November 22, 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 Wash ington on Tuesday, November 22, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Messrs. Leach, Allen, Irons, and Mangels, Alternate Members of the Federal Open Market Committee Mr. Johns, President of the Federal Reserve Bank of St. Louis Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Brandt, Eastburn, Hostetler, Noyes, Roosa, and Tow, Associate Economists System Open Market Account Mr. Rouse, Manager, to the Board of Governors Mr. Molony, Assistant Division of Research and Mr. Koch, Adviser, Statistics, Board of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors Mr. Keir, Chief, Government Finance Section, and Statistics, Board Division of Research of Governors Division of Inter Associate Adviser, Mr. Hersey, national Finance, Board of Governors Ratchford, Baughman, Coldwell, and Einzig, Messrs. Reserve Banks of of the Federal Vice Presidents
Richmond, Chicago, Dallas, and San Francisco, respectively. Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Meigs, Senior Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on October 25, 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 Octo ber 25 through November 16, 1960, and a supplementary report covering the period November 17 through November 21, 1960. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Rouse commented as follows: As the written report to the Committee points out, System operations were undertaken in large volume since the last meeting of the Committee to supply the reserves needed for seasonal and other needs of the economy. It is probably worth noting that over $0.5 billion reserves were absorbed by gold and foreign account operations, pointing up the fact that the balance of payments problem has a very direct and measurable meaning as far as the System is con cerned. System purchases of short-term securities outside the bill area were generally taken in stride by the market. I stated at the last meeting that the techniques for operating in these other short-term securities might have to be somewhat different than normal. Our initial purchases, in fact, were made from several of the larger dealers who had made offerings approach was gradually extended to cover all to us, and this of the dealer firms. Then we found that dealers were offer ing short-term securities to the Desk in increasing volume. Thursday we were able to include other short-term Last with Treasury bills, and several securities on a go-around of the dealers commented on the smoothness with which the
operation was carried out even though it took longer than a go-around in Treasury bills alone. Treasury bill rates rose generally over the period since the Committee last met, although unfortunately rates have declined somewhat in the past few days. Average rates in yesterday's Treasury bill auction were established at per cent for three-month bills and 2.75 per cent for six month bills, 27 basis points and 18 basis points higher than in the auction preceding the last Committee meeting. At these higher levels, and with recent actions by monetary authorities abroad to lower interest rates, the relation ship of our short-term rates to rates abroad is somewhat more satisfactory from the balance-of-payments point of view. While System actions and attitudes have not been the whole story in this development, they have certainly helped to a considerable extent. Over a good part of the period since the Committee last met, the money market has appeared tighter than would normally be expected with free reserves in the $400-$500 million range. The problem of the distribution of reserves between country and money market banks has continued to be with us and the New York banks have come under heavily in creased pressure since the beginning of the month as a result of heavy deposit drains, part of which relate to Treasury Tax and Loan account withdrawals and part, no doubt, to the gold outflow. All of this leads us to view the high estimated reserve figures in the period ahead as shown in the spread sheet attached to your supplementary report--with a great deal of caution. On the other hand, the pending changes in Regulation D will have a substantial once all vault cash can be counted as effect, and perhaps will put more of their excess reserves reserves, country banks we will have to approach the work. My own feeling is that to basis, and see how the statis period ahead on an experimental measurements are reflected in the money market. tical reserve agreement as an to look to the repurchase We would continue the System with maximum flexibility instrument that provides an uncertain period--since in an easy money mar during such to be withdrawn or mature ket we can permit the agreements On the other hand, if temporary pres without replacenent. new agreements. In this past sures are evident we can make in order to keep repurchase we found it advisable, period, to 2-3/4 per cent, to lower the rate on the books, agreements and we may need to do so again. period of expansion in the supply of The seasonal way at a time when the out acceptances is under bankers' is at an all-time high, re standing volume of acceptances reserve positions of the pressure on the flecting in part
the New York banks and the relative attractiveness of the bankers' acceptance for both borrowers and investors, The holdings for foreign central banks at the New York Bank have also reached a postwar high, and the dealers have had some success in placing additional amounts with domestic in vestors. Nevertheless, dealers' portfolios, at around $56 million, have risen substantially since the time we last met. I would expect to increase seasonally the System's holdings of acceptances, both outright and under repurchase agreement, over the period of pressure ahead, as in other recent years. With the refunding of mid-November maturities success fully out of the way, the Treasury is currently engaged in an optional offer to holders of about $750 million F and G bonds maturing in 1961 of an opportunity to exchange into an addi tional amount of $1.3 billion outstanding 4 per cent Treasury bonds of 1969. While the prices of the 4' s--and some surround ing maturities--dipped yesterday, mainly as a result of the backing their bid prices down as a precautionary dealers' we would not anticipate that these price developments measure, would greatly affect the success of the exchange, in view of the holders of F and G bonds, or that the mar the nature of greatly affected by the offering. If ket itself should be the Treasury were to get an exchange of $200-$300 million, results would be satisfactory. the as to whether there were to Chairman Martin's question In response Mr. Robertson read a state Mr. Rouse's report of operations, comments on as follows: ment substantially not administered during view the Account was In my the Com manner that accomplished four weeks in a the past it, to create additional objective, as I understood mittee was relatively tight the money market. The market ease in it should have been of the period, when throughout most indicate that the last meeting The minutes of much easier. to provide additional will of this Committee it was the tightening factors--rather than offset all reserves, to more There can be differences tighter conditions. than to create which was degree of easing respect to the of opinion with record for con no basis in the but there is contemplated a tightening operation, the Committee contemplated tending that actually occurred. which the motives any way challenging without in Furthermore, it is my belief of the Account, of the Manager or intentions in the wrong way: was done, was done that what
a. In the first place, instead of "experimenting" in the area outside of bills for the purpose of preventing our easing actions from driving the bill rate below 2 per cent (as was contemplated by the Committee), the Manager entered this area in a large way--over $300 million--which was more than I thought of as an experiment, and was so great as to accentuate the problem of disposition when it becomes necessary to absorb reserves through reverse open market operations. The net effect, I fear, is a reduction of the liquidity of the System's Open Market Account. Instead of merely keeping the bill rate from going below 2 per cent, this operation, combined with other factors, served to drive the rate up considerably. b. In addition, the operation during the four-week period consisted, in part, of an excessive use of repurchase agreements, and at rates lower than the discount rate. This was not done merely as a means of assuring dealers of adequate financing to carry their inventories, but was designed to stimulate the use of repurchase agreements by non bank dealers. I regard this massive use of repurchase agree ments (which totalled over $600 million at one point) as an inappropriate and even detrimental course of action for the Federal Reserve System to follow. As the Comnittee knows, I have always questioned the legal for our repurchase agreements with nonbank basis dealers in Government securities. In view of this it seems to me the System at least legal situation, should hesitate to utilize repurchase arrangements prospective benefits are very great and unless the cannot be achieved in any other way. remember, in my December 1954 As many of you will to demonstrate that the use of memorandum I attempted the System was difficult to repurchase agreements by apart from any question of legality. justify, quite questions presented in I asked for answers to specific but there has never been a response to that memorandum, that invitation. 1955 the New York Reserve Bank, as agent Since Committee, has been authorized for the Open Market agreements with nonbank to enter into repurchase . to the understanding that dealers "subject . . would be used sparingly in entering the authority
into repurchase agreements at rates below the dis count rate." In my view the entering into such repurchase agreements with nonbank dealers during the past four-week period to the extent of hundreds of millions of dollars is not a "sparing" use" Our authorization on this matter provides that repurchase agreements "shall be used as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis." In my judgment, it is not possible to reconcile this authorization with the recent massive engagement in repurchase agreements, admittedly de signed "to encourage dealers to leave Government securities under repurchase agreements with the System for longer periods of time," Our current action in this respect not only fails to yield special benefits but it fosters inequities in the Government securities market and tends to diminish the strength and independence of that market. Use of repurchase agreements in lieu of outright purchases of short-term Governments does not, in my opinion, materially relieve pressure on short-term interest rates. The reserves we supply in this manner flow into commercial banks, and in view of the temporary nature of these reserves the over whelming volume inevitably flows into the short-term market. In other words, the result of our action is substantially the same as what would be accomplished by outright purchases, and the latter course would avoid the detrimental effects of the repurchase agree ment program. I suppose none of us will deny that furnishing reserves to nonbank dealers at 2-3/4 per cent when bank dealers must borrow at a 3 per cent discount rate places the latter group at a competitive disadvantage and consequently is inequitable as between the two groups. I do not believe we can justify this favoritism to non bank dealers. Even more important, our wholesale use of repurchase agreements, particularly at preferential rates,is in jurious to the independence and strength of the Govern It is another step toward ment securities market. dominance by the Federal Reserve System, with perverse effects on the market's own strength and reliability. Such use weakens rather than strengthens the market by habit of relying on the Federal getting dealers into the
Reserve rather than on commercial banks for their financing, and in turn unwisely relieves those banks of the responsibility to finance dealers and thus help to create a self-reliant market for Government securities. Perhaps the most unfortunate aspect of this course is the danger that our subsidizing of the nonbank dealers on such a large scale will gradually diminish our freedom to conduct open market operations with no considerations in mind ex cept the welfare of the national economy. If those dealers should come to rely, with justifi cation, on Federal Reserve financing of their inventories, it might prove psychologically difficult--and dangerous to our relations with the market--if the public interest should require abrupt withdrawal of repurchase agreement financ ing. As is obvious from the foregoing, I oppose the use of repurchase agreements except "sparingly" (a word that does not fit recent practice) and as required by the authorization to the agent Bank "solely for the purpose of providing the money market with sufficient reserves to avoid undue strain on a day-to-day basis." Furthermore, I oppose the use of repurchase agreements at rates below the discount rate except in the unlikely situation in which there is no other available means of injecting needed reserves into the banking system, comments on the experimentation I hope these latter and the excessive use of repurchase in the nonbill area, will not divert attention from the first pointagreements, is, my belief that. during the past four-week period, that market was not achieved of ease in the money the objective to the degree the Committee contemplated. myself in a foregoing, I find the light of the In to ratify and confirm although I must vote position where of the Account during the past four weeks, the transactions can now be done place and nothing they have taken because about it, I cannot "approve" them. Mr. Robertson's statement that a copy of Martin suggested Chairman study with the thought the Committee for to all members of be furnished later meeting of discussion at a on the agenda for it might be put that
the Committee. He felt that it would not be desirable to discuss the statement on a piece-meal basis at this time. Mr. Bopp said that he thought it might be in order for him to make a brief observation on Mr. Robertson's paper at this time, since he happened to have been the member of the Open Market Committee who usually participated in the morning telephone call with the Desk during the pre ceding four-week period. This had been an enormously difficult period, Mr. Bopp said, and on each day one found it difficult to put funds into the market and to keep them there, especially when it was known that at the turn of the year the System would be pulling funds out of the market. He felt that the market perhaps had been a little tighter at times than the Committee wanted it to be, but he noted that at the meeting on October 25 several members expressed considerable hope that the bill rate get lower. During each of the morning calls would not be permitted to with the intentions of the period, he had expressed agreement during this as operations were concerned for of the System Account as far Management as a matter of procedure if more day. Perhaps it would be desirable that in this morning call so that the Committee were to participate members of of the problems confronting would be fully aware currently more of them At any rate, Mr. Bopp the operations that were proposed. the Desk and member of the Committee from any had received no indication said, he to carry out the the actions being taken past four weeks that during the way unsatisfactory, and 25 meeting were in any decisions at the October given to the Management had been that any indication he was not aware
of the System Account by any Committee meber that operations should be different than those conducted. Chairman Martin commented that he felt this was well said and he was glad that Mr. Bopp had expressed his views as one who had participated in the calls during this period. For himself, he had said on many occasions that he completely disagreed with Mr. Robertson on the use of repurchase agreements. He felt that repurchases represented a very useful instrument in the operations of the System Account and that their value had been well demonstrated over a period of many years. For the Committee to give up the use of this instrument would in his opinion be a step backwards. As far as the past four-week period was concerned, Chairman Martin said that he had not studied in detail the use of repur chase agreements in the operations of the Account, but generally speaking he would subscribe to their use. The Committee had many problems that it should be studying and he would commend to all the necessity of spending more time in examining what was involved in handling the System Account. This was a fundamental activity for all of us to have in mind. Rouse whether he had any comments he wished to make He then asked Mr. at this time. suggested by Mr. Bopp, he had received Mr. Rouse said that, as member of the Committee was dissatisfied no previous indication that any with the operations carried on in the Account since the last meeting. Mr. Robertson were rather the comments made by He felt that some of before the next meeting of the but he would prefer to prepare extreme,
Committee a paper dealing with the points that had been raised rather than to comment on them now. Chairman Martin stated that he felt this would be a desirable way of handling the questions that had been raised by Mr. Robertson, and it was understood this procedure would be followed, Mr. Robertson stated that he wished to make one further comment at this time. It was rare for a member of the Committee to call upon the Manager of the Account, he said, and he believed it would be improper if he were to do so, indicating dissatisfaction with the way the Account was being handled. He thought that the Management of the Account should not be influenced by the views expressed by one member of the Committee. Mr. Rouse stated that he has had such calls in the past, although they have been rare. On such occasions, if he felt that the member's views were at variance with the consensus of the Committee, he has had to make a judgment as to whether to disregard those views or to request a telephone meeting of the Committee, Mr. Rouse said that he is pre pared to take the responsibility for making such a judgment. that, unless there were further Chairman Martin suggested comments, the transactions in the System Account since the last meeting that in the case of Mr. and confirmed, noting be approved, ratified, but not to approve the to ratify and confirm Robertson he would vote transactions.
Thereupon, upon motion duly made and seconded, the open market transactions dur ing the period October 25 through November 21, 1960, were approved, ratified, and confirmed, Mr. Robertson voting to ratify and confirm but not to approve the transactions for the reasons he had stated. Mr. Balderston said that, in view of Mr. Robertson's statement, he would be interested in having Mr. Thomas comment on what the figures showed with respect to whether the System recently had supplied reserves over and above seasonal expectations. Mr. Thomas said that the projections of needed reserves that were presented to the Committee at its preceding meeting, measured on the basis of a normal seasonal pattern, would have given total reserves of about $18,600 million. Actually, total reserves for the current week would be close to $18,800 million, or about $200 million more than would have been projected to take care of the seasonal pattern and to reserves of around $400 million. Mr. Thomas went on to maintain free this period there had been much heavier drains on say that during had been estimated at the time because of market factors than reserves gold outflow had put a much 25 meeting. For example, of the October than had been anticipated and the Manage greater strain on the market found it necessary to meet that factor. ment of the System Account had larger than would had been a little in required reserves Actual growth somewhat more than that there had been projected, indicating have been past four weeks. Mr. deposits during the seasonal growth in the usual with the aim of the this was in accordance Thomas said he thought
Committee, and he felt that the figures indicated a movement toward the objectives that the Comittee had set. Whether the operations had accomplished the objectives as adequately as might have been done was another question; the results might have been different had there been no concern as to what happened to the Treasury bill rate during this period. In sum, however, it seemed to Mr. Thomas that System operations had progressed in the direction desired by the Committee at its preceding meeting. A staff memorandum on recent economic and financial developments in the United States and abroad had been distributed under date of November 18, 1960, and a memorandum on projections for member bank reserves also had been distributed to the Committee under that date. With further reference to economic developments, Mr. Noyes made the following statement: It would be a mistake, I think, to take too much comfort from the more nearly horizontal course of economic develop ments in October. While this was clearly preferable to a of the increased slippage that appeared in continuation there is little reason to suppose that the scattered September, any fundamental change in the situation. The gains signal in retail trade was largely associated apparent improvement conditions affecting automobile with the weather and special sales. The rise in housing starts was from a sharply cur indication from the high rate, and there is some tailed use that November will see another percentage of permit decline. The rise in unemployment to 6.4 per cent is foreboding, that the high current in view of the likelihood especially industry will not be of employment in the automobile level pointed out in our memorandum, if maintained for long. As not improve, normal seasonal underlying situation does the will carry the number of persons actually unemployed trends
to over five million by February. Put another way, the seasonal factors which have been working recently to mini mize the number of persons actually unemployed will be operating in reverse from now until early spring. Hence, the human and financial problems stemming from a relatively high seasonally adjusted rate of unemployment will become more intense even if the rate itself does not increase further. A similar observation might be made about the steel in dustry, where no more than seasonal declines are likely to add to the gloom already prevalent. Thus, while confidence may be maintained for a while by the usual seasonal bulge in retail trade, we are likely to see increased concern, and perhaps nore outright pessimism, as the winter progresses, even if the seasonally adjusted measures of aggregate per formance hold at or close to their present levels. Neither consumers' nor businessmen's expectations, as reported in recent surveys, provide a basis for optimism regarding the near-term future. If presently reported ex pectations are borne out, consumer purchases of durable goods in the next six months will be below year-ago levels. For the first time since the bottom of the 1958 recession, less than half the businessmen responding to the Dun & Bradstreet survey expect sales to increase in the quarter ahead. Dif fusion indexes of so-called leading indicators are still at low levels, well below 50 per cent. Having said these rather discouraging things about the prospects for any immediate upturn in economic activity, I declines in activity which have should remind you that the very small, and that as yet there occurred thus far have been acceleration in the rate of decline. is no evidence of any product in the are that gross national The prospects changed from the third quarter current quarter will be little it is worth, the evidence up a little. For what perhaps even further declines will be future plans suggests that the of in any other postwar downturn. For less precipitous than of expectations with regard the McGraw-Hill survey example, expected decline shows an equipment expenditures to plant and an antici 1957 they reported in October cent, while of 3 per Similarly, consumer cent for 1958. of 7 per pated decline expectations are off only very durable goods purchase item which bulks largest new automobiles, the moderately for Builders are volume of expenditure. in terms of dollar in residential housing activity expecting some improvement of us have felt the misgivings some in 1961 and, despite of housing demand, survey the continuing strength about has been only a very seem to indicate that there figures
moderate decline in the number of families who say they are actively interested in house purchases. Certainly, the downward drift in the economy so far is not the sort of decline that has generally been associated with a recession in business cycle analysis. It has led to a profusion of new and refurbished descriptive phrases--and I can see no harm in offering still another. I would like to suggest that this might be termed a "moderated recession." An important goal of monetary policy--and, in fact, of all economic policy--is to moderate economic fluctuations. The Executive, the Congress, and the Federal Reserve have all avowedly been working in pursuit of this objective. It should not come as a complete surprise if we succeeded, at least in some small measure. In 1959, for the first time in recent history, bank credit expansion in a boom year was limited to about the amount of increase in time deposits. Fiscal policy inevitably lagged, but the shift from the fiscal 1959 budget to the fiscal 1960 budget was dramatic. The cost-price spiral was checked abruptly as it became clear to all con cerned that they could not rely on further inflation to validate wage and price increases not justified by underlying relationships. Hence, most of the excesses demand/supply with a boom never appeared in 1959 or generally associated policy was eased progressively--even early 1960. Monetary the total output of goods and services was still while later fiscal policy shifted away from the climbing--and projected in the early budget estimates. substantial surplus the moderate nature of the light of all these facts, In the aggregate measures of and the prospect that downturn so far, will decline less as gross national product, activity, such seem altogether reasonable. than in 1954 or 1957-1958, this time respect to credit statement with the following Mr. Koch presented developments: today is that we I would like to make The main point and monetary expansion achieving the bank credit have been In the four current directive. sought in the Committee's investments of total loans and ending with October, months seven billion dollars, or commercial banks increased over all almost four per cent. credit was concen growth in bank through October The June as the rise in Government securities, in holdings of trated that this considering moderate, particularly loans was quite show their greatest when loans usually of the year was the season
strength. Business loans, for example, the largest component of the loan portfolio as well as the component with the most clearly defined seasonal movement, were down about $300 million from the end of June through October this year as compared with an increase of almost a billion dollars on the average over the same period in most recent years. Despite the greater relative increase in Government securities holdings than in loans in recent months, loan-deposit ratios of banks continue high and have declined only slightly from the peak reached earlier in the year. Thus far in November, credit and deposits at city banks have declined rather sharply. This is to some ex tent seasonal and may also be a reaction to the large bank purchases of Treasury bills last month. Nevertheless, the current decline bears close watching. The active money supply, demand deposits and currency, has also grown during the current half year but much less sharply than bank credit. Over this period, growth in the money supply on our new daily average basis has been about two billion dollars, or four per cent at a seasonally adjusted annual rate. You will note that this percentage growth is seasonally adjusted and expressed at an annual rate, whereas the percentage figure I cited for bank credit expansion was not seasonally adjusted and covered only four months. This is because seasonal adjustment factors are not available for the credit figures and, therefore, annual figures based on a particular season's data would not be very meaningful, But even after allowing for a lack of direct compara bility of the bank credit and the narrowly defined money supply money supply has grown less rapidly than bank figures, the mainly because of the sharp rise in time deposits credit, in recent months. Since May, time deposits that has occurred banks have risen $3-1/2 billion, or over 14 at all commercial adjusted annual basis. Foreign inter per cent on a seasonally however, have risen only moderately in bank time deposits, recent months. at the reserve position of the banking system, Looking free reserves have continued between $400-500 million, and the Reserve Banks around $150 member bank borrowing fron to be somewhat maldis Available reserves continue million. the lion's share of country banks possessing tributed, with reserve position of the city them. The relatively tight due to the failure of country banks, however, is only partly of their resources into channel a normal proportion banks to It has also been with the city banks. correspondent balances banks in putting new funds the behavior of the city due to
that come into their possession to use very promptly, mainly by purchasing Government securities. The recent course of the outstanding total reserves of member banks also clearly reflects the System's credit-easing actions. Such reserves totaled $18.9 billion on a seasonally adjusted daily average basis in October, as compared with $18.1 billion in April, an increase of almost 4-1/2 per cent over the six-month period. Regarding the outlook for bank reserves and based on the free reserve figure, the pattern table before you shows that most of the large volume of seasonal reserves required by banks in late November and early December may already have been provided for by the vault cash and reserve requirement ratio actions taken by the Board last month. Even assuming no further System open market operations, which is the assumption underlying the second last column of the table, free reserves would likely fluctuate between $450 and $800 million between now and the next meeting of the Committee in mid-December. These free reserve figures, however, may be quite mis leading over the next couple of weeks. In the first place, the reserves already provided for will at first be available in the main at the country banks. Their flow to the cities may very well be slow, as has been the case several times in the recent past. Secondly, seasonal liquidity needs are ap proaching and these tend to be concentrated at city banks. Therefore, it would seem the part of wisdom over the next three weeks for the Desk to make sure that money market con ditions and city bank reserve positions are kept quite comfort able, lest financing knots develop that threaten the desirable bank credit and monetary expansion that seem to be in progress. It is undoubtedly too early to assess convincingly the results of the Account's recent actions in buying short-term certificates, notes, and bonds as well as Treasury bills. A judgments on the operation, however, may be in few tentative order. First, as to the facts about recent System open market in the four weeks ending November 16 the Account operations, dollars of reserves through net pur provided over a billion half a billion were securities. Roughly chases of Government a quarter of a agreements with dealers, through repurchase purchases of Treasury bills of varying billion through direct a billion through purchases another quarter of maturities, and notes, and bonds. Over the same of short-term certificates, gold outflow about half reserve drains were a period, the main in currency in circulation dollars and an increase a billion of a quarter of a billion,
As for our recent operations in short-term securities other than bills, both their market interpretation and ob servable results underline their modest character. They have been taken in stride by the market as a minor change in practice. In general, the operations seem to me to support the "bills preferably" policy, at least in so far as the policy applies to the short-term area of the Government securities market. Short-term Government securities other than bills have been available only in relatively limited quantities and it has apparently been more difficult to buy them on a "go-around" basis, thus raising questions not only of equity in doing business with the various dealers but also of being sure of getting the best price. The question of buying on a best price basis also becomes difficult to accomplish when it is necessary to compare prices of what are in effect two different commodities, say a 3-month bill and a 13-month bond. In such a case, the determination of best price neces sitates a judgment about the appropriateness of a given yield curve. On the other hand, it does seem possible, by buying different types and maturities of securities, even those concentrated in the short-term area, to achieve some differ ential effects on their interest rates, at least in the short run. This is undoubtedly due in part at least to or psychological reasons, which may be becloud expectational ing to some extent real market forces. of the differential effects of our recent The evidence on interest rates of various short open market operations is by no means clear, however, term Government securities when short-term bill rates is the season of the year for this it does seem likely that such usually rise. Nevertheless, risen more recently than they would have if open rates have to bills. I hasten to operations had been confined market rates, if they have in effects on add that the differential have been small, indicating that fact occurred, probably in the short-term area has been quite private arbitrage effective. outside observers note on these operations, As a final bear witness to generally that they commented quite have actions and its of the System's the flexible character to achieve the maxi try different techniques willingness to of monetary action to economic stability. mum contribution the manner in which for comment on is all to the good, This securities market in the Government we conduct our operations upon us much and has brought way out of hand has gotten exaggerated criticism. undesirable and
Mr. Hersey presented the following statement with respect to the United States balance of payments and related matters: Indirect evidence suggests that the fairly large miscel laneous outflows of private capital from the United States that began earlier this year, and increased after the British and German discount rate increases in June, have been con tinuing. Much of this flow has to be estimated as a residual from known items in the balance of payments: we suppose that it includes such things as leads and lags on commercial pay ments, withdrawals by foreigners of money previously held in various types of assets in this country outside banks, and movements of U. S. nonbank funds to other countries. Tentative estimates for the balance of payments in the July-to-September quarter suggest that unrecorded capital outflows exceeded one-half billion dollars in that period. These unrecorded outflows, taken together with something less than one-half billion of recorded outflows of U. S. private short-term loans and investments abroad, and blown up to annual rates, explain all but a small part of the over-all deficit in the third quarter, now estimated by the Commerce Department at a little under $4-1/2 billion (annual rate). In addition, there have been net withdrawals of foreign private deposits and other known liquid assets in August, September, and October. Declines in foreign private dollar holdings result in larger additions to foreign official re these official reserve gains have been leading serves, and purchases of gold from the United States. to large Foreign gold purchases this month have been very large, far, after about $300 million a month about $400 million thus September and October. However, this month foreign in both at the New York bank have declined, official dollar holdings of November, so that the net addition through the first half gold and dollars together has been less rapid to official impression to be gotten from than in October. The general and from the more inclusive these changes during November the over-all deficit for October is that figures now available stayed at a high rate. (The balance of payments has in the in October was of gold and dollars foreign gain over-all a very preliminary count, million, according to about $500 declined, the official gold and as private dollar holdings To create this about $600 million.) dollar gain was and capital out clear that miscellaneous it is pretty deficit, continuing pretty heavily. flows have been private capital movements the causes of these Whatever that the movement might there is a real danger have been,
snowball into much larger dimensions than we have seen yet, and with much larger participation by Americans, if a flight psychology should really take hold. A sidelight on this, which may or may not mean anything, is that the price of gold on the London market has now come down to about $35-1/2. Meanwhile, the merchandise trade surplus in the third quarter exceeded $5 billion, annual rate, and though a level ing off seems to have begun last summer, we anticipate that no great change will occur in the present quarter. At this rate, the United States has been very close to a temporary equality of its international receipts and payments, apart from recorded short-term capital movements and the outflow of unrecorded capital. However, many people understand that a really satisfactory balance in our basic international accounts--a balance that would hold over an average of good and bad years--is not going to be achieved in a matter of months, but is going to take a few years at best. Also, many people realize that a lot lies out of our hands: it is essential that we avoid inflation in this country, but it is also necessary that other countries, with surpluses in their balances of payments, take actions to reduce those surpluses. Given all these circumstances--a persisting underlying lack of balance, requiring adjustments abroad as well as here, and an uneasy psychological situation--the Presidential directives issued last week served two purposes. (1) They were fairly drastic actions to show that the United States has no thought of devaluing the dollar. (2) They were a forceful reminder to countries with balance-of-payments like Germany, where Secretary Anderson and Secretary surpluses, Dillon are conducting talks this week, that we expect greater part to get back to balance in international efforts on their payments. The German balance of payments this year has been in many the opposite of ours. Despite extreme boom conditions, respects surplus on current and long-term capital they still have a small accounts combined, and their earnings from foreign military in this surplus. On are a very important factor expenditures been a very large inflow of capital, much top of this there has of it unidentifiable--like our outflow. continues, and credit conditions While the German boom that the German discount too much to hope remain tight, it is from 5 to 4 per cent, will change rate reduction twelve days ago, the British bank rate drastically. Similarly, the situation cent, though it was 6 to 5-1/2 per on October 27, from reduction international rate differentials, made explicitly to reduce so only to a small extent. did
In both Britain and Germany, and in Europe generally, there has been some easing of conditions in automobile and textile markets, and an approach to balance at a high level in steel markets. Nevertheless, denand has continued extremely strong for capital goods. For example, in the machinery and equipment field excluding autos, British new orders have exceeded deliveries by an average of 14 per cent over the first eight months of 1960, and in Germany the corresponding rate of monthly buildup in order backlogs during the first nine months equalled 20 per cent of monthly deliveries if you take the whole machinery and equipment sector including autos, and 30 per cent if you limit it to non electrical machinery. Another feature of the German situation-not paralleled in Britain--has been the accelerating rate of growth in retail sales, excluding autos. Whereas year-over-year gains in retail sales in 1959 averaged 5 per cent, they averaged 7 per cent in the first half of 1960, 8 per cent in August, and 11 per cent in September. Given this strength in important focal centers of demand abroad, I would not expect any marked weakening in world trade in the next few months. Moreover, taking into account also the British failure so far this year to keep their exports from sag ging while their imports remain high, and the very important part interest-induced capital movements have been playing in British reserve gains, I would not expect any further cuts in British or German discount rates in the near future. Mr. Mills said that Mr. Hersey had spoken in terms of a gold out had been running at a rate of $4.3 to $4.5 billion during flow that recently pointed out, however, that the net gold outflow during the the year. He less than $4.5 billion and that calendar year 1960 would be substantially of outflow might result in misunderstandings. use of the annual rate transfers of gold and the annual rate of net Hersey stated that Mr. the first half of 1960 from the United States during dollar liquid assets was running at a rate third quarter it whereas in the was under $3 billion, deficit If the balance-of-payments $4-1/2 billion. of approximately the total for the year rate to the end of 1960, continued at the recent between $3 and $4 billion. would be somewhere
Mr. Treiber presented the following statement of his views on the business outlook and credit policy: The state of the domestic economy is not yet encouraging. There is little evidence of a probable pick-up in the near future. Since consumer spending is such a large part of gross national product, and since an early revival of economic expansion may well hinge on a resurgence of consumer spending, it is a little disturbing that consumption expenditures in the third quarter of 1960 showed the first drop since the 1957 recession. While there was a good recovery in retail sales in October, automobile "clearance sales" played so large a part that we cannot rely on the one-month figure as indicative of a trend. The expected seasonal rise in unemployment in the winter months may prove to be a deterrent to spending. Inventory changes seem more likely to act as a drag on the economy than as a stimulus in the next few months. However, changes in total inventories this year have not shown any unhealthy aspects of cumulative decline. Some further realignment of inventory positions should still be consistent with continuation of the same general business climate that we have been living with most of this year. Although private housing starts rose in October, the easing of mortgage credit has been modest. A sustained upturn in housing may still have to await a further easing of credit terms. Business spending on plant and equipment is leveling off under the influence particularly of declining corporate profits. in the McGraw-Hill survey which But we can take some comfort that there may be no significant decline in the offing. suggests As for the stimulating factors, we can probably look to a continuing uptrend in State and local government forward spending, and to higher Federal expenditures. developments in October included a Significant bank credit loan activity (reflecting in part a pronounced weakness in company financing from the banks sizable shift in sales finance a marked rise in securities paper market), but to the commercial While the money and in total loans and investments. holdings absence of any additional in October, the supply rose sharply programs until late next spring Treasury cash financing in total bank credit a major source of increases indicates that the next five or six will be missing in and the money supply are likely to remain at a high months. Also, Treasury deposits we have at of the year. However, through the remainder level gains in total bank reserves, least achieved continuing sizable
in bank liquidity, and in the total liquid assets of the nonbank public. On the international financial front we can see some glimmer of light for the first time in several weeks, with the dollar showing greater strength in the exchange markets, the London gold market tending toward lower prices and diminished activity, the establishment of a helpful trend of interest rates in Europe, and clear signs that effective steps are being taken by the U. S. Government to reduce our balance of payments deficit. However, it is much too soon to cheer, and we should continue to give very careful attention to international considerations in the formulation of credit policy. It seems to us that domestic economic conditions, and especially the substantial and growing unemployment figure, fully warrant our maintaining the current policy of ease and fact justify some leaning toward greater ease, if would in be accomplished without forcing short-term market in this can current levels. In some respects the task terest rates below market operations seems less difficult than a month for open rates here and abroad has ago, for the gap between interest the projections now suggest that few narrowed. Furthermore, needed in the next three weeks, open market purchases will be of reserves through the thanks to the prospective release changes. Should these cash and reserve requirement vault prove unavailable, repurchase latter sources of reserves to make up the difference. could probably be used agreements might be instructed to maintain, I should think the Manager the degree of ease preferably to increase moderately, and attention to the recent weeks, with primary prevailing in reserve levels, and rather than to free feel of the market to prevent a efforts be made proviso that strong with the free reserve bill rates. Incidentally, decline in Treasury than usual after the become even less significant figures may since country banks become effective, changes in requirements of newly freed reserves. are slow to make use discount rate at to reduce the would think it unwise I dissipate the important so would tend to this time. To do which have resulted benefits to the dollar psychological the monetary authorities initiated by the cuts recently from satisfactory in The directive seems of Britain and Germany. its present form. for any great difficulties seem to be there do not While dilemma between weeks, the the next three policy in credit could become seriously international objectives domestic and
aggravated over the coming months, if recessionary tendencies here should gain strength and if our balance of payments problem should prove recalcitrant. In that event, it might be necessary to think of new techniques to add reserves without depressing short-term interest rates unduly. The suggestions made by a couple of members of the Committee at the last meeting for experimenting with open-market transactions over the whole maturity range might well offer one very worthwhile approach. Under present conditions we are certainly justified in maintaining as flexible a view as possible of all alternatives for solving this perplexing policy dilemma, Mr. Irons said that business conditions in the Eleventh District had been a trifle more favorable since the meeting on October 25 than he had reported at that time. Changes ranged from moderate declines in some areas, to no tendency toward deepening of earlier declines, to slight gains in some fields of activity. Conditions in agriculture were good. Unemployment as a percentage of the labor was lower than the national figures, with most of the unfavorable force in the manufacturing area. Attitudes were good, trends centered the financial picture, Mr. Irons said that he After reviewing pleased with operations directed toward carrying out had been quite three or four weeks. He felt Committee's policy during the past the had handled the situation satisfactorily and the Account Management an adequate degree of ease. he believed to have been had achieved what Committee's objective like to see the said that he would Mr. Irons as it had been during the past next period maintained about for the should attempt to feel the System Account four weeks. He did not had been accomplishing in the market. Operations force further ease
some of the things the Committee had desired such as an increase in bank credit, an increase in the money supply, and a better situation in the short-term rate structure. While the situation did not call for forcing further ease, Mr. Irons noted that the distri bution of reserves had been uneven and that some of this might be corrected as vault cash was released. It would take several weeks for the effects of the vault cash release to extend from the country banks to the money centers, he said, and the free reserve statistics that would appear in the next few weeks would not be entirely meaningful. He would be pleased if the System Account could continue to hold about the degree of ease that had been attained, not being guided too much by free reserve statistics and taking into consideration the distribution of reserves. Mr. Irons said that hoped the short-term Treasury bill rate could be held somewhere he 2-3/8 per cent level, that he would be pleased if the near the would range between 2-1/2 and 3 per cent, and that Federal funds rate using the discount window for not be disturbed to see banks he would to the $250-$300 million area for some of their current needs up it would be possible to a whole. He hoped that the System as and would prefer open market operations substantial direct avoid to the market by repurchase make reserves available that the System any pressures that in order to relieve as far as possible agreements might occur on banks.
Mr. Mangels said that Twelfth District conditions continued to be spotty. Steel production had dropped below the 50 per cent rate and steel operators anticipated no improvement in the immediate future. Residential construction had been lagging and during the first nine months of 1960 had been 14 per cent below a year ago, although total construction contracts in September were 4 per cent higher than a year earlier. The lumber situation was weak, and unemployment continued fairly severe in both the Pacific Northwest and California. Mr. Mangels said that operations for the System Account, to what was done during the period since the last meeting both as it was done, had been handled excellently and the way in which had come to the San Francisco in his judgment. A few inquiries as to purchases of a change in Committee policy Bank regarding had not been bills, but those inquiries securities other than in connection with reservations he had pressed. The only rate on the use of the preferential had to do with operations in Government securi for nonbank dealers repurchase agreements that there undoubtedly were ties. He recognized, however, rate desirable in of such a made the offering circumstances that particular instance. this
With reference to policy, Mr. Mangels said that it might not be easy to maintain the bill rate between 2 and 2-1/2 per cent during the next few weeks as would be desirable. In these circumstances he felt the Manager of the System Account should have considerable leeway in operations directed toward carrying out the Committee's policy during the next few weeks. Mr. Mangels felt it would be necessary for the Manager to base his operations on the feel of the market to a considerable extent. He would go along with the use of repurchases to the extent that that was necessary at rates below the discount rate, but as a practical matter he felt it likely that most of the operations would be directed toward absorption of reserves that might result from the release of vault cash rather than the supplying of additional reserves in this period. Mr. Mangels concluded his remarks with the comment that he would try to keep free reserves around the $500 million level and that he would make no change in either the discount rate or the directive at the present time. Mr. Allen presented the following statement: The business news in the Seventh District is again mixed. Production cutbacks are underway in television, construction machinery, and autos, all important in our area. But con contract awards remain strong, particularly in the struction large public and private jobs. And consumers appear case of to be more willing to spend than in the third quarter. operations in the District has for The rate of steel points higher than the national average. some time been a few continues but is not what it was. Our The differential that steel poured in the friends in the business estimate no more than 20 million tons, the fourth quarter will be projections for the the third quarter. And their same as in tons, the same as the of 1961 are now 40 million first half a further letdown of of 1960, which would imply second half
total industrial activity. Possibly these people are as excessively pessimistic as they were excessively optimistic a short time ago. Department store sales in the Seventh District were 7 per cent below last year in the week ended November 12, compared with 2 per cent less for the nation. On the other hand, total construction contract awards in the third quarter were 5 per cent higher in our area than a year ago--2 per cent higher in the nation, Residential awards continued weak but public works and public utilities combined were up 43 per cent over last year in our district 30 per cent higher in the nation. And there is evidence that awards continued in large volume in October, The number of automobiles sold in October was the highest for that month in history. November has started off so well that it should come close to the record November thus far, that of 1955. But production has been at such a high level that the large inventories are bringing reduced production schedules, despite the good sales. It is estimated that inventories at the end of November will be about the same as on November 10, 963,000 cars. One factor which I have mentioned before is that this year there are 24 different makes of cars compared to 18 a year ago, The normal seasonal pattern of loan expansion has not occurred in our district either. And the only noticeable evidence of pressure is in our two dealer banks. Their deposits have held up, and their tighter position reflects bill holdings. Our other central reserve mostly increased city banks are in an easier city banks and our reserve are sellers of Federal funds. Our position and many of them followed the national pattern of higher country banks have excess reserves and lower borrowings. In the matter of monetary policy I feel that we should the same degree of ease as to continue with about endeavor To repeat what I have said that of the past several weeks. job and I fail to see policy has done its before, monetary contribution at this ease would make a desirable how greater have had qualms about whether As a matter of fact, I time. appropriate to the state present degree of ease, although the the light of the inter economy, is proper in of the domestic resolved those doubts situation. I have partially national our relatively low interest the theory that, even though on that outflow has to the gold outflow, rates are contributing to the fundamental causes of dramatically brought attention deficit, whereas a higher rate our balance-of-payments immediately but less loss of gold would have meant structure
would have delayed public concern and action and thus have postponed the evil day, and an even more evil one. That justification of what we are doing may appear to be circuitous reasoning, but it helps me to the conclusion that we can properly continue on our present course. I would not suggest any change in the discount rate or in the directive. Mr. Leedy said that there were a few signs in the Tenth District of improvement in the economic situation but that they were not very strong. Generally nonfarm employment was showing some improvement but was overbalanced by slackening in manufacturing. Mining employment in Oklahoma was at the lowest level since 1951. Construction had been exceeding the levels of a year ago with strong gains in public works, utilities, and other nonresidential construction accounting for these gains. Residential building continued well below levels of a year earlier. Harvesting operations in the Tenth District with both wheat and corn crops large. Fall were progressing rapidly well and pastures in most parts of the District sown wheat was doing condition. Retail trade appeared to have shown a fairly were in good past few weeks as compared with a year ago. sharp increase during the although there had been some loans had increased seasonally, Business in the past four weeks. loan demand in other categories lessening in this fall was in commodity part of the loan expansion A considerable Bank, borrowing continued relatively and food lines. At the Reserve active demand from Districts with fairly than in most other higher country banks.
Mr. Leedy said that he would align himself on policy for the next few weeks with those who would, if it were possible, add some further ease. He would not force reserves into the banking system but to the extent that reserves could be put in without driving interest rates, particularly on the short end, lower, he would conduct probing operations with a view to making additional reserves available. He would be concerned about placing too much reliance on net free reserve figures because of doubts as to whether they represented the actual degree of ease. This was particularly true because of the unequal distribution of reserves among country banks. Insofar as the past four weeks were concerned, Mr. Leedy said that it seemed to him that the accomplishment of what appeared to be two incompatible results had been of importance. The System had injected very large amounts of reserves into the banking system but at in interest rates, particularly in the the same time the downward drift short-term area, had been reversed. At the time of the October 25 these two objectives could been concerned as to whether meeting he had System could provide the reserves that is, whether the be accomplished; the same time not intensify the for the domestic economy and at needed was encouraging an outward interest rates that condition in short-term to be an almost insurmountable funds. This had seemed movement of had been accomplished it the desired results but as he now saw problem, as it should have the System had moved degree and to a considerable
moved. Whether this could continue indefinitely was another matter. The projections of needed reserves now before the Committee indicated that perhaps any additional needed reserves could be supplied through repurchase arrangements. Mr. Leedy said that he would subscribe to use of this procedure. He also said that while departure from transactions in bills and the extension of repurchase arrangements at rates below the discount rate were matters that normally he would not subscribe to, it did seem to him that in the situation that had confronted the System the liberal use of these alternatives had been justified. He would make no change in what had been done during the past four-week period other than, if possible without adversely affecting short-term rates, to attempt to provide more reserves, Mr. Leach made substantially the following statement: The general level of Fifth District business activity continues in a slight decline. Seasonally adjusted non agricultural employment has declined only a little since its May peak, but manufacturing activity, as measured by seasonally adjusted manhours, has decreased about 5 per cent. The furniture industry was fairly well satisfied with the fall market and expects to finish this year close to last year's The lag in new orders for textile products has record level. been met by reductions in output so that inventories have well under control, prices soft but resistant remained fairly to sharp declines, backlogs fairly strong, and prospects good period will be fairly brief and that the current adjustment moderate. Public and industrial construction continue at high and new contract awards in these areas are increasing. levels, numbers of unsold houses in existence in some With considerable parts of the district, home building and the lumber industry Consumption of cigarettes, 80 per show substantial declines. are produced in the Fifth District, is still cent of which at an annual rate of about 5 per cent. increasing rise in business loans, In spite of a more-than-seasonal member banks moved of district weekly reporting total loans
irregularly downward over the four weeks ending November 9, exhibiting considerably less strength than in the comparable period of any of the five previous years. Average daily borrowings at the discount window continued well below the levels of like periods of previous years, and district banks remained net sellers of Federal funds, In implementing open market policy during the next three weeks, I suggest in view of the large release of vault cash that we lean relatively more heavily than usual upon the tone of the market, with particular attention to short-term rates. Experience has indicated that country banks are slow to use additional cash reserves and consequently the volume of free reserves is likely to indicate more ease than actually exists. I see no reason to change the degree of ease that we have been aiming at and I would not want a sloppy market, but I would not be hasty in mopping up temporary bulges in free reserves if they should occur. I have been happy about the level of the 90-day bill rate during the past several weeks and hope we can continue to do our job in the period ahead without causing a sizeable reduction in the rate. In general, I think monetary policy has made a useful and appropriate contribution in recent months and no further moves will be needed until there is a further change in economic conditions. Mr. Mills said that from now to the end of the year the first call on the Committee's thinking might properly be how to devise ways and means to prevent a contraction in the active money supply in the of 1961, Although there has been a less than normal first quarter credit this fall, there should nevertheless seasonal expansion in bank bank loans during the weeks contraction of prove to be a seasonal immediately after the turn of the year that would have a depressing active money supply. This should be forestalled, effect on the possibility of touching so as to prevent even a remote Mr. Mills said, As to means for preventing spiral in bank credit. off a deflationary less emphasis on be given to placing thought might any such possibility,
the absorption of reserves after the year-end than has been the Committee's practice in other years. Similarly, thought might be given by the Treasury to advancing its projected cash borrowing from April to some earlier date in the first quarter of 1961 so as to provide a springboard for maintaining or increasing the money supply and as a means of absorbing some of the reserves that would automatically develop after the year-end. Lastly, attention might be turned to the fact that two elements that have given most strength to the improvement in the active money supply have been the Treasury's two issues of tax anticipation bills, one of which will mature on March 22 and the other on June 26, 1961. Some of these securities are still in the portfolios of the banks and, particularly in the case of the March 22 bills, there could be a downward kink in the money supply at that time, if not the date of the Treasury's contemplated cash forestalled by advancing borrowing on a tax and loan account basis. to current policy, Mr. Mills said that he would be With respect if the supply of reserves between now among those who would be content pretty much in line with the weekly and the end of the year developed handed to the Committee this submitted in the projection average figures but banks should an oversupply of reserves, There should not be morning. respect to the position. With a relatively comfortable be kept in Mr. Mills said will supply reserves, of vault cash that imminent release between their availability at as concerned about the lag that he was not
the country banks and their becoming available in money market centers as he might have been in the past. This was because country banks are to be subjected to an increase in their reserve requirements of 1 percentage point simultaneously with the release of vault cash which would give them an automatic stimulus to put the reserves that became available through the release of vault cash to effective use. Mr. Mills said that he would not favor a change in the discount rate at the present time, Mr. Robertson made the following statement: In the light of prevailing economic conditions as sketched by Mr. Noyes, and in order to give monetary policy a chance to perform whatever it can do in swinging the economy back into a moderated upward position (rather than a moderated recession point), I believe we should permit the total volume of bank reserves to rise further. I suggest we should strive for a level of free reserves in the neighborhood of $550 to $650 million. This means that we will have to absorb from $250 to the next three weeks, through million of reserves, over $350 of securities from our portfolio. I would think this the sale would permit bill rates to range above 2 per cent but not as they have reached during the past two or three weeks. high as funds rate to be lower than the I would expect the Federal recent average level. perhaps it would be well period (and the next one) In this in reverse. Why not try to sell to continue our experiment, but than bills - we have acquired some of the securities - other would not expand the "experiment" past four weeks? I during the the whole range of maturities longer-term securities over into as suggested by Mr. Treiber. not a part of the Open Market although it is In addition, people thinking about in order to get more Committee function, that the System should take advantage of the subject, I suggest on interest rates to lift the ceiling "no pressure" interval this to perhaps 5 per cent - so high on time and savings deposits on the part of the System would not indicate a belief that it that would not be pay that rate, a rate that banks should
approached by any commercial bank. This would free commercial banks to set their own rates in the light of their ability to pay, and the competitive conditions prevailing in their respective areas. It would certainly enable commercial banks to compete with other types of financing institutions for savings. It might tend to increase total savings. It might even tend to start a return flow of foreign funds back into American banks and perhaps have an impact on the gold outflow. Such an action should be accompanied by a carefully worded statement showing clearly that the action was experimental and that the System would remain in a position to lower the ceiling if speculative or unsound tendencies developed which threaten ed the banking system. Mr. Shepardson said he was in complete agreement with the position that had been expressed by Mr. Irons. The country seemed to be in a good credit position at the moment and the degree of ease currently was sufficient. With the release of vault cash, there might be some deviation that would disclose the need for a change in the free in the figures not like to see any added ease pressed on reserve level, but he would as compared with the level that now existed. For that reason, the market by Mr. Irons as well as that the views expressed Mr. Shepardson said credit policy to be him to describe the appropriate Mr. Allen seemed to situation and the international in terms of the domestic followed, both situation. the neighborhood of $500 with free reserves in Mr. King said that for the remain comfortable the market should the position in million, controlled in minute could not be While the bill rate next few weeks. him to be seem to per cent would 2.20 to 2.30 range of from degree, a seemed to have few weeks there During the past in this period. desirable
been more problems to be handled by the Desk than in any similar period since he had been a member of the Committee, Mr. King said, and he felt the rebound of the bill rate to around the 2.50 level during that time had been desirable. This would go a long way toward discouraging any notion that the Federal Reserve was going to press easy money in order to deal with problems that could not be cured by money. For this reason, he would echo the thoughts expressed by Mr. Allen and he would add that he saw no reason for a change in the discount rate at the present time. Mr. Fulton said that no significant change in the over-all economic picture of the Fourth District had appeared in the past four weeks. New were selling fairly well but department store sales had model automobiles weakened during this period. Unemployment was slightly less on a adjusted basis but it had increased in actual numbers. seasonally had been holding up fairly well other than in the residential Construction industry is still running at about half its capacity, area. The steel of the present rate of people in the industry look for a continuation and production almost to the fourth quarter of 1961. upon the activities of the Desk as having Mr. Fulton said he looked A large volume of reserves in the past four-week period. been very good so far as the rate without upsetting the market had been supplied degree of ease should ahead, the earlier was concerned. Looking structure free reserves. Great the statistics of be maintained, disregarding to maintain any particular the Desk in trying existed for difficulties
target of reserves, particularly in view of the early release of vault cash. For this as well as other reasons, Mr. Fulton said he believed the Desk should operate with as great latitude as could be given to it in carrying out the Committee's policy. He would make no change in the discount rate or in the Committee directive at this time. Mr. Bopp said that there were no encouraging economic developments in the Third District to be reported. Final demand was no more than holding its own. He would not favor a change in the Committee's directive nor in the discount rate at this time and a comfortable reserve position be maintained in the market for reasons already mentioned. should the prospective release of vault cash, no special Particularly because of of free reserve figures during the need be given to the level attention Mr. Robertson's suggestion as ahead. With respect to period immediately and other time deposits, Mr. rate of interest on savings to the maximum approach to the sympathetic with the suggested Bopp said that he was money rates, but it was concerned with The Reserve System problem. in the market was not a specific rate to him that to regulate seemed market deermine the of having the the general position consistent with price of money. the Sixth District situation in that the economic Mr. Bryan said at the reserve As he looked national trends. materially from did not differ the right direction moving in System was him that the seemed to figures, it It in the same direction. to move it should continue believed that and he
appeared that free reserves in the week ending November 16 averaged $445 million. It looked to him as though maintaining that figure would bring about approximately $18,949 million of total reserves for the next three weeks, which would be around $200 million more than last week's level. He did not think this would be excessive. Mr. Bryan said that he would advocate that the Committee aim at maintaining the free reserve figure as a general target without requiring that the Manager of the System Account hit or pretend to hit the figure on the nose. Mr. Robertson had advocated a figure somewhat higher than the one he (Mr. Bryan) had cited, and he would not argue much about that figure if it appealed to the Committee. Mr. Bryan said he could agree also with those who saw this as a particularly difficult time, one in which any particular figure should not be given as a single guide for the operation of the Desk. At the same time he believed that the Committee had a fundamental and basic to give guidance figures and that the Committee and moral responsibility this responsibility merely because it happened to be should not abdicate in a difficult situation. was nothing in the Eighth District business Mr. Johns said there the country as a whole as to warrant comment. picture so different from upon to accommodate the Louis Bank had not been called So far, the St. which was quite unusual at banks at the discount window, Memphis cotton upon the reasons for this, season of the year. After commenting this a demand for accommodation would Johns said that he anticipated that Mr.
develop sooner or later and that when that time arrived he would regret the necessity for charging the Memphis banks a discount rate having the present relationship to other short-term interest rates. However, he would not suggest a change in the discount rate at this time. With respect to the operation of the System Account during the past four weeks, Mr. Johns said that he doubted whether a tight condition in the money market was consistent with the consensus at the meeting on October 25, at which time the conclusion was to supply seasonal reserve needs on a liberal basis with doubts to be resolved on the side of ease and with emphasis on the tone of the market. Apparently the tone of the market said that the market was tight. Mr. Johns said that he doubted that it would be practicable to expect the Manager of the Account to derive a consensus from comments by individual members of the Committee between meetings that differed from the consensus at the most recent meeting. So long as the intervals between meetings were not so great as to risk dire consequences, he felt the best procedure was to assume that operations would be carried on by the Desk from one meeting to another, and to bring up at a meeting any questions regarding operations during the preceding period. Mr. Johns recalled that at the October 25 meeting was not sanguine about buying securities other he had indicated that he a means of keeping the bill rate from going down, although than bills as the experimentation in He did not think he was willing to experiment. regard. The bill rate proved anything in that the past four weeks had
had gone up, but he doubted that this was related to the fact that the System Account had purchased securities other than bills, Mr. Johns went on to say that, for the next few weeks, the Board of Governors had taken action to inject a substantial quantity of reserves into the market through the release of vault cash. In view of this action, which he felt was wholly appropriate, the question was not whether the Committee should force additional reserves into the market. Rather, it was whether it should try to offset the reserves that would be made avail able by the release of vault cash. Mr. Johns said that he would prefer the Committee should not take action to offset these reserves. This would mean that the free reserve figures were going to be all over the lot. He hoped the Committee would not become frightened if this happened or if free reserves went to a figure beyond the range of any target that had been spoken of by the Committee at any recent meeting. He would let the reserves from vault cash stay in and would not try to offset them. In his in this country was such as to call for view, the economic situation continuation of a policy of monetary ease. the light of the deficit in the balance Mr. Szymczak said that in factors, his judgment was that of payments and considering all other correct as it could be in recent policy had been about as nearly monetary was called for at this time in the weeks. He thought that no change for the System Account. the discount rate or in operations directive or in or less in line with free reserve figure more have as a target a He would
the staff projections, but he would not allow such a figure to be a definite guide nor would he permit the amount of free reserves to go too high. The System Account should continue to watch the reserve supply from day to day and from week to week, and to the extent that it was necessary to put in any additional reserves at any time he would favor doing this through the use of the repurchase agreements much as was done during the past four weeks. Mr. Balderston said that the System was walking a narrow path between domestic slide in the economy and a foreign outflow of gold. On one side, there was need for an increase in bank reserves to fortify the still further as an antidote to unemployment. On the other money supply the bill rate sufficiently so as side there was a need for maintaining to encourage a movement abroad of short-term funds. Mr. Balderston not seasonal factors between now and December 21 said that his feeling was that bill rates. One might conclude that any additional would help to maintain the market should be supplied between reserves that could be supplied to of reserves would other hand, any redundancy December 21. On the now and with which the Committee would be faced in January. add to the problem during the past few months, changes in the money supply After commenting on Committee should was that the that his conclusion Balderston said Mr. placed before the staff projections indicated by degree of ease keep the had intimated, market short, as Mr. Mills morning. In the Committee this by offsetting System permitted to operate unchecked forces should be
actions until the next meeting of the Committee, If, however, the bill rate were to drop to or below 2 per cent, Mr. Balderston said that he would hope that the Desk would then intervene. He would make no change in the discount rate at this time. In response to a question as to the significance of December 21, Mr. Balderston said that in years past bill rates had tended to rise between the latter part of November and about December 21 and he was using that period for his comments, Chairman Martin said that he felt System policy had been about as good as could have been expected over the past period. He continued to believe that the balance-of-payments problem was the most important problem for the country to deal with at this time. This was because he believed it to be the most significant shadow in the domestic business picture, and the only way that he could point this up was to say that the was now in danger. This had not happened for credit of the United States a real shadow for the planning of or a very long time. It represented This truth must be recognized. The dollar making capital expenditures. because of measures that had been had been stronger recently, partly the members of the Committee but this should not mislead taken publicly, Until the whole problem was not very difficult. thinking that the into the new Administration contemplated, understanding of what world had a clear would be great difficulty in following it could be anticipated that there new Administration would engage in a proper course. Unquestionably the already precariously in balance. spending. The budget was some increased
If increased spending occurred with a declining business picture, there could easily be a substantial deficit to deal with. The System should keep itself in position to be helpful in whatever way it might help. One word of caution on this, the Chairman said, was that more and more he got the impression that there was a conviction on the part of a good many people that all our problems--the budget, the cost-price relationship, debt management policy, and the like--could be solved if the System would just raise short-term interest rates and lower long-term interest rates. While this might be an overstatement, it represented the approach that some people were taking. In the Chairman's opinion, there was a very real question whether the System could operate in longer maturities for more than a very brief period of time without running into difficulties, The real point was that, when an attempt was made to determine the short rate against the long rate except for a very short period of time, in trouble. This was a problem that all members of the System would be should be studying carefully in the course of the next the Committee wish to fall back into a pattern of months. The System did not several rates or a partial pattern of rates, Martin said that so far as today's meeting was concerned, Chairman policy was proceeding in a generally it was perfectly clear that Committee a change in the discount was no suggestion for satisfactory way. There So far as instruc Committee's directive. a change in the rate nor for Chairman Martin said Management were concerned, tions to the Account the discussion that Rouse be guided by suggest that Mr. that he would point on not had made a good Mr. Mills and others had taken place.
trying to offset the reserves that would become available from vault cash, and in the Chairman's opinion there was certainly no need to try to be precise in any such offset when the Committee was thinking in terms of generally continuing a policy of ease in the money market, He then inquired whether there were any other comments with respect to instructions to the System Account and no comments were heard. Chairman Martin then inquired of Mr. Rouse whether he had any comments to make, and Mr. Rouse suggested that the limitation of $1.5 billion approved for the first paragraph of the directive at the meeting on October 25 be restored to $1 billion. Thereupon, upon motion duly made and seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including maturing securities, and allowing maturities to replacement of run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by with the Treasury, as may be necessary in the direct exchange prospective economic conditions and the light of current and situation of the country, with a view (a) to general credit market to the needs of supply of funds in the relating the to encouraging monetary expansion for commerce and business, (b) growth in economic activity the purpose of fostering sustainable consideration current inter while taking into and employment, practical administration of developments, and (c) to the national of securities held that the aggregate amount the Account; provided for the purchase or (including commitments in the System Account at the close of this date, sale of securities for the Account) of indebtedness short-term certificates other than special of the temporary accommodation to time for the from time purchased by more than $1 increased or decreased shall not be Treasury, billion; account of Treasury for the direct from the (2) To purchase discretion in cases of New York (with Reserve Bank the Federal
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. Chairman Martin referred to a memorandum from the Federal Reserve Bank of New York dated September 8, 1960, recommending that the Bank's Market Statistics Department be authorized to furnish to the Securities Department quarterly statistics on the volume of individual Government securities dealers, stating that he had discussed this subject with Mr. Hayes and that, with Mr. Hayes' agreement, he would suggest that the matter be tabled. There was no disagreement with this suggestion. Chairman Martin stated that unless there was objection the next meeting of the Committee would be held on Tuesday, December 13, 1960, and that the following meeting would be scheduled for Tuesday, January 10, 1961. No objection to the fixing of these dates was indicated. Mr. Treiber stated that he would like to join in the suggestion that Mr. Robertson had made regarding the desirability of raising the maximum permissible rate of interest payable on time and savings under the Board's Regulation Q, Payment of Interest on Deposits. deposits be happy if the Board could be Mr. Leedy said that he would now provided under the law for fixing relieved of the responsibility on time and savings deposits. He felt that maximum rates of interest rates on time deposits regulate the level of interest an attempt to
should not be lodged with the Board. However, it would be unrealistic to fix a rate far above a figure that any bank might pay and say that the Board was administering the existing legislation. Therefore, in Mr. Leedy's view the Board should be relieved of responsibility for fixing any such rate by legislative action. Chairman Martin said that this was an appropriate subject for discussion. He also commented with a smile that of course a good case could be made for permitting banks to pay interest on demand deposits. Mr. Mangels commented that, as a matter of interest, share accounts at savings and loan associations in the Twelfth District had far in 1960, whereas investments had risen sharply in both 1959 and thus This suggested that it might be only a increased by a lower percentage. loan associations in the area time until the savings and question of rates on share accounts that not be able to pay the increased would savings to their institutions. as a means of attracting they had been offering The meeting then adjourned. Secretary.
Also: Record of Policy Actions