say. Speculative bubbles do burst, and when they do the consequences could be much more chastening than any losses incurred as the result of selling by a monetary authority on a scale of which no one was certain, except that it was almost certainly not unlimited in amount or duration. But there is no doubt that, while it lasted, this speculative outflow of capital would be added to that outflow of capital which already bulks so large in our balance-of-payments position; and to that extent it would add to our current worries. It is of some importance to agree, however, as to the nature of the worries that would be thus created. The central point here is that, under existing international monetary arrangements, these U. S. dollars flowing abroad become claims on our gold that they end up--as they may be expected to stock to the extent end up-in the hands of foreign monetary authorities. The question then becomes: on what kind of scale may we expect that these foreign monetary authorities will convert into gold to them under the conditions "capital-flight" dollars accruing the we have assumed? think, not unreasonable to assume that the monetary It is, I the speculators who are assumed authorities of the world--unlike the first place-have a the capital outflow in to have started happen to the international of what will clear enough understanding stability they, too, have a very monetary mechanism, in whose adequate cause in motion without were to set stake, if they great of gold from the country that is acting as massive withdrawals to assume is equally reasonable banker. But the world's principal hesitate to effect will not monetary authorities that these same have adequate cause. think that they do withdrawals if they such conviction that be found in a cause" would And that "adequate States were unwilling people of the United government and the the within and outside policies and actions, unable to adopt those or balance of payments pursued if the which must be of government, into reasonable equilibrim States is to be brought of the United and kept there,
I tried, at the last meeting of this Committee, to indicate the nature and dimensions of the balance-of-payments problem of the United States as it now confronts us. Its seriousness need not be exaggerated; but neither can it be minimized. It is unhappily true that we still have a long way to go before we can say we have solved it. It is to this that our attention must continue to be directed, not to the spectacular developments in a highly speculative market, for which the most that can be said, perhaps, is that these developments may have served to awaken to an appreciation of the seriousness of our balance-of-payments problem some of those who would still say that the people who have been stressing the importance of that problem since have simply been seeing ghosts. Mr. Hayes presented the following statement of his views on the business outlook and credit policy: I can think of few occasions in the last three or four years when it was more difficult to decide just what are the most appropriate specific techniques of monetary policy for current circumstances, domestic and international. We have recognized right along, ever since our balance of payments became seriously adverse in 1958, that although domestic considerations must be our main concern, we could not ignore the international implica tions of our actions. It so happened that during much of that time our policies were well suited to both domestic and inter national conditions--but this has no longer been true during much of 1960, and last week's gold episode should serve as dramatic evidence that we are dealing with a complex and sensitive problem with respect to our international financial position. Undoubtedly one of the causes of the gold speculation has been fear that this country might resort to unduly loose monetary and fiscal policies in an effort to combat recessionary tendencies. to the domestic scene, we find that while business Turning is still on a high plateau, this plateau has begun to sag, largely inventory adjustments. The economy has lost momentum because of the specific discouraging elements in the in recent weeks. Among are the September slump in housing starts and mortgage picture applications, the leveling of capital spending, lower retail sales, in manufacturing employment, average hours worked, and declines caution, rather than outright and labor income. However, pessimism, is the predominant mood of business and consumers, and retrenchment in production yet of any strong there is no evidence inventory reduction. Recent disorderly program of or any small changes and fewer than statistical data show relatively wide differences of Yet there are contradictory currents. usual
interpretation in terms of the future course of business. From our own policy viewpoint, it seems to me unnecessary to choose now from among these divergent forecasts. It seems sufficient to recognize that business is sufficiently soft, unused resources sufficiently large, and prices sufficiently stable to warrant our seeing to it that ample credit is available, at reasonable rates, for all legitimate needs. The record of actual bank credit expansion has been encouraging in recent months. Largely because of heavy bank purchases of Government securities, the growth of total loans and investments was far above average both in September and in the third quarter. A sharp increase in Government deposits and time deposits has prevented this rise in bank credit from being reflected in a comparable rise in the money supply. But there is a good chance that it will lead to an enlarged money supply in the fourth quarter. Meanwhile, total nonbank holdings of liquid assets are showing good gains, as is the liquidity of the banks themselves; and we have provided the banks with record levels of total reserves and nonborrowed reserves. There is less cause for satisfaction when we look at the level of interest rates and the shape of the yield curve. It might be argued that long-term rates are still at too high a level to be appropriate for the current state of business, particularly with residential construction declining and business spending on plant and equipment leveling out. But of considerably greater importance, at least for the present, is the fact that the sharp decline in bill rates earlier this year-and resumed in the last few days--has doubtless been a significant factor in the serious deterioration in the balance-of-payments deficit in the third quarter. It seems to me that the balance-of-payments deficit, with all of the complications which may accompany it in the way of gold sales and loss of confidence in the dollar, confronts all Americans with an extremely serious if not almost intractable problem. This seems doubly true when we reflect that there are some signs of leveling in the European boom, which may mean less support from Europe for our exports during the coming year, All of this argues strongly for our avoiding further overt measures of monetary ease, rate cut, unless they are clearly called for by such as a discount domestic economy--and I do not think they are at the state of the present. It also argues for our trying actively to avoid driving short-term interest rates to lower levels than those now prevailing. of the Treasury's refunding program and of the The imminence national election also suggest the wisdom of our avoiding any overt or dramatic move. ahead raises some problems for open The period immediately projections indicate a operations, inasmuch as reserve market
need for substantial injection of reserves, whereas bill rates have already been moving down rather sharply and the volume of 90-day bills in the hands of dealers is relatively small. While I would hope we could continue about the same general policy of ease we have been following, I believe we should place major emphasis in the next four weeks on the aim of avoiding lower bill rates or even of encouraging somewhat higher rates. This objective should, I think, take priority over both the feel of the market and the maintenance of any given level of free reserves. (Fortunately we have succeeded in getting the market to pay a little less attention to swings in free reserve statistics than formerly.) With this major objective in mind, it might be well to broaden our open market purchases to include short-term securities other than bills, even though the available supply of such securities is probably not very great. A further release of vault cash or a narrowing of the central reserve city differential in reserve requirements might also be a way of avoiding the impact effect of System purchases on the bill market and would probably be construed by the public as one more step in an orderly long-term program rather than as an overt move of general credit ease. Beyond this, I think we should remain especially alert to developments in the long-term capital markets. It may be that the present heavy atmosphere will clear up once the current American Telephone and Telegraph financing is out of the way, particularly if the Treasury refunding is kept out of the long term area. But if congestion still remains, this may prove to be one of those comparatively rare occasions when the Committee should give serious study to the possibility of limited operations in the longer end of the market to clear the air and a lower rate level. I am not advocating a decision encourage today on such action; but I do think it would be well for every to reflect in the next few weeks on our member of the Committee oft-repeated assurance to the public that we are always prepared such action might be warranted. exceptional cases when to consider and international aims is present conflict between domestic The no stone be left unturned in enough to suggest that perplexing our efforts to resolve it. like to see it include some for the directive, I would As difficult problem with that we recognize an unusually indication international objectives, domestic and respect to reconciling be added to the following could clause such as Perhaps some consideration current "while taking into clause (b): international developments."
Mr. Johns said that in looking at the business situation he found little to offer encouragement. The search for favorable elements was becoming increasingly difficult, and some of the factors cited as favorable in certain resumes did not stand up too well on detailed analysis, From the point of view of the domestic situation, therefore, the language of clause (b) of the present directive seemed appropriate. In fact, this directive and the directive that immediately preceded it appeared more appropriate now than when they were originally adopted. Accordingly, he felt that reserves should be made readily available to the banking system, thus making it possible for the banks to bring about monetary expansion and encouraging them to do so. It was difficult to see how this could be done to any considerable degree without some lowering of interest rates. He said he was not convinced that monetary policy is ineffective as an antirecessionary measure and that he felt its use thinking in terms of in the present circumstances, would be desirable a domestic objective and also both to economic recovery as contributing of the balance of payments and gold problems by limiting to mitigation depth and duration of the recession. the to agree with Mr. Thomas indicated that he was inclined Mr. Johns to provide reserves by the probable effects of attempting concerning area. He was not sanguine securities outside the short-term purchasing in any significant longer maturities to purchase would be possible that it However, he would on the bill rate. considerable effect quantity without a situation in which appeared to be and this like to experiment,
experimentation might be justified. The arguments with respect to the so-called "bills only" policy had been going on for a long time and it might be desirable to collect some empirical evidence. It was clear from the projections that substantial quantities of reserves would have to be supplied for seasonal purposes, to say nothing of cyclical needs. He would like to see seasonal needs supplied liberally and additional reserves made available to encourage monetary expansion, as provided in the directive. Mr. Johns said that he would be reluctant to insert in the directive any reference to the balance of payments or to the international problem, not because he did not think that a problem existed but because he thought it would be advisable to avoid advertising the Committee's concern. In response to a question, Mr. Johns indicated that if it were decided to conduct transactions in securities other than bills, his thought would be to experiment along the maturity curve. Mr. Patterson reported that such Sixth District information as had become available since the previous Committee meeting showed about as national data. The latest statistics could be used the same picture that the country had been in a recession to support either the contention the present situation was merely a pause, with for several months or that a recession pending. In no way did the news point to an impending upswing,
Mr. Patterson went on to say that the rate of insured unemployment in the District did not show the usual seasonal improvement during September, which suggested that a decline probably occurred in nonfarm employment. Only one State (Alabama) had thus far reported actual employment figures for September, but these showed a further slight drop after seasonal adjustment. Construction employment was below a year ago in all District States except Alabama and Tennessee, where the number of construction workers was about the same. In September the number of workers employed on farms in the District was substantially higher than in August, but the total was 5 per cent below the year-ago level. A recent report showed relatively little change in the labor situation in the District's 16 major labor markets, the only recent change being the addition of the Birmingham area to those classified as having a substantial labor surplus. The low operating rate of the steel industry was, of course, the principal reason, and the closing furnaces would idle several Saturday of two more open-hearth last Rouge also were listed as Chattanooga and Baton hundred workers. A member of the Reserve Bank's with a substantial labor surplus. areas who visited six of the largest textile mills in Georgia research staff and, with the somewhat recently that activity had slackened found with earlier in the year, having weakened in comparison order position seemed likely, Generally speaking, however, none further curtailment for some pickup in pessimistic; they looked of the operators seemed activity in the next few months.
The rough measure of housing starts available from seasonally adjusted residential building permit data indicated that the rate of decline in District housing activity had closely paralleled that of the nation, and August data on outstanding mortgage commitments of savings and loan associations in Alabama, Georgia, and Florida offered little hope for a revival in home building activity in the months immediately ahead. In the Tampa-St. Petersburg area, which had a large inventory of unsold homes earlier this year, mortgage commitments were at a very low level, and such commitments were down sharply from year ago levels in Orlando and Miami. In the Miami area the number and volume of mortgage foreclosures, while still relatively low, had been sharply higher in 1960 than in 1959. Retail sales, bank debits, bank loans and investments, and deposits provided about the same picture as nationally, Mr. Patterson said. Fortunately, farm activity was at a high level in most parts of the District as the fall harvest season reached its peak. The large cotton crop in Alabama, combined with the large tobacco crop in Georgia and Tennessee, the peanut crop in Alabama and Georgia, and the rice and sugar cane crops in Louisiana were pushing farm output to a record were removing much of the enthusiasm generated by high. Lower prices for the year should be close to last the abundant crops, but income level when the receipts were counted. year's
Mr. Bopp said that the staff portrayal of national developments was indicative of developments in the Third District. The economy of the District showed no evidence to support anything other than a pessimistic view. Data on employment, production, and construction, and the latest survey of capital expenditure plans all pointed in that direction. As to the financial situation, the reserve positions of banks had shown some tightness at times, and city banks had been borrowing Federal funds, Mr. Bopp then commented that at the meeting of the Philadelphia felt that the deterioration of directors last Thursday the directors the business picture warranted additional moves toward ease. They in the discount rate if he had so would have voted for a change he did not recommend a change. but for several reasons recommended, additional pressure on short rate reduction would create A discount in the light of international which would be undesirable term rates, money market had not thus far Also, the ease in the developments. sluggish, and the market, which remained over to the capital spilled keel in the absence of an even suggested maintenance Treasury financing if conditions remain circumstances. Nevertheless, of compelling would not vote to assure that the directors he could not unchanged, rate at their next meeting. reduce the discount period in which was a difficult that this Bopp commented Mr. domestic developments them. However, or to form to express judgments,
seemed clearly to call for greater ease. Because of the balance of-payments problem, which argued against lower money market rates, and the sluggishness in the capital market, the circumstances suggested that an exception to the policy of maintaining an even keel before, during, and after a Treasury financing and also to the policy of refraining from entering the long-term market might be warranted. A considerable amount of reserves would have to be provided in the period ahead, and the purchase of longer-term securities would coincide with the program of meeting reserve needs. On the question of maturities, he tended to concur ith the view expressed by Mr. Johns. Operations should be such as to indicate that this was clearly an exception to the Committee's operating policies, although perhaps not in maturities too close to those of any new securities that the Treasury might offer. The problem of timing was important, but after examining the arguments pro and con it was his conclusion that the weight was on the side of going ahead. Also, since an exception to the normal operating policies would be a statement probably should be made in order involved, he felt that to avoid misunderstandings, although he recognized that the prepara tion of such a statement might present difficulties.
Mr. Fulton said there was little cheerful news from the Fourth District, where economic activity had continued to decline for some time. Although construction, other than residential, was being maintained sur prisingly well, this factor did not provide the fillip for which the District was hoping. Auto sales were up quite a bit in the past three weeks, which was a hopeful sign, but it was not known how long the level of sales could be maintained. Department store sales had been maintained rather well except for some weakening in the past week, but insured unemployment had risen contraseasonally and now stood at the highest level of the year, a level higher than in the 1953-54 period. Mr. Fulton said that he was told that steel orders for November than October, and that no pickup was in the offing. Some were lower for were being taken out of production. Takings of the automotive furnaces expectations for sheet and running about 70 per cent of industry were for bars. Because of the 80 per cent of expectations strip, and about probably would 1960 models, the auto manufacturers large overhang of at that time was a and what would happen drastically reduce output, appeared to be some slackening to the mills. There matter of much concern on the United was being pressed and foreign steel the boom in Europe, of an opinion recently, economists who expressed Of 49 District States market. 43 thought that on a plateau while activity was thought that economic six was in recession. the country
Mr. Fulton said he was not satisfied with the degree of decline in free reserves recently. Float fluctuations had been counteracted by the Desk, which in his opinion was not wholly necessary, and this had reduced free reserves to a point lower than he would like to see them. In his view reserves should be supplied freely, but the constant reduction in bill yields inhibited any massive action through purchases in that area. A reduction of reserve requirements, or at least action on vault cash, might relieve the situation more effectively than by going into operations in the short-term market, since a more permanent and broader foundation would be provided for the banks than by injecting funds through the market in New York. In summary, he would like to see free reserves increased through action that would not have a direct impact on the rapidly declining bill rate. He would not favor reducing the discount rate at this time or making any change in the directive. comment by Mr. Patterson that With reference to the earlier had been declared an area of substantial labor surplus, Baton Rouge affected by the previous recession. noted that this area was not Mr. King that Mr. Bopp had expressed his (Mr. King's) Mr. King then indicated doubt that a discount rate, he expressed As to the views effectively. essentially it was to any extent, for would stimulate activity reduction they wanted to go ahead with people having to decide whether a matter of rate would exert a change in the discount plans. Then, too, their Account operations, he agreed on the bill rate. As to additional pressure
substantially with the position stated by Mr. Bopp and previously by Mr. Johns. He would not be inclined to change the directive at the present time. Mr. Shepardson commented that thus far everyone seemed to be in agreement that this was a difficult situation. Looking at the domestic problem, the international problem, the Treasury financing, and the situation as a whole, he was inclined to feel that this was a time to try to hold quite steady. The System should maintain a condition of ease, and should provide necessary reserves, but he questioned the wisdom of flooding the market with reserves at this time. He doubted whether this was the moment to make a change in either the directive or the discount rate. Mr. Robertson referred to a portion of the draft of policy record entry for the Committee meeting on October 4, 1960, which stated that it that open market operations should continue to be had been the consensus needed reserves readily, avoiding conducted along the lines of supplying and resolving doubts on the strain on bank reserve positions, seasonal the market to be emphasized more with the feel and tone of side of ease, him that such a course was It seemed to than statistical guidelines. tinkering with the instruments was not a time to be appropriate, that this instead this was a Federal Reserve, and that utilized by the customarily the System believed. Accordingly, to the principles in which time to adhere had been made about going into agree with the comments that he would not
longer-term securities. He was not inclined to favor the suggested amend ment to clause (b) of the directive and would prefer to continue the directive in its present form. He would not be concerned about bill rates to the exclusion of pursuing anti-recessionary measures by making reserves readily available and encouraging growth of the money supply. In summary, he would continue to operate along the lines suggested by the consensus at the previous Committee meeting, rather than be swayed from that position by international events or by prospective declines in the bill rate. He would not favor changing the discount rate at this time. Mr. Mills said he joined Mr. Robertson in supporting a policy of the kind indicated by the statement that the latter had quoted from the draft of policy record entry for the October 4 meeting. Fundamentally, he continued, the Federal Reserve System's objective is to exert its through monetary policy to see that there is an availability influence existing needs. In his sufficient to nourish the economy's of credit satisfactorily toward that System's policy actions had moved opinion the made available to the commercial and the supply of reserves objective, of credit. The fact to support an expansion banking System was adequate of an increase in bank had taken the form expansion of credit that the more than an expansion Government securities in United States investments the crux of the of loans was and other types commercial, industrial, of of the recessionary seem to be a reflection as it would situation, in the discussion noted so frequently that had been economic influences
today. Since he assumed and believed that the supply of reserves and the policy of the System had been adequate to support a seasonal expansion of credit and to encourage a greater than seasonal expansion of credit, the fact that there had not been exactly the type of seasonal expansion of industrial and commercial credit that had been expected led to the presumption that there was a lack of demand on the part of the commercial and business community to employ the credit resources that the commercial banking system could and would put at their disposal. If the banks cannot find the ordinary outlets for their credit resources, the result is primarily that those resources are employed in the Government securities market, thus exerting a definite and increasing downward impact on short-term interest rates. The other avenue in which the commercial banks might, under more ordinary circumstances, expand their credit would be through their investment portfolios, very possibly by increased acquisition of corporate securities increases in their holdings of municipal securities. How and by further ever, under a situation where the liquidity position of the banks continued ratios were high, it was unlikely that to be strained and loan-deposit there ould be an expansion of investment portfolios, especially in a him to the point that a economic climate. This brought recessionary do more than force down of reserves could not in the supply superfluidity wishful thinking could bring rates at a time when, if short-term interest more solid short-term rate. much prefer to see a it about, one would
Events were moving so fast that it was difficult to set any specific objective, Mr. Mills said. His feeling was that the Desk should operate in the light of the credit factors that had been mentioned, to the end of seeing that the supply of reserves available to the banking system was comfortable but not superfluous, and that such a policy should be continued until the outlook was more clear. Mr. Leach reported that business activity in the Fifth District continued at a level moderately below the peak reached earlier this year, with signs of further weakening, Employment remained quite high except for small declines in manufacturing, but man-hours worked had decreased of the reduced workweek in some industries, particularly textiles. because 1.5 per cent during September and the rate Insured unemployment dropped in every state except West in the United States as a whole was less than industry was fairly stable at the Virginia. Activity in the textile since early September. Unless reduced level of production prevailing however, further curtailment of pro there was an increase in orders, of producers to in view of the determination duction might be necessary backlog of orders. The and maintain a reasonable hold down inventories further in an to modernize machinery was plowing back earnings industry industrial construction Commercial and reduction program. aggressive cost made several because of commitments high level, largely at a continued were 17 per cent past four weeks awards in the ago, but contract months below the corresponding and 13 per cent four weeks below the previous
period last year. Bituminous coal production in September was only one per cent above the level prevailing in the midst of the steel strike last year, but there were some signs that the industry was holding its market better than formerly. The tobacco crop was one of the best on record and prices were up about 4 per cent. District farmers had sold over one billion pounds of tobacco for more than $600 million--an increase of about 22 per cent in gross revenues over the similar period of 1959. There had been small erratic fluctuations in retail trade, but generally sales had been running at a level only slightly below that of last year. The positions of Fifth District banks continued to ease, Mr. Leach said. Despite a larger than usual seasonal upswing in both business and total loans in recent months, banks had expanded their investments more than seasonally, cut their borrowings at the discount window, and successively increased their net sales of Federal funds. With respect to policy, Mr. Leach believed that for the next four weeks the Committee should take no further steps to ease credit and that it should guard against developments which might force bill rates down rates under 2 per cent, coupled with very large amounts further. Bill of free reserves, might well arouse fears here and abroad of an unduly benefiting the domestic economy. easy money policy without materially it drives down money rates and ease is not beneficial because Excessive be as pessimistic as the future. He might not stores up trouble for enough and that the present the Committee had eased some, but he felt that
position was about right. Because of the bill rate, particularly, he would not like to see further easing. The forthcoming Treasury financing called for an even keel policy, but even if there were no Treasury financing he would recommend continuation of present policy, with precautions against excessively easy credit. In supplying needed reserves, he would purchase other short-term securities as well as bills if bill purchases seemed to be running bill rates down unduly, but he would wait a while before giving serious consideration to the purchase of longer maturities. He would not favor changing the discount rate at this time. Mr. Leedy commented that if the System was going to get the job done that it was supposed to do, it must exert some effect on long-term the System had done thus far had not accomplished too much rates. What to him that the System did not yet know in that direction. It seemed what extent the differential between foreign rates, short-term, clearly to short-term, was contributing to the outflow of gold. and domestic rates, out, building up their holdings of central banks, as had been pointed With did not seem to be of overriding States Treasury bills, that factor United were various conjectures as to what was underlying importance. While there was in a position to appraise of gold, until the System the adverse flow rate differential was a major the extent to which the more accurately supplying needed reserves that the policy of factor he did not believe affected by that consideration. should be too greatly through the bill route the problem of the be sensitive to the System should Needless to say,
short-term rate and should attempt to do what it could to keep bill rates from drifting lower, but on the basis of the projections some very substantial reserves should be made available to the banking system and it seemed appro priate for the System to provide them. When more light had been shed on the subject than at present, the Open Market Committee should give consideration to operating in securities other than bills, but, as he saw it, for the moment that subject did not have to be decided. For the next few weeks, it seemed to him that the Committee should undertake to do what it had been doing in recent weeks, namely, to supply needed reserves while keeping an eye on the bill rate. In this period he would not make any change in the directive or do anything beyond meeting reserve requirements. While he would be watchful and attempt to do whatever was possible on the bill rate, he would not let the bill rate be the controlling factor. Mr. Allen reported that at a meeting of area economists held at Reserve Bank on October 19, half of those present did not the Chicago consider the present trend a recession "worthy of the name." Their sentiment was supported by the comment that a continuing heavy demand for rates up, by the statement of the Sears Roebuck funds was keeping interest good sales results were being obtained when merchandising economist that of capital goods who described and by a manufacturer was pushed vigorously, with strength in some lines situation as a sideways movement the current felt otherwise, that is, who in others. Of those who balancing weakness of the steel situation, a representative about the were far from complacent
industry characterized the picture as "bleak." He was not only unhappy about the present but pessimistic, based on order bookings, about the months ahead. Thus the views continued to be diverse, Mr. Allen said, without a clear majority on either side. Department store sales in the District showed up well one week and poorly the next. Automobile sales were making a good showing at the moment; the daily sales rate in the first ten days of October was 7 per cent above the same period last year and the strong market was thought to have continued through the second ten days of the month. However, much of the pickup came from "crash" sales of 1960 model cars and earlier introduction of 1961 models, and most estimates for the full month of October placed sales in the 500,000 to 525,000 area, 4 per cent over October 1959. October production was estimated at more than 600,000 units. Based on the production and sales estimates, inventories on October 31 would be about 950,000 cars, of which 1960 models should be less than 200,000. An inventory of 950,000 would be an all-time high for that date, the closest to it being 607,000 on October 31, 1959. banks increased in the three loans at Seventh District Although $56 million in the same 12 by $95 million, against weeks ended October reporting banks in the loans at all weekly period last year, whereas free reserve position million, the large dropped more than $800 country on District banks. had had its effect permitted to develop which was dropped to $10 million at the discount window Daily average borrowing
in the week ended October 19, and almost none of the borrowing was by city banks, which were able to fill their needs easily and cheaply in the Federal funds market. Mr. Allen said that he would not favor any further move in the direction of ease at this time. He would not change the directive or the discount rate. Mr. Marget's concluding comment at the meeting three weeks ago, to the effect that the range of flexibility of monetary policy was limited by the balance of payments situation, was a sentiment with which he (Mr. Allen) agreed. Moreover, apart from the balance of payments and considering the domestic economy on its own, so far as that was possible, he felt that monetary policy had been directed in early and substantial fashion to doing what was in its power to do and that further action at this time would be needless and excessive. Even if the pessimists as to situation should turn out to be correct, monetary policy had the business in his judgment made its play and in sufficient degree. On the other hand, his, and the Committee wished to judgment differed from if the Committee's would be that the Board consider additional reserves, his suggestion provide of central reserve the reserve requirements further step toward equalizing a requirement for central by lowering the current city and reserve city banks greater pressure at seemed to be under the city banks, since they reserve this time. deal in securities that the Account to the suggestion With regard that the present felt, like Mr. Robertson, bills, Mr. Allen other than
situation was not one which was appropriate for experimentation. He was in complete agreement with the statement made by Mr. Thomas on this score. Mr. Deming reported that good agricultural conditions in the Ninth District had led to income figures running ahead of a year ago. Relative to the United States as a whole, however, he was not sure that the District was quite as well off as two years ago. In a recent survey of expectations, the attitudes expressed by people in various sections of the District corresponded closely with agricultural developments. Turning to policy, Mr. Deming noted that comments had been made to the effect that the System should avoid overt action at this time. He had said this himself on previous occasions. It seemed to him, however, that anyone viewing the pattern of actions taken by the System over the past couple of months would have to conclude that the actions had been overt, even dramatic. Thus, while he agreed that no overt action should be taken meant that he did not want to reduce the on the discount rate, this merely time. He would not object if overt action were taken discount rate at this with respect to reserve requirements. earlier that the System should be Mr. Deming said he had thought reserves without putting further appreciable able to supply seasonal What he had thought on this point, however, pressure on short-term rates. Since he believed by what was happening. to be borne out did not seem reserve needs, and be mildly the System should supply seasonal that make this the first such needs, he would appraisal of generous in its
order of business and downgrade the priority on preservation of short-term rates. It might be that the supplying of reserves, at least in part, could be accomplished by reserve requirement reductions and that there would then be a better chance of preserving short-term rate levels. As he saw it, this would work best if the reserves that were freed went into longer-term securities; in turn this prospect might be enhanced if reserves were given to the country banks through the freeing of additional vault cash. He saw no objection to reducing further the differential between reserve requirements of central reserve and reserve city banks, but he did not think this would help the short-term rate picture or that it would supply much in the way of reserves. The step could be taken, however, as part of a necessary program. With respect to open market operations, Mr. Deming said he would favor going out into the longer range of short-term securities within the framework of the Committee's present operating policy. This might have the off the very short-term rates. However, he effect of taking some pressure going out to the long end of the market at this time. He would not favor would not favor changing the directive. would supply reserves to meet Mr. Deming said that he Summarizing, of those needs, and that he being generous in the appraisal seasonal needs, However, if a lowering of short-term rates go down if necessary. would let such as action on by technical measures rates could be avoided short-term up to fifteen months, he or moving to purchases of maturities vault cash directions as possible. move in as many different would
In clarification of his earlier statement, Mr. Hayes said that he agreed with Mr. Deming's views on reserve requirements. He thought that any change in vault cash provisions and in central reserve city reserve requirements probably would be construed as a step in a long-range program and not as an overt action. Mr. Mangels said that although such Twelfth District data as had become available in the past three weeks did not indicate great change, the data were somewhat on the down side. Pacific Coast employment was down in September, while unemployment had risen from 6.3 to 6.8 per cent, compared with 5 per cent a year ago. Only two cities in the District, Sacramento and Honolulu, were classified as having a balance in the availability of and demand for labor. San Diego had recently been classified as an area of sub stantial labor surplus due to cutbacks in aircraft production and a substantial reduction in industrial construction since August 1959. Lumber output and prices were down and inventories were high, with third quarter shipments below the third quarter of last year. Reflecting the importance 18 per cent and Washington showed rates of the lumber industry in those areas, Oregon of cent, respectively. Public works of 7.3 per cent and 8,7 per unemployment than in August, and steel in September was 10 per cent higher construction Department store to 56 per cent of capacity. was holding at 54 production were about 1 per cent below the year to date they sales were unchanged; for had been picking up. ago. Sales of automobiles a year and investments of reporting went on to say that loans Mr. Mangels on the other hand ended October 12, while in the three weeks banks declined
there was an increase in deposits, both time and demand, with savings deposits increasing almost $100 million. Borrowings at the Reserve Bank were virtually nil; there had been some days when there were no borrowings on the Reserve Bank's books. District banks, however, had been fairly heavy net purchasers of Federal funds, and some banks reported that their positions were still rather tight. A recent survey indicated that there had been a decline of about 1/4 per cent in rates on business loans. Mr. Mangels expressed the view that monetary policy had been quite appropriate. In the past three weeks, he noted, the Federal funds rate was under 3 per cent most of the time. Government securities dealers had adjusted their heavy inventories, and some issues were in short supply. For the period ahead, he would try to hold free reserves somewhere around $500 million, and he would not be inclined to go beyond dealing in bills at the present time. If the System went into the longer-term market, those funds might to a large degree land in the bill market anyway. He saw some merit suggestion for an adjustment of central reserve city reserve require in the he noted that the Board still had considerable leeway for the ments, and to give some thought to either vault cash. The Board might wish release of or both of those actions in the days to come. he would not favor changing the discount rate After indicating that Committee might want to consider Mangels suggested that the at this time, Mr. that would provide for of the directive along lines amending clause (b) cushioning adjustments and expansion for the purpose of encouraging monetary activity and employment. increases in economic encouraging
Mr. Irons said there had been no substantial changes in the Eleventh District during the past three weeks although on balance the changes that had occurred probably could be characterized as a slight sliding-off of activity. While consumers appeared to have money--time deposits had increased sub stantially--they were being cautious in their expenditures. Department store sales had been moving somewhat along the lines mentioned by Mr. Allen, with one week quite strong and the next week not so strong; for the year they were about 3 per cent under a year ago. There had been no change in the crude oil situation. The eight-day allowable basis was still in effect, and people appeared to be getting rather accustomed to it. Even the oil people were not as critical as they were a few months ago. Despite hail and excessive rainfall in some areas, on the whole the agricultural outlook was reasonably favorable. Employment, unemployment, and the industrial production index had shown no significant change in the past three weeks. Turning to the financial picture, Mr. Irons reported that District loans, investments, and deposits during the past banks had shown declines in loans declined, commercial and industrial three weeks, However, although total Reserve positions were much easier than loans increased rather substantially. banks had been net sellers of Federal funds, a few weeks ago, and District with virtually no buying of such funds except on the part of one bank. Borrowings at the Reserve Bank were accounted for almost entirely by a in West Texas, reflecting seasonal requirements. group of banks expressed the view that the System Mr. Irons agreed with those who reserves available. Excessive action in terms of making had taken sufficient he would make reserves Thus, while serve no useful purpose. ease would
available for essential and needed bank credit and growth, he would avoid undue ease. If he had any criticism of what the System had done in past periods of recession, it was in easing so much as to force interest rates down to low levels, particularly in the short-term area. He would like to see the Federal funds rate in the range of 2-1/2 to 3 per cent and the bill rate in the area of 2-1/4 to 2-1/2 per cent, and he would try to avoid further downward pressure on the bill rate. He had a strong feeling that there should be no change in the discount rate. With regard to the directive, Mr. Irons said he was inclined to favor the suggestion of Mr. Hayes because something of that nature would simply recognize a fact. The System had been taking international develop ments into account, the problem had been discussed in the press, and it might be well to have on record that the Open Market Committee was giving consideration to the international situation. On the other hand, he would not favor any change in the directive that would point toward greater ease on the domestic side of the picture, With regard to the question that had been raised about Account Mr. Irons said he would favor operating within the limitations operations, operating policies, which indicated that the Committee would of present bills. This might be an short-term securities, preferably operate in Management would prefer, due to the rate movement, occasion when the Account the bill rate should go to 2 per operations to bills. If not to confine funds to the market to supply additional lower and it was necessary cent or
through open market operations, he (Mr. Irons) would favor supplying those funds through the purchase of such other securities as might be available, within the limitations of the Committee's operating policies. On the other hand, he would not favor going to the long-term area with the deliberate intent of forcing down long-term rates. In his opinion, the domestic situation had not reached a point that would call for such operations. Mr. Erickson said that activity was still moving sideways in the First District. The New England index of production was up almost a point in August from July, and it was higher than in August of last year, and for the past eight weeks electric power output had been running ahead of a year not as much as nationally. Shoe production was at the best ago, although March. Favorable construction totals in August had previously level since and there were no later figures available, been reported to the Committee, a 15 per cent increase in Engineering News Record reported However, the same as nationally. Through the contracts for September, the construction sales were 3 per cent above last year. middle of October, department store unemployment was was not good; insured situation, however, The employment survey showed no last year. The September well ahead of still running labor areas. The of any of the principal change in the classification an increase in deposits savings banks showed survey of mutual September gain had been increasing of 4.8 per cent; the comparative from a year ago 4.4 per cent. increase was May, when the month since gradually each
Mr. Erickson went on to say that for the period ended October 12 commercial and industrial loans at weekly reporting banks were 5.5 per cent ahead of last year and stood at the highest point since the week ended July 13. During the past three weeks District banks were substantial sellers of Federal funds, and the use of the discount window had been more moderate than at any time since he became associated with the Reserve Bank. One day last week not a single bank was borrowing, the first time this had occurred in fifteen years except on end-of-year and mid-year dates. Mr. Erickson said he would favor no change in the discount rate. He was rather intrigued by the suggestion of Mr. Hayes for a change in the international situation; he was more concerned about directive in view of the would like to see the change made. situation than in the past and that who said that the easing accomplished thus Being in agreement with those more ease. Since it would be sufficient, he would not favor far had been quantities for seasonal reserves in rather massive necessary to supply that serious consideration be given to reducing purposes, he would suggest After the next reserve city banks. requirements of central the reserve to experiment with thought it might be appropriate couple of weeks, he with the hope of other than bills, in short-term securities operations going below 2 per cent. the bill rate from keeping change in the directive would favor a said that he Mr. Balderston part of the total gold outflow was suggested. The as Mr. Hayes had such on the System in and might reflect it would be unwise problem; to ignore
the future. He would not like to see the discount rate reduced in view of the impact of such action on the bill rate. After noting that the primary problem was to decide what quantity of reserves to feed into the banking system at this time, Mr. Balderston reviewed certain developments since the first of the year. Member banks had paid off their borrowings to the extent of about $900 million, nonbor rowed reserves had increased about $1 billion, but total reserves were approximately the same as at the turn of the year and also a year ago. Despite the reduction in borrowings and despite overt actions taken by the System, long-term rates had not decreased much, perhaps 10 per cent, the money supply was at least $2 billion less than a year ago or at the turn of the year, and banks were still illiquid. Since these results were to him quite unsatisfactory, he urged that the System continue to press reserves banking system until such time as the banks were liquid on the commercial to make additional loans. The banks, he thought, would at first enough since many of them were out of bills and invest the additional reserves, however, they would make other After replacing those bills, felt illiquid. arose, they would make loans. investments and, as opportunities indicated objective without how to proceed toward the The question of greatly, Mr. Balderston said. While depressing the bill rate concerned him the Desk to use the range of $500 he felt that the Committee should instruct would favor using such means a free reserve target, he to $600 million as bill rate below 2 per cent. to avoid depressing the as might be available
Chairman Martin stated that his general thinking had not changed, and that he could not get very pessimistic about the domestic picture. He continued to feel that the biggest shadow was cast by the balance-of-payments problem. Many, he thought, did not quite realize the magnitude of that problem in terms of prices, cost relationships, and other factors. Accord ingly, he would have no objection to changing the directive in the manner suggested by Mr. Hayes. As to the domestic situation, the Chairman said that if his premoni tion was correct the System would have to be careful that it did not feed fuel to the fires of pessimism by appearing to embark on a cheap money policy. The System should take every step possible to be helpful to the domestic economy, but it could not afford to have idle reserves just sit ting around, for that would give the impression that the System had lost sight of fundamental factors. Regardless of the tone and feel of the market, he believed that when free reserves got to the $800 or $900 million level such an impression began to be created, and it was an impression that might This, he noted, was in the realm of expressing a judgment. be warranted. that a Treasury refunding operation was The Chairman pointed out within reason the System ought to follow under way, which suggested that then said that he was impressed by the statement an even keel policy. He Mr. Robertson had read from the draft of policy record entry reflecting and that he did not see any good the consensus of the October 4 meeting, consensus at this time. It the policy indicated by that reason to change correct now. However, when at the time, and it was was essentially correct
it came to the means of achieving the objectives, there appeared to be differences of opinion, While one might like to see the markets different than they are, the Chairman continued, it is not easy to get the markets to perform in the way that one might want them to perform. The System should not be frozen in its policies, but he doubted the advisability of tinkering with open market operations when it probably would not be possible to prevent the bill rate from going down if the pressures were in that direction, or to alter substantially the prices of long-term securities. In saying this, he was expressing a personal judgment. As Mr. Johns had said, perhaps empirical evidence was needed at some time. In his own view, however, this would be a peculiarly inopportune time to gather such evidence, for it would in the market as to the System's attitude. In other create misunderstandings seriously whether this was an appropriate time to do words, he questioned much in the way of experimentation unless it was felt that some really im might be a question whether the result would be achieved. There portant attitude on how to deal with the market, Committee should change its whole think this was the time to procedural problem and he did not but that was a however, that dealings in securi In this connection, he noted, resolve it. the scope of the 15 months would be within within a maturity of ties been in existence right along. operating policies that had Committee's that all the that it was heard continually The Chairman commented sell bills, in order securities and to do was to buy longer-term System had
to make the bill rate go up and the longer-term rate go down. This was one theory, but the theory was not necessarily sound in practice. Possibly the Desk could acquire some long securities, while selling short-term securities, and long-term rates would come down, but in his judgment that was improbable. He questioned very much whether this was a course the Committee should be pursuing, but in any event that was a longer-range consideration. After commenting that he took quite seriously the comments made at this meeting to the effect that the Board might be looking at reserve requir ments, the Chairman remarked that he thought the System had been performing well on monetary policy and that it had made a good record. Perhaps the matter had not been presented well to the public, for there did not seem to be general understanding, but the record nevertheless was good. The System about taking the horse to water, pushing his head in the should be careful trough, and drowning him instead of letting him drink. In his view, Chairman Martin said, unless the balance-of-payments be gotten into better perspective, there would be a con situation could and probably inter the business picture domestically, tinuing decline in and that was the problem his bills at some time, One must pay nationally. Steps had not been taken that the whole world was wrestling. with which to the payment of the bills. would lead that he would have out in his thinking Martin said he came Chairman by Mr. Hayes and that the directive as suggested no objection to changing Robertson, was ade as read by Mr. the October 4 meeting, consensus of the Although the System should do every with respect to current policy. quate rate in a reasonable relationship, its power to keep the bill thing within
he did not think the System had the power to control the bill rate under present conditions. He would have no objection to operating in maturities up to 15 months, or to having the Desk come in with concrete proposals for something different if the results could be clearly seen, but the System was dealing with forces that he thought were too big for it to control. The same problem was involved in the gold outflow. No one could know what the volume of purchases by speculators would be, and it might be that the market could be controlled by feeding in a little gold, but in his opinion the forces at work were bigger. Once anyone started down the path of trying to make interest rates or to control them, desirable as that might be, he was playing with a difficult problem. his views regarding the directive and The Chairman then reiterated the consensus at the October 4 meeting as a policy the appropriateness of business picture, whether it period ahead. There was a declining for the but the economy was not called a recession or a rolling adjustment, be There was no sign as yet that the going over a precipice by any means. There had been recessionary into a major depression. decline had burgeoned to ease, so the when the System began March, and that was tendencies since to business developments. had been well attuned System's record whether more could not evaluate on to say he Martin went Chairman but he questioned the building industry, rates would restore money and lower a revival of the building might do damage to felt that such a course it. He look at the to take a different were beginning some dealers industry because houses and the money of the design of both from the standpoint situation,
problem. That was something that must be taken into account, for such adjustments might only be made more difficult. In his opinion, to put these builders in a position where they would have to compete with people who could get money for nothing would not stimulate the economy under present conditions. The Chairman commented that the System would have to take care of seasonal needs and that it wanted the money supply to grow. It must pro ceed in an orderly way, and he felt that the job was being done in an orderly way. The Chairman then inquired regarding the views of members of the Committee concerning a change in the directive such as suggested by Mr. Hayes. Mr. Shepardson, who had indicated earlier that he would not be inclined to change the directive, commented that the point had been made, and he thought well taken, that the System in fact had been taking the international situation into account. This was appropriate, he thought, he wished to change the position he had taken with reference and therefore to the directive. Mr. Robertson said that he did not consider the matter too impor no reason to oppose the suggested change in tant and that he would have the directive. any members of the Committee Chairman then inquired whether The change, and there were as opposing the suggested would want to be recorded no comments to such effect.
At this point Chairman Martin referred again to the language pre viously read by Mr. Robertson reflecting the consensus of the October 4 meeting, following which Mr. Hayes said that as he listened to the discus sion today he got the impression that there was considerable concern regarding the bill rate and a general hope that the System could avoid driving the bill rate lower. He thought that that point probably should be mentioned. Chairman Martin said he would be glad to have that mentioned and that personally he would like to see the short-term rate stay at 2 per cent or above. He did not believe that anyone could disagree. It was noted by Mr. Thomas that there had never been a time in history when there were free reserves for any extended period and the bill above 2 per cent, following which Mr. Hayes suggested that rate remained the System would have to experiment with new techniques. Martin said that perhaps this was so. Today, however, Chairman that he would like to see the bill he would put the matter on the basis he would not like to see open at 2 per cent or above, but that rate stay beyond 15 months, that is, used which involved going market techniques for the purpose of of present operating policies, beyond the framework such techniques would not bill rate. In his opinion, achieving a higher necessarily work. refer to was the concern what he had meant to Mr. Hayes said that lower, and Chairman Martin driving short-term rates expressed about not
responded that it would be appropriate to have that comment included in the minute record. The Chairman then inquired whether any Committee members would like to be recorded as favoring a change in open market operating techniques, and Mr. Hayes said that although he would not necessarily favor going into long-term securities now, he had sympathy with the views expressed by Messrs. Johns and Bopp. He would have no great preference as to whether the type of experimentation suggested by them should be conducted at the present time or whether to wait until after the American Telephone and Telegraph flotation and the Treasury refunding were out of the way and it could be seen whether the long-term market had improved. The Chairman then stated that apparently it was not necessary to take a vote today on the question of a change in open market techniques. suggested that mere repetition of a consensus as Mr. Balderston to open market operations that seemed appropriate under conditions exist time of an earlier meeting might leave the Committee open to ing at the failing to give precise instructions to the Desk, following the charge of the bill rate seemed to commented that the concern about which Mr. Johns to be a rather clear consensus, that is, cut across what he had understood freely, with some feeling that reserves should be provided that seasonal requirements. If, in the provided in excess of seasonal they should be needs, the bill rate should go below 2 per process of supplying seasonal that the Desk should stop whether it was intended cent, he wondered supplying reserves,
Chairman Martin said he had thought it was clear that the Desk should supply reserves to meet seasonal needs regardless of the course of the bill rate, if that was the only way in which the reserves could be supplied. He inquired whether there were any further comments on that point, and several members of the Committee stated that this was their understanding. Mr. Thomas noted that the question was one of providing reserves beyond the requirements of seasonal expansion in order to stimulate monetary growth. If free reserves were maintained over a period of time sufficient to stimulate growth in the money supply, he predicted that the bill rate would go below 2 per cent. Mr. Johns said he thought that was correct, following which Chairman Martin repeated he had thought it was clear that the decision would be to let the bill rate go below 2 per cent, if that was necessary, in order to supply reserves. Mr. Deming said that in thinking in terms of supplying seasonal had in mind figures from the memorandum of the Board's staff needs he had which indicated a need for about $1.3 billion of reserves, give or take developments. This would contemplate the main something in the light of of a substantial level of free reserves, but he would not regard tenance of meeting seasonal requirements. a program as going in excess such repeated that if, in addition to supplying seasonal needs, Mr. Thomas to encourage more than at a level high enough free reserves were maintained the bill rate would go below 2 per expansion, he felt that seasonal monetary cent.
Mr. Hayes said that, as he recalled the discussion, the majority of those who commented today had expressed the strong hope that in accom plishing the purpose of supplying seasonal reserve needs the bill rate would not go below 2 per cent. He interpreted those comments as a hope that the System might be able to use techniques, including operations in securities other than bills or further releases of vault cash, that would facilitate accomplishing the dual objectives. Mr. Robertson commented that, as he understood it, the primary objective was the providing of needed reserves. He interpreted the comments on the bill rate as a hope that the supplying of the reserves would not force the bill rate too much lower. Mr. Hayes said he thought the comments reflected more than a that methods be explored of hope; that they reflected a suggestion impact on the bill rate. supplying reserves without undue maintenance of the bill rate then said that if the Mr. Robertson he would be very much set forth as the primary objective, were to be were put in terms of a hope On the other hand, if the matter opposed. the bill rate go below be supplied without having that reserves could he would support such a statement. 2 per cent, the consensus of this meeting, Mills made the suggestion that Mr. in a form which actions, be drafted the record of policy as prepared for of the consensus not merely a reiteration clear that it was would make it with this suggestion. agreement was expressed meeting, and at a previous
Mr. Shepardson commented that it seemed to be agreed that the System should provide reserves to meet seasonal needs. However, as he understood the comment made by Mr. Thomas, this raised the question whether those needs could be supplied without at the same time maintain ing a level of free reserves of, say, $500 or $600 million. Mr. Thomas replied that seasonal needs could be provided at any level of net free or net borrowed reserves, but that the question was whether monetary expansion should be encouraged. If a policy were followed that would maintain free reserves so as to encourage monetary growth, he predicted that the bill rate would go below 2 per cent no matter how the reserves were supplied. It was the effect of free reserves in the market that would determine the bill rate, not what securities the Federal Reserve bought or sold or what course it followed in supplying the reserves. Mr. Shepardson then stated that at the previous Committee meeting he had expressed the view, to which he still adhered, that the slack in the economy at present was not due to a lack of availability of credit, but instead to a lack of buying interest. This situation was not going to the market. Therefore, while he changed by pressing more reserves into be reserves were needed, he would not would not be averse to supplying what should drop somewhat. He would if the free reserve figure be too concerned if the System tried to period immediately ahead, more concerned, in the be supply. The money supply had not too hard for expansion of the money push as much as some would like, but funds had been going into savings increased
and time deposits. As he saw it, there was not a lack of credit but a lack of demand, and the availability of more credit would not help that situation at the moment. Mr. Mills said he believed instinctively that a forcing of reserves into the market under present conditions would amount to pushing on a string as far as providing any real stimulus to growth in the money supply was concerned. The real stimulus would come only on those occasions when the Treasury borrowed new cash through tax and loan accounts. When supported by reserves, the deposits created in that way would remain in the banks in the absence of pressure that would force the sale of securities by the banks. Chairman Martin then said that he thought the Committee was in substantial agreement on the policy to be followed. It was not in full agreement on the techniques to be used, but he believed the general course to be followed could be stated quite clearly in the record in a manner that would be acceptable to everyone. Mr. Rouse said he would interpret the discussion as meaning that should be free reserves at all times. there this was correct, and there was no indica The Chairman replied that tion of views to the contrary. said he also interpreted the discussion as meaning that Mr. Rouse the Committee would have no specific target was being suggested, although $300 to $500 million of free reserves. in mind somewhere from view of the volume of open market Mr. Rouse then suggested that in next four weeks, the Committee might operations that was indicated for the
want to consider changing the portion of the first paragraph of the directive which provides 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 the date of the Committee meeting in question, 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. Chairman Martin suggested that the figure be changed from $1 billion to $1.5 billion, and no objection was indicated. Mr. Rouse then referred to the discussion about dealing in securi bills, and to the references that had been made to securi ties other than longer than 15 months. In terms of a general ties having a maturity not he felt that two years was better than definition of short-term securities, satisfactory for credit 15-month limitation is generally 15 months. The only to repurchase agreements. but in the past has been applied purposes, out as two years would permit commented that to go as far Mr. Mills two-year maturity range. if they fell within a in Treasury bonds operations and he thought it had not operated in bonds, By and large, the Committee to bills and to confine operations the sense of the Committee had been and bonds, its operations were to go into notes If the Desk certificates. would rather not offer. impression that the Committee might convey an that a 15-month definition said it was his understanding Mr. Hayes within 15 months, including in any securities maturing would permit dealing
notes or bonds, following which Mr. Thomas pointed out that there was nothing in the area beyond one year not already selling at a rate below the prevailing yield curve. After some discussion based on that comment, Mr. Robertson indicated that experimentation in the area up to 15 months would be agreeable to him if such operations were deemed advisable by the Desk, but that he would not go further and in any event would hold down the volume of such operations. Mr. Robertson also said that 15 months had been ingrained in the Committee's thinking over the years, to which Mr. Rouse replied that he had always thought in terms of 18 months or two years. The matter of deciding on 15 months for loan purposes was something different. In his view it might prove desirable not to tie the Committee' s hands at some future date by adopting such a definition of "short-term" securities at the present time. Chairman Martin concluded the discussion with the comment that it was evident that some members of the Committee would feel he thought did not extend to maturities beyond 15 months. easier if operations upon motion duly made and Thereupon, 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 allowing maturities to maturing securities, and replacement of for the System Open Market Account run off without replacement) in the open market or, in the case of maturing securities, by be necessary in the the Treasury, as may direct exchange with
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, while taking into consideration current international developments, and (c) to the practical administration 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 $1.5 billion; (2) To purchase direct from the Treasury for the account 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 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, to the memorandum from the Federal Reserve Chairman Martin referred recommending that the Bank's York dated September 8, 1960, Bank of New to furnish quarterly statistics Statistics Department be authorized Market securities dealers to the the trading volume of individual Government on like again to defer considera and said that he would Securities Department, that the Secretary of the In this connection, he noted tion of this item. on the matter. today, had some observations who was not present Committee, was indicated. Martin's suggestion to Chairman No objection Open Market Com of the Federal the next meeting It was agreed that at 10:00 a.m. November 22, 1960, Washington on Tuesday, would be held in mittee The meeting then adjourned. Assistant Secretary
Also: Record of Policy Actions