February 7, 1961 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, February 7, 1961, 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. Robert son Mr. Shepardson Mr. Szymczak Mr. Irons, Alternate to Mr. Bryan Allen, and Mangels, Alternate Messrs. Leach, Members of the Federal Open Market Committee Deming, Presidents of Messrs. Erickson, Johns, and the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Hexter, Assistant General Counsel Mr. Mr. Thomas, Economist Hostetler, Marget, Brandt, Eastburn, Messrs. and Tow, Associate Economists Noyes, System Open Market Account Mr. Rouse, Manager, to the Board of Governors Mr. Molony, Assistant Division of Research and Mr. Koch, Adviser, Board of Governors Statistics, Board of to the Chairman, Mr. Knipe, Consultant Governors of Research and Economist, Division Mr. Yager, Board of Governors Statistics, Office of the Special Assistant, Mr. Petersen, Secretary, Board of Governors and Swan, First Vice Messrs. Wayne, Patterson, Federal Reserve Banks of Presidents of the Atlanta, and San Francisco, Richmond, respectively
Messrs. Ellis, Baughman, Jones, Parsons, Clay, and Walker, Vice Presidents of the Federal Reserve Banks of Boston, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas, respectively Mr. Garvy, Adviser, Federal Reserve Bank of New York Mr. Rudy, General Counsel, Federal Reserve Bank of Dallas Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, the minutes of the meeting of the Federal Open Market Committee held on January 10, 1961, were approved unanimously. Before this meeting there had been distributed to the members of a report of open market operations covering the period the Committee February 6, 1961. A copy has been placed in the files January 24 through of the Committee. report, Mr. Rouse commented as follows: Supplementing the written since the last meeting indicates that the Experience Committee's dual concern over the level of short-term rates and the availability of reserves requires an increasingly to open market operations. Over much of flexible approach was easy because of storm the period, the money market this ease spilled over into the induced float, and although at times, short-term rates tended to rise on bill market and Thursday, on the other hand, balance. Last Wednesday an evident need to supply reserves at a time when there was rates were moving lower. The repurchase agree Treasury bill mechanism for inserting funds. ment provided a convenient to the more general effects of recent System operations, As that we can take it as an encouraging sign that I think been holding up better than could required reserves have on seasonal grounds, despite substantial be expected fluctuations in free reserves. there was considerable interest, As might be expected, over the portions of the some skepticism, in the market and
President's economic message that dealt with the relation ships between short- and long-term interest rates. The immediate reaction was that prices of long-term bonds moved up in moderate trading as much as 1 point (or down about .06 per cent in yield) last Thursday and Friday, mainly on short covering by dealers and small speculative buying. Yesterday, however, prices edged down by a few 32nds, principally on small offers by holders anxious to acquire the new 18-month Treasury note offered by the Treasury. Although the message had little effect on short rates, partly because the market was already well conditioned to the official attitude toward that sector, it appears that the long-term rate has already seen some of the adjustment that the President considers desirable. The President's balance-of-payments message yester day--suggesting that the Treasury might offer foreign official holders of dollar balances special certificates at attractive rates--had a more visible impact on short-term rates. Partly this, the average rates in yesterday's auction because of were established at 2.37 per cent and 2.57 per cent for three bills, respectively, in each case about 7 basis and six-month points above the previous auction. Whether this trend of rates will follow through remains to be seen. long and short Treasury offering was considered very generously The market, and the main question raised was the priced by the to the public. Subscriptions received at size of allotments Bank yesterday were unusually heavy, and it the New York some dealers were not waiting until the last appeared that enter their subscriptions, as is the usual practice. minute to a modest reaction in prices of issues of There was only new 3-1/4 per cent notes offered comparable maturity to the by the Treasury at par. Market guesses were that the new off in when-issued trading at a substantial issue would start of par 6 bid and par 8 first quotations this morning premium; out that expectation. The Treasury, offered appear to bear that as a result of concentrating the of course, had hoped short-term issue--properly pricedrefinancing in a single there would be a favorable impact on both short- and long term rates. its holdings of $3.6 billion of The System rolled over into the new issue. 4-7/8 per cent certificates the maturing has apparently not had any great I might add that the market to the cash refunding method this difficulty in adjusting some holders of maturing issues may not time, even though be able to roll over their maturing holdings. If cash
refunding should become a normal Treasury technique, there may be possibilities for the System under more normal con ditions to reduce its large holdings of some individual issues by permitting some run-off of the maturing issue in future refinancings and replacement with bills. Subscriptions already received at the New York Bank total more than $10 billion, including the $3.6 billion subscription entered by the System. On the basis of these subscriptions alone, allotments to the public would be around and this figure will, of course, be reduced by 50 per cent, subscriptions in other districts and by subscriptions from others entitled to 100 per cent allotments. referring to the change in the free reserve position Mr. Robertson, between the first and second weeks of the preceding period, that occurred asked whether it was just float that caused this decline. Mr. Rouse replied that float was responsible for the decline of free reserves between the two weeks. The bulge in in the amount the first part of the period was erased when the checks float during was faced with the problem during last were collected. The Management even though Treasury bill rates week of having to furnish reserves agreements were used on Wednesday were moving lower. Large repurchase brought the free reserve figure to meet this problem. This and Thursday and on Friday over $150 million of those up. The market turned easy repurchase agreements were lost. one of the reasons for letting Mr. Robertson then asked if back was a desire to not trying to put them get so low and reserves bring the bill rate back up. that the bill rate was a factor. Mr. Rouse replied
Thereupon, upon motion duly made and seconded, the open market transactions during the period January 24 through February 6, 1961, were approved, ratified, and confirmed. A staff memorandum on recent economic and financial developments had been distributed under date of February 3, 1961. With further reference to economic developments, Mr. Noyes presented the following statement: The more optimistic sentiment in business and financial markets which has continued in recent weeks is well illustrated by the 6 per cent increase in stock prices that occurred in the month of January. This has been attributed to both the conservative and the aggressive nature of the task force reports to the new President and his own statements. Some observers seem to be appraising the future more optimistically because the Administration appears to have rejected radical proposals which they feared might be adopted, while others are pleased that prompt action is being taken to employ con ventional antirecessionary weapons. The result has been a widespread further shift toward confidence in the economic the fact that there has been little or no outlook, despite improvement in the underlying facts with respect to output, trade and employment. In January, steel mill operations were up 6 per cent from the depressed December level, an adjustment that seemed long overdue to those who have followed the relation between steel consumption and production since last spring. On the other hand, auto assemblies were down 20 per cent from the already curtailed volume. Even the earliest preliminary figure for total industrial production is still incomplete, now appears most likely that the index will decline but it With auto sales down more than seasonally and one point. department store sales off sharply in the last two weeks, total retail trade for the month is almost certain to be part, of course, to the severe weather con down, due in ditions in many areas. The 900,000 increase in unemployed resulted in a slight decline in the seasonally adjusted annual rate of unemployment, from 6.8 to 6.6 per cent, but this amount of change is not technicians familiar with the behavior of the regarded by
series as a significant improvement. Long-term unemployment continued to increase. Thus, it seems clear that the more optimistic appraisals of the outlook in January were based on expectations of an early upturn, rather than on any significant improvement in general business conditions during the month. Of course, it does not follow from this fact alone that these brighter expectations will not be realized. Greater optimism itself provides some stimulus to the economy. There is also evidence that rates of decline are less severe in the case of many industries, and some have leveled out. It may be significant, for example, that on average sensitive commodity prices have not declined further in recent weeks. Furthermore, there is no doubt that the recommendations in the President's economic message a week ago, though moderate, are generally of a stimulative nature; and some, such as the accelerated G.I. insurance dividend payment and the extension of unemployment insurance benefits, will serve to bolster the demand for goods and services in the near-term future. The length of time that may be required for other parts of the program to take effect is more difficult to estimate. Previous experience with expediting Government procurement and public works programs to improve their countercyclical effects has not been altogether favorable. One potential danger in the present situation seems to me to be that overly optimistic expectations for a strong early reversal of the downward trend will be disappointed. The easing at the end of last week and yesterday's rather abrupt decline in stock prices suggests that some reappraisal of the very bullish attitude of the preceding weeks may already be under way. While there may be good reason to suspect that many measures of economic activity are currently at or near their cyclical low points, and will not decline much further, there is, as yet, little basis for projecting a rapid or vigorous recovery, either as a result of natural forces or measures already undertaken by Government. In this connection, it is worth remembering that the very rapid turnaround in 1958 was unusual and followed an unusually sharp decline. While there is no immutable reason that recessions and recoveries must be symmetrical, there is also no reason to suppose that one recovery will necessarily follow the pattern of its immediate predecessor. As one surveys the various elements of potential strength in the economy, none of them seems poised for a rapid upward surge. Put another way, there are very few components of total output that have
been depressed to such a point that substantial upward adjustment seems imminent. Unless the Administration is provoked to much more drastic and overtly inflationary measures than have been proposed thus far, some further decline in the current quarter, followed by a more gradual--and perhaps healthier--upturn than in 1958 seems the more likely possibility. Mr. Thomas then presented the following statement on the monetary situation: Recent developments in the financial sectors of the economy may be reviewed in terms of the three prongs of the objectives--or aspirations--of current System policy. (1) To foster credit and monetary expansion.- Contraction of credit and money has been somewhat smaller than is customary at this time of the year. In other words, there has been a seasonally-adjusted expansion. (2) To avoid lowering short-term interest rates in order not to add to the outflow of gold.--Short-term interest rates have not declined in recent weeks, although some decline generally occurs in January. The gold outflow has perceptibly slackened in the past two weeks. far as possible, further easing (3) To foster, so of long-term credit markets. This is a more indirect result of Federal Reserve operations. So far long-term rates have not declined, but their variations have shown a relation ship to short-term rates that is consistent with the record of the past. Taking up these three facets in reverse order, the situ to long-term interest rates is somewhat mixed. ation with respect Yields on U. S. Government bonds, which declined in December, turned up in January, as did also yields on State and local During the last few days, however, since the government bonds. President's statement regarding the desirability of lower long prices of Treasury bonds have risen somewhat, i.e., term rates, declined. Yields on both U.S. and State and local yields have government bonds are above the low levels reached last summer. In contrast, yields on outstanding high-grade corporate bonds, which tended to rise in December, have declined in January at approximately the low of last August. This decline and are bond yields is apparently related to the reduced in corporate volume of new issues offered and in prospect since the turn of the year. New issues of State and local government securi ties, on the other hand, have been in somewhat larger volume than in the last quarter of 1960.
Stock prices have risen fairly steadily since October and the more comprehensive averages are higher than at any previous time. Trading activity has been at an exceptionally high level. Yields on stocks at recent prices and dividend returns have fallen to an average of about 3-1/8 per cent--close to the low est levels of recent years. The margin between yields on stocks and those on highgrade corporate bonds has widened appreciably. Some easing of the mortgage market is indicated by FNMA operations in December. Offerings and purchases continued to decline and were less than two-fifths the high volume of early 1960. Sales by FNMA, which have been negligible, increased in December to half the volume of purchases. With reduction in the maximum permissible rate on FHA mortgages from 5-3/4 per cent to 5-1/2 per cent, FNMA has set its purchase prices for 5-1/2 per cent mortgages at a slightly smaller differential the from prices for 5-3/4 per cent paper than would be indicated difference. This may provide a slight nudge toward by the rate a broader reduction in mortgage rates. With respect to shorter-term rates, yields on 3-5 year Treasury issues rose somewhat in January, after declining in contrary to the usual seasonal pattern. Treasury December, in December, have fluctuated in bill rates, after declining or above the low levels previously reached. These January at have shown some correspondence with variations fluctuations in the reserve positions of banks. Rates on finance company to the lowest level since paper were further reduced in January rates has no doubt of Treasury bill 1958. The maintenance aggregating $500 million, in weekly been aided by increases, by reductions in the Federal Reserve bill offerings, as well as to reduce somewhat the availability portfolio, which has tended of reserves relative to demands. allowance for seasonal variations, Bank credit, after loans and investments of expanded in recent months. Total has usual in December, seem to after increasing more than banks, January. Loans declined sub declined less than usual in have a moderate increase in December, but stantially, after only of Government securi to add to their holdings banks continued in January. The reduction usually are reduced ties, which to the usual seasonal loans corresponded roughly in business to finance companies and to and decreases in loans pattern, followed rather large increases brokers and dealers in securities to dealers in Government securities, in December. Bank loans while loans to other dealers remained rather large, however, have securities are relatively small. in
The bulk of the January increase in holdings of U.S. Govern ment securities at city banks was in Treasury bills. There were also increases in other short-term issues and in notes and bonds maturing within one to five years, with a further decline in holdings of longer-term issues. In maturity distribution of securities held, banks have substantially improved their liquidity positions during the past year. The increase in bank holdings of Treasury bills and other short-term securities may have tended to keep bill rates down, but at the same time sales of bills by the Federal Reserve and the less than seasonal decline in the money supply and in required reserves have operated in the opposite direction. Demand deposits at banks decreased much less than usual in January, and time deposits continued to show a sizable increase. It is evident that the seasonally adjusted money supply increased by a substantial amount in January. Preliminary figures show it may have increased by $1 billion. By the beginning of February, the money supply was probably larger than a year ago. Time deposits at commercial banks increased by about $900 million in January. In the same month of previous years, changes have varied between increases of $400 million and decreases of a week ending February 1 there was a similar amount. In the increase of over $500 million in time deposits at further sharp reflecting principally a special large-scale trans city banks, action by Sears Roebuck with a number of banks whereby the banks customer paper, thereby increasing their consumer took over loans and their time deposits. Government deposits, which were larger than United States the end of December, declined substantially in January usual at but turned up last week. Interbank balances did not decline as much as usual in January of this year. At the same time banks their borrowings from other banks. These are other reduced indications of relative improvement in bank liquidity. positions continued relatively easy on the Bank reserve during the past month, but showed rather wide week-to average and are now somewhat tighter than they have week fluctuations some time. Free reserves varied from close to $1 been for billion in the weeks ending January 4 and January 25 down to million last week. They may average even less around $400 we would say about $300 million. Required reserves, this week; than estimated seasonal needs in December, which increased by more $200 million larger than the figure projected from are now over on the basis of the usual seasonal pattern. the December average
Reserves were made available during the past 5 weeks by the seasonal return flow of currency and decline in required reserves and were absorbed by a less than seasonal decrease in float, by the gold drain of around $400 million, and by a reduction in the System portfolio, which aggregated about $800 million in the four weeks ending February 1. As a net result, while required reserves are now more than $200 million above level, excess reserves are below the assumed the projected a somewhat larger amount, giving total $700 million figure by reserves of close to the projected figure. reserve needs for the period ahead, it In projecting seems appropriate to make some allowance for the higher level reserves have reached, since an aim of policy is that required credit expansion. The level of January 25 has been to achieve $100 million above the December as a base; this is more than used below the level actually reached in the week of base, but is February 1 by about $100 million. Excess reserves of $700 million have been added to the January 25 figure for required to give a total reserve base. If the gain in required reserves week is maintained, the projected figure reserves attained last reserves needed will leave excess reserves of less than of total $600 million and free reserves of less than $550 million. some $400 million of Federal Reserve In the current week, offset normal market factors draining credit would be needed to to the projected figure, but reserves and bring total reserves $100 million of this could be taken out next week. System which have included substantial repurchase operations to date, and moderate outright purchases, will supply over contracts (on a daily average basis) this week and nearly $200 million if the repurchase contracts remain $60 million more next week, February 16. On this basis, free reserves until maturity, mostly might average close to $300 million this week and nearly $500 ending February 22, the run-off next week. In the week million reserves supplied by market contracts would absorb of repurchase remain close to $500 million. and free reserves would factors, March 1 and March 8), System subsequent two weeks (ending In the $500 million would be needed to maintain purchases of nearly reserves at the levels indicated. during the next three Most of the reserve variations perhaps about $100 million temporary. Except for months are few weeks, there would purchases during the next of additional System portfolio until increase in the need to be no sustained reserve needs and allow in order to cover seasonal early May about $40 million a week. estimated gold drain of for an whether it wishes to may wish to consider The Committee to credit expansion in supplying provide more or less inducement
reserves. The amount of reserves supplied in recent weeks has permitted or perhaps encouraged monetary expansion, relative to the usual seasonal pattern, without actually depressing bill rates. The $700 million of excess reserves assumed have not been available in the past two weeks largely because they have been absorbed by the higher than projected level of required reserves. Unless required reserves decline in the period ahead, the total reserve needs projected will make possible little more than $500 million of free reserves. If credit demands should be greater than seasonal, somewhat more reserves might be needed during the next month. Decision as to when and how to supply those needs can be made by the Account Management on the basis of developments in the market. Mr. Marget presented the following statement concerning the balance of payments and related international developments: In January, the U. S. Treasury sold $320 million of gold to foreign countries. This compares with a December level of $440 million (if we leave out the special sale of $300 million in gold to the United States by the International Monetary Fund), and a November level--the worst we have seen thus far--of over $490 million. It is true that there has been a slackening of gold sales since January 24, but it is not possible to conclude from that fact alone, or from the mere fact that there has been some improvement as compared with the appalling figures for November and December, that the worst is now over. January 24 is still too recent a date to permit any such conclusion, and, while $320 million is less than $440 million and $490 million, respectively, it is still much too high for comfort. If any comfort is to be found, it is with respect to the nature of the forces that may be working toward a reduction in the rate of gold outflow in the immediate future. There is some comfort, to begin with, in the fact that December did not witness a repetition of the disturbing develop ment that I reported to this Committee a month ago: namely, that for virtually the first time since our balance of November saw, payments situation became a matter of serious concern, an actual diminution in the level of foreign dollar balances, by as much as evidence, obviously, that existing foreign $470 million--clear balances were being converted on a large scale into owned dollar gold. In December, on the other hand, while the sum of the gold outflow and the increase in foreign dollar balances reached a record high, the level of existing dollar balances, instead of
2/7/ 1 showing a sharp decrease comparable to that shown in November, actually showed a significant increase. (While privately owned foreign dollar balances declined by $82 million, official dollar balances rose by $290 million.) We do not yet have the complete January figures on foreign-owned dollar balances, but the fact that foreign dollar holdings with the Federal Reserve Bank of New York remained virtually unchanged in January gives at least reason to hope that the mass con version of dollar balances into gold that we feared might have started in November is, for the moment at least, in abeyance. There is some comfort, also, in the action of a country such as Japan, which, with holdings of almost $1.9 billion, is second only to Germany (with around $3.5 billion) in the size of its dollar holdings convertible into gold. As I reported last time, the Japanese Finance Minister had announced on December 20 last, in reply to an interpellation in Parliament, that the Government of Japan wished to increase the ratio of gold in Japan's reserves from the present 14 per cent to 30 per cent, "following the example of other countries." On the other hand, as I also reported last time, the Minister had added that he was "in no hurry to purchase gold right now." In fact, a struggle was then going on within the Japanese Government as to whether the Japanese should or should not convert dollar balances into time. It is comforting to learn that, at least for gold at this the moment, the opponents of conversion into gold have won out. We are informed that, while Japan intends to bring its gold ratio it does not propose to make any up to 30 per cent "eventually," gold purchases for the time being. Finally, for what it is worth, there is the evidence pro vided by the London gold market concerning what is described in the financial press as a "dampening of speculative enthusiasm" with respect to the price of gold. Since last Friday, the price in London has been such, after payment of brokerage and handling a net price of about the United States par. charges, as to yield these developments add up to, clearly, is the suggestion What possibly--I stress the word "possibly"--be moving into that we may a slackened rate of gold outflow, while the inter a period of national financial community holds its breath to see which way in this context, must mean, things are going to move. "Things," the course of the United States balance of for our purpose, payments. For in the case of a country like the United States, immense reserves that it still possesses, and with the with the in the defense of the dollar determination to use these reserves parity as freely as the President has declared it at its present to be our determination to use them, what should matter is not such
expectations of speculators as rest on nothing more substantial than guesses as to how other speculators may act, but the answer to the basic question which has been facing us ever since the developments of 1958 awakened us to a realization that we, too, can have a balance of payments problem: namely, are we, or are we not, moving toward a position of reasonable equilibrium in our international accounts? it is the movements on capital account which As we all know, have had the effect of obscuring the very real progress toward such equilibrium that we have been having in the sector which would ordinarily have been characterized as the most difficult and intractable part of our problem: namely, the trade sector. But while this may be irritating, it can hardly be ignored. Capital movements do affect the balance of payments, and there fore the international movement of dollars and gold. We do have therefore, by asking what we are likely to see, in the to begin, immediately ahead, in the way of capital movements. period This, in turn, requires some judgment as to the nature of the forces which have been behind the very large outflow of capital that we have been witnessing. Specifically, if those commentators were right who have discussed the capital outflow as if it were solely a result of interest-rate of recent months this country and abroad, we should not differentials as between relief in this quarter until there is a marked shift expect any in the international structure of interest rates in our favor. quite clear that the recent capital outflow But the evidence is solely the result of interest-rate differentials; has not been the element of confidence in our basic that, on the contrary, as in our policy with respect to the domestic policies, as well played a very considerable role. It dollar price of gold, has realm of possibility that the is, therefore, not beyond the for believing that the "flight evidence I cited at the outset last November, to that had begun, particularly from the dollar" for the moment be in most unpleasant reality, may loom up as a confidence factor, which has been abeyance, could mean that the in balance-of-payments terms, may now begin working against us something that we shall be work in our favor. But this is to happens. Thus far, to be sure, to cheer about only when it able with respect to by the President, particularly the statements of gold, seem to have had a calming the official dollar price of this kind, one is always reminded effect. But on occasions Alfred Marshall, the great economist of a remark of Voltaire's that was fond of quoting. "An incantation," of the last generation, "will kill a flock of sheep, provided that it is said Voltaire, of arsenic." Thus far, it is principally accompanied by a dose
the incantation that has been so favorably received. What will be watched from now on will be the application of the arsenic, and the effects thereof. Within the field of Federal Reserve responsibility, the arsenic involved--namely, monetary policy--is bound to have its effect on interest rates, which in turn have certainly had their effects upon capital movements, although not nearly to the extent implied by so many commentators. Here I would note only that in January there were reductions in the discount rate by both Germany and Japan. In both cases, the action was taken, not because of a significant slackening in the strength of the domestic economic situation in those two countries, but--in the words of the announcement by the German Bundesbank-- in order "to reduce the continuing inflow of foreign exchange and to facilitate the export of funds." In this respect too, then, with proper policies on our side, there is no reason to expect a further deterioration in the capital account of our balance of payments, and, over a period, we may even expect an improve ment. But, when all is said, it is our position on current account, and particularly on trade account, that is going to be really decisive. And here I recommend a perusal of the figures given on page 28 of the current Staff Report on Recent Economic and Financial Developments, with respect to what happened during the last quarter of 1960 to what is called there the "basic deficit" in our balance of payments--that is, the deficit after exclusion of recorded U. S. private short-term capital outflow and estimated unrecorded capital outflows. The latter two items amounted to a full billion in the quarter; without them, the "basic deficit" would have been $0.4 billion, or around $1-1/2 billion annual rate. (It should be noted that this figure of $0.4 billion for the fourth quarter includes the Ford transaction; without that, the "basic deficit" for the quarter would have been virtually zero.) It has been recently that, taking as a basis the projection for estimated, moreover, U. S. foreign trade for the year 1961 that was made recently of Payments Group of the National Foreign Trade by the Balance Council, one arrives at the following result: that if the capital movements in response to doubts about the dollar and to interest-rate differentials were to dry those in response up this year, the over-all deficit for the year can fall to a neighborhood of $1 billion. This is still not level in the have in order to be able to say the zero deficit that we must we have reached that position of reasonable equilibrium that in our international accounts which we have set as our goal;
and it is still further removed from the actual surplus in our international accounts that we must obtain in "good" years in order to balance the moderate deficits that we may expect when the cyclical constellation with respect to trade prospects may be less favorable than it is now. But it is also a picture vastly different from that of the low point in our balance-of-payments experience since 1958 (as in the second quarter of 1959) when, instead of running an export surplus at a seasonally adjusted annual rate of nearly $6 billion, as we did in the fourth quarter of 1960, we had virtually no surplus on trade account at all. There has certainly been adjustment since that low point; and the direction and degree of adjustment have not been unrelated to the policies that were being followed during the period in question. Given time, and unremitting adherence to those policies, in all fields, which alone can assure that our products will maintain, and indeed improve, their competitive position vis-a-vis those of our principal trading partners, we can solve our balance-of-payments problem, and with it the vexing problem of apparent conflict between internal and external policy goals which is now so much with us. But those two conditions--the right policies, and enough time to let them work out to the desired result--are of the essence. Mr. Hackley then entered the room and Mr. Hexter withdrew. Chairman Martin said that the ad hoc Subcommittee appointed at the meeting on January 10, 1961, had had two meetings and wanted to dis cuss Committee operating procedures at the end of this session. Therefore, he would suggest that there be an executive session at the end of this meeting with attendance limited to the members of the Committee, the other Reserve Bank Presidents, the four incoming Presidents, and Messrs. Young, Thomas, and Rouse. No objection to this procedure was indicated. Mr. Hayes then presented the following statement of his views on the economic situation and credit policy:
It seems to me that the basic conditions which should determine our policies have not changed materially in the brief interval since our last meeting, although there has certainly been an important gain, for the time being at least, in foreign confidence in the dollar following the President's strong statements on this subject. The domestic business picture does not seem to have brightened and may, in fact, have turned a little darker. For example, retail sales have been relatively weak, and the retail inventory-sales ratio has reached the highest level since the summer of 1958. The general inventory situation suggests that the inventory adjustment process has not yet reached completion, even though this point may not be very far in the future. Meanwhile there is always the risk that the high level of unemployment may add a further secondary push to what has been up to now an inventory recession, or at least that it makes a business turnaround more remote in the absence of special stimulating forces--this despite the high rate of personal savings over the past year, which could of course finance a revival of large-scale consumer spending. Oddly enough, the stock market has continued to ignore these more gloomy possibilities, but it is not clear to what extent the buoyant market in equities reflects business optimism as distinguished from fears of inflationary developments. Despite the gratifying recovery in foreign confidence in the dollar, this remains a matter of great delicacy. We have made only a start toward correcting the heavy balance-of-payments deficit; and moreover, if the recession at home should deepen, and particularly if it should bring on a sizable Treasury deficit, this would put the strength of the dollar to a further test. Some deficit in the Federal Budget is to be expected, but if it should begin to approach the magnitude reached in 1958 we might face increasing skepticism abroad on the strength of our And of course the same risk would arise if we were currency. short-term interest rates with a conse to permit a decline in quent stimulus to a renewed outflow of capital. Thus the balance of payments must remain a major consideration in our policy decisions. It seems to me that the policies pursued by the System over the last month or two have been appropriate for the twin objectives posed by the domestic recession and the international status of the dollar. Banks have been supplied with a rising fund of reserves, their liquidity positions have improved, and supply has been increasing. The behavior of total the money bank credit at weekly reporting banks in January was considerably than the seasonal pattern, primarily because of continued stronger
acquisitions of Government securities by the banks--and this followed a record breaking expansion of bank credit in December. Time deposits moved up again strongly in early January, and I understand that the money supply will show a substantial rise in the second half of the month in contrast with the slight dip in the first half. We have also witnessed a decline in the velocity of money, a development associated with the diminished pressure on the cash balances of the public at large. Moreover, it has proved possible to hold the bill rate at around the 2-1/4 per cent level without interfering with the liquidity needs of the domestic economy. In the light of the Treasury's recent financing announce ment and our long-standing "even keel" policy, it is clear that in the next week or so we should try to maintain about the same atmosphere in the market that has prevailed during the recent past. The projections suggest that this may not be too diffi cult, although there is always a danger that the bill rate may slip lower while at the same time the position of bank reserves may not leave much scope for net selling of bills designed to counteract such a tendency. I would continue to place the main emphasis on the bill rate. Looking beyond this immediate situ ation, I think it is incumbent upon us to grapple now with the difficult implications of a continuing delicate international situation and a possibly deepening recession. At the risk of repetition, I would like again to stress the need for flexi bility in our policies. We are confronted with an increased experimentation in public policy, particularly in emphasis on fiscal policy and debt management. While we should welcome these innovations to the extent that they may relieve monetary policy from carrying the whole load of countercyclical action, we should not let an inactive or an inflexible posture on our part encourage unwise actions in these other areas of public policy. At this point I had intended to comment on the desirability operations along the lines of of experimentation in open market suggestions which have been made at the last few meetings, but remarks until the executive session scheduled I shall defer these immediately following this meeting. to consider a change in the discount I see no reason now the directive--apart from the longer-range question rate or in which the directive should take. We as to the proper form in mind the possibility that, in the should, I believe, have event of a renewed large-scale flight of short-term capital, the System might wish to consider an increase in the discount rate in order to put upward pressure on short-term market rates--but hopefully this can be avoided, if present favorable trends continue.
Mr. Erickson commented to the effect that it was necessary to give consideration to the extremely severe weather conditions that had prevailed recently in the First District when making any evaluation of business conditions. Continuing, he said that employment and production figures still showed an unfavorable trend. On the other hand, in the weeks ended January 21 and 28 there were rather substantial increases in electric power output over year-ago levels, and the January poll of New England purchasing agents was more optimistic than the December poll. Construction was down in December; for the year, residential was off 4.6 per cent, nonresidential was up 17 per cent, and public utility and heavy engineering were down 33 per cent. The over-all decline for the year was 3.4 per cent. Department store sales had been erratic due to weather conditions. Mr. Erickson said the December survey of mutual savings banks showed a deposit gain of 5.9 per cent compared with December 1959. The comparative percentage gains had gone up gradually from the low of 4.4 per cent in May. At the end of the year, mutuals showed an increase of better than 11 per cent in mortgage loans from the previous year. The average rate on con mortgages was between 5-1/2 and 6 per cent, but four small banks ventional prime mortgage rate to 5-1/4 per cent. Commercial and had cut their industrial loans of reporting member banks showed a rise in January, in contrast to a decline last year, and on January 25 were 7 per cent ahead of a year ago.
After expressing the opinion that the Desk had done a good job in the past two weeks, Mr. Erickson said that he would not favor a change in the discount rate or the directive at this time. He would instruct the Desk to supply reserves as needed, bearing in mind the short-term rate more than any free reserve figure. Mr. Irons reported that on balance there had been no particularly significant changes in the Eleventh District. Construction in the past month was good; awards were very high in January. The situation in regard showed some improvement, with demand reflecting the to petroleum stocks of the country. Employment had increased, but severe weather in other parts increase in unemployment; in Texas, unemployment there was also a slight per cent of the labor force. It seemed doubtful was averaging about 5.3 would be any great improvement over the next few months, but that there trend foreseen. The industrial neither was any particularly unfavorable up for the most recent month. Depart production index for the District was were down, with unfavorable weather a factor. ment store sales, however, had been affected by unusually heavy rains. Agriculture situation remained easy. Borrow Mr. Irons stated that the banking banks were net sellers of at the Reserve Bank were low and District ings sales aggregated about $150 million less Federal funds. However, their net Demand deposits had shown some down than in the preceding two-week period. accounted for by interbank deposits. movement, with most of the decline ward on the other hand, continued to rise substantially, building Time deposits,
up liquidity to a higher level than the money supply alone would indicate. While there had been some decline in loans, it was no wore than seasonal, and investments were up. Turning to policy for the next period, Mr. Irons commented that the Treasury financing suggested maintenance of the status quo. He felt the Account had done a creditable job in the past two weeks; after getting over the float problem during the earlier week, conditions were about as they should be. He would like to see about the same degree of reserve availa bility maintained as in the past week or so, with any deviations on the side of less aggressive ease but no overt action in that direction. As far as guides were concerned, he would favor using the short-term rate, as reflected by the bill rate, and he would like to see the bill rate around 2-1/2 per cent. Also, he would like to see the Federal funds rate in the area of 2-1/2 to 3 per cent. As far as free reserves were concerned, he would prefer the $450-$500 million range to the $600-$700 million range. a better relationship and that it would provide He felt this would indicate availability to the banking system. The Account should adequate reserve have considerable leeway in the forthcoming period, but he would urge would put pressure on the Treasury bill rate. He avoiding anything that no change in the directive or in the discount rate. would recommend developments in the Twelfth District Mr. Mangels reported that from the rest of the country. The were not significantly different a slight improvement in employment and a slight Pacific Coast had shown
drop in unemployment. However, this was no cause for optimism as it reflected increased payrolls in the food processing industries due to seasonal factors. Aircraft and manufacturing employment, on the other hand, was down. The net effect of these movements kept unemployment in relation to the total labor force at a 6 per cent figure. District steel mills in the week ended January 28 were operating at 84 per cent of the off after the rise during the average, which marked a leveling 1957-59 first two weeks of January. The lumber industry remained in the doldrums, with production down and the volume of unfilled and new orders not offering As to agriculture, farmers were not suffering at the any encouragement. present time. Pacific Northwest wheat farmers in particular were doing well, since wheat prices were 17-22 cents above support prices, largely as a result of export demand. Total construction in December was up 1 residential construction was down 13 per per cent from 1959. Although 3 per cent, construction of public cent and nonresidential was down declines. In the area of retail sales, works and utilities offset those indicated that both department stores and automotive sales latest figures were down somewhat in January. indicated that there had been a sharp decrease ($180 Mr. Mangels bank loans during the last two weeks of January, this being million) in 1960 period. Demand for commercial the decline during the comparable twice for consumer and real estate loans was not loans was slack, and the demand encouraging. However, banks added about $100 million to their holdings of Demand deposits held about even during this period, bills and certificates.
although expectations were for a more rapid decline in bank deposits in the next month or six weeks than in the past. Time deposits, on the other hand, were up somewhat despite a continuing decline in savings deposits. Only two banks, both country banks, resorted to borrowing from the Reserve Bank in January. It was reported that there had been some talk among the banking fraternity of a cut in the prime rate during the next 30 or 60 days. However, it seemed to be felt generally that if the Administration's programs were implemented and the Government needed new money for them, interest rates would be higher at the end of the year than at present. Turning to policy, Mr. Mangels said that in view of the Treasury financing situation, he would maintain an even keel for the next week or so. He would define this as meaning free reserves somewhere around $600-800 million, with the bill rate around 2-1/4 per cent. He would make no change in the discount rate or the directive at this time. However, by the time of the next meeting he felt that in the absence of unforeseen developments he would be inclined to move to a somewhat easier position in order to encourage recovery of the domestic situation. Mr. Deming reported that in the Ninth District there were some optimistic appraisals of the outlook, coming mostly from the business community. However, he did not believe that this was a general feeling on the part of the public; in fact, he could paint a fairly black picture of the outlook for the District on the basis of available information. A recent newspaper poll indicated that a substantial percentage of the
respondents thought the outlook for the current year was not too good. Of those interviewed in January 1961, 57 per cent indicated that they thought the outlook was good compared with 79 per cent during the same month in 1960 and 71 per cent in 1959. In evaluating conditions at the present time (good, bad, or indifferent), 64 per cent thought that times were good in 1960 compared with 39 per cent in 1961. Only 15 per cent thought that times were bad in 1960, while 31 per cent felt that way in 1961. Also, the District's natural resource industries were not experiencing a great amount of activity, showing declines from preceding periods, so the outlook there was not too optimistic. The agricultural picture could be quite good, although there might be a moisture problem in the spring. In discussing the banking situation, Mr. Deming remarked that the bank loan picture indicated a softerning of activity. While loans at city banks usually fall during January, they fell faster this year, the dollar amount of decline being almost 6 times as large as the average decline over the past thirteen years. It was thought that this might reflect a shift by borrowers to other markets for funds. The banks were happy about the improvement in liquidity, but not particularly happy about the decline in loan demand. On balance, Mr. Deming said, it appeared that the District situation was about the same as the situation in other areas. He doubted that there was a firm basis for optimism at this time on the part of business and the
stock market, and he could not see what underlying factors were used in arriving at this optimism. Mr. Deming indicated that he had no disagreement with the views of Messrs. Hayes, Erickson, or Irons. In his opinion, the prescription that the Committee was following was the right one. He would not change the directive or the discount rate at this time, and he would favor using the bill rate, rather than the level of free reserves, as a guide for open market operations. He added that he felt the Desk had done a good job in the past two weeks under conditions that were somewhat less than favorable. Mr. Allen indicated that in the short interval since the last meeting there was little new in the Seventh District. Total economic activity continued to decline in January, with the automobile industry most important depressing development. Automobile sales contributing the in January were 369,000 units, 19 per cent below last year. Some improve ment was expected in February and March., with guesses that 1,250,000 cars will be sold in the first quarter, but that would be 16 per cent below of 1960. Inventories continued relatively static, at the first quarter a little over 1,000,000 units. The industry was gearing production to that basis first quarter production would not exceed sales, and on Automobile analysts in per cent below last year. 1,300,000 units--35 being scraped in terms of production and Detroit felt that the bottom was not get worse. There was much the same sales and that conditions would
attitude throughout the District generally, with no evidence that business men or consumers believed that a major slump was in the making. January saw some improvement in farm machinery and household appliances and a number of industries increased orders for steel, but the over-all production rate was held down by reductions in orders from auto producers. Mr. Allen mentioned that there were diverse views among mortgage lenders in the Chicago market as to the probable effect of the recent reduction of the ceiling rate on FHA mortgages. The most general view was that it would merely increase the prevailing discount for such by about 2 points. However, the president of a large mortgage mortgages that the reduction might be just what was needed to set company believed a downward adjustment in home mortgage rates, and an important in motion considered the move beneficial as part of a package of official builder expectations. Reports at a meeting measures designed to bolster consumer major lenders to agriculture, held at the Chicago Bank of the nation's delinquencies and foreclosures of farm real last week, indicated that levels, that interest rates had declined estate mortgages were at low somewhat further, that activity in recently and were expected to decline slow, and that the supply of agricultural credit, farm real estate was was adequate for 1961 and was somewhat both long-term and short-term, larger relative to prospective demand than in 1960. together with movements in Allen remarked that these factors, Mr. securities markets, seemed to indicate response, slow the long-term
though it might be, to monetary ease. However, the demand for bank credit continued weaker than normal for this time of year. Business loans at District reporting banks dropped $132 million in the four weeks ended January 25, compared with $22 million last year, but the basic deficit of Chicago central reserve city banks rose to an average of $82 million for the period ended February 1. These banks had begun to buy bills in anticipation of the April 1 tax date and the Sears financing on January 31 generated pressure. Eight Seventh District banks purchased $316 million of the $1.1 billion total of Sears' customer contracts sold. Turning to policy, Mr. Allen stated that in his opinion the reasons so generally expressed two weeks ago for continuing the status quo continued to be valid and controlling. He would not favor a change in the discount rate, the directive, or the degree of ease. Mr. Allen then referred to the many expressions heard to the effect that longer-term rates were too high and must be reduced. He was not at all sure that they were too high if the savings-investment process so important in our way of life was to be nourished. In any case, the word "confidence" was all-important, and by this he meant real confidence, hoop-la or "incantations," to use the word Mr. Marget had not psychological Voltaire. Bank reserves were plentiful, savings had increased quoted from the past year, and it seemed that the requisites for substantially in investment in the long-term area were present except for the one that was It was, of course, important that the System, most necessary--confidence.
in its limited sphere, do whatever it could to increase confidence on the part of the saver and investor, and refrain from doing anything that would impair confidence. Mr. Allen added that under present conditions, difficult as they were, he felt that the Committee could make its maximum contribution by continuing to operate until its next meeting, at least, as it had been operating for the past several weeks. Mr. Leedy commented that it had been recommended at the end of January that the Kansas City metropolitan area be classified as a sub stantial labor surplus area. It was estimated that about 8 per cent of the labor force was unemployed on January 15. If the city was so classified, it would be the first metropolitan area in the District to be classified as an area of substantial labor surplus since Regarding the banking picture in his District, Mr. Leedy said it followed much the same pattern as the neighboring Districts. There had been a substantial reduction in loans since the first of the year, demand deposits were under the year-ago levels, largely as the result of a substantial drop in interbank deposits, and there was an unusually large increase in time deposits. Mr. Leedy recommended that the Committee continue to do what it had been attempting to do since the January 24 meeting. As he saw it, recent developments, including the attitude indicated by the President in his statements regarding the need to protect the dollar, were working in
the System's favor and were tending to minimize its problem. Nevertheless, the System still had a responsibility in this area that it must continue to fulfill. In his opinion, the Committee should pursue about the same policy that it had been following, being sensitive to any downward movement in the bill rate of a material nature and also keeping watch on the Federal funds rate, which he felt need be only slightly lower than the discount rate. The level of net free reserves that might eventuate from pursuing such a policy would not concern him too much. Mr. Leach reported that business activity in the Fifth District continued to decline slowly, although a few indicators showed some slight improvement. Man-hours, seasonally adjusted, had declined in the durable but furniture factories collectively had improved a goods industries, little. In the nondurables field, activity had held up well in food and but had declined in other groups. The small volume tobacco manufacturing to restrain activity in the textile industry of forward buying continued mills recently had a sizable increase in their generally, although yarn employment had declined, employment in the backlog of orders. While total services remained stable or increased fields of trade, finance, and store sales slowed sharply under adverse slightly. January department a favorable early start. The position of weather conditions after District banks continued to ease. that monetary policy had done its Mr. Leach expressed the view opinion, any further easing at this and a good job at that. In his job,
point would be a grave mistake. It was unlikely that it would stimulate employment, and on the basis of recent experience it probably would expand time deposits rather than the money supply. With loan demand relatively weak, banks presumably would channel most new funds into short term investments, thus aggravating the balance-of-payments problem by further depressing short-term rates. However, while he was opposed to further ease, he did not think it would be advisable at the present time to adopt a positive program to mop up reserves solely to push rates higher than they now were. Although he hesitated to say anything about reserves, he believed $700 million of excess reserves was a little high; it seemed to him that a range of $500-600 million would be an appropriate benchmark. However, he would play down the present importance of the free reserve figure as an indicator compared with short-term interest rates, particularly the 90-day bill rate. Although the 90-day rate was recently as low as 2.13 per cent, he was pleased that it had risen to a substantially higher level. Considering existing levels of interest rates abroad, he believed the System should seriously consider offsetting action if the bill rate approached 2 per cent. This did not mean that he favored a 2 per cent 2 per cent figure had acquired inter peg, or any other peg, but the national psychological importance. In view of the balance-of-payments problem and the current Treasury financing, a reduction in the discount of the question, and he saw no immediate need to rate was entirely out change the directive.
Mr. Leach added that, inasmuch as this was probably the last Committee meeting he would attend, he would like to say that while he thought the System's policy actions since last spring had been as appropriate as any one could reasonably expect, he believed that there was much room for improvement in the manner of handling the directive to the New York Bank. Mr. Mills said he was heartened by what he sensed to be a spread ing awareness of the necessity that the Open Market Committee focus its attention on the international financial situation. To that end, it was his belief that the objective should be to develop a level of positive free reserves in the range of $400 to $500 million, which conceivably would be reflected in a Federal funds rate approaching 3 per cent and, he would hope, a 90-day bill rate in the range of 2-1/2 per cent. In his belief, the pursuit of that objective would not do violence to those who espoused the view that reserves should be supplied in greater abundance and who endorsed a level of positive free reserves of $700 or $800 million more. His reasoning was that in reverting back to past experience or even it was clear that where a level of positive free reserves in the range of maintained constantly over any considerable $400 to $500 million had been period, a more than ample stimulus had been given to the expansion of bank loans and investments. Again, as at the January 24 meeting, he attention to the chart of positive free reserves and wished to call negative free reserves over a period of several years. This chart
indicated that on the occasions when the System had permitted positive free reserves to remain for a long period at a high level it had produced con ditions that were followed by a vigorous counter policy and by attendant difficulties and problems. With regard to the international situation, Mr. Mills said it seemed to him that the Committee was fortunate in the erudite presentations that it received concerning the statistical movements of domestic and international financial affairs. However, it might also be well to turn back to the perceptiveness that comes from reading economic history. If it is true that history repeats itself, it seemed not at all improbable that the country was moving into a situation that would find its friends abroad again saying that "when America sneezes, Europe and other parts of the world have pneumonia." There were definite signs of deterioration in in England and Western Europe, and in his economic activity abroad, both opinion the economy of Japan was poised at a very narrow balance. If the movement of recessionary influences continued its downward path in the United States, history would suggest that at some point the market for foreign goods would be so impaired that the balance of trade would turn in favor of this country, possibly more violently than one would choose of his own accord. Accordingly, Mr. Mills said, his concern was more with the possibility that in the future this country would experience an inflow that it would experience a continued outflow. In the mean of gold than time, however, he thought it was of critical importance that the System
bring the short-term interest rate structure of the United States, to the extent of its powers, to a level that was competitive with the rate structures in Great Britain and on the Continent. Mr. Robertson said that he would not comment on economic conditions, or debate them, except to say that there was still no upturn or any immediate indication of an upturn. The turnaround had not yet been made. It seemed to him, as he had pointed out before, that it was a grave mistake on the part of the Committee to attempt to use the bill rate as the controlling guide for monetary policy. In his opinion, this had prevented monetary policy from making the kind of contribution it was capable of making toward a reversal of the economic downturn by increasing the availability and lowering the cost of money. This failure would serve to prolong the recession. months he had been urging that the Committee provide For several the banking system with a more ample supply of reserves in order to policy to make whatever contribution it could toward enable monetary He still believed in the validity of that reversing the economic trend. in driving the bill rate to 2 per course of action, and if it resulted He felt that the Committee, in cent or below, he would not be concerned. up the bill rate, had set up a "bogey," based on no good pressing to hold the discussions around the table. He was not reasons that he had heard in rate would stimulate a the argument that a lower bill impressed with or even accentuate the outflow of gold. further outflow of capital
Furthermore, he believed that any outflow of capital based on interest rates would flow back when rates here rose--as they would when the economy began to move upward. The outflow of gold would reverse itself if and when the world learned that this country meant to manage its internal affairs in a way that would revitalize the economy and at the same time maintain the stability of the dollar. Also, he did not believe that long-term rates could be lowered significantly and effectively while the System was pegging short-term rates. Therefore, the System should have the courage to permit short term rates to go lower. In his view, it would not require much lower short-term rates to achieve the desired effect on longer-term rates. In fact, even the policy that the System had been following was apparently beginning, belatedly, to exert some slight impact. Mr. Robertson commented that during the past several months he had joined in voting for renewal of the policy directive. He had done so because the language of the directive was sufficiently broad to position. The statute, he noted, requires a statement of encompass his the policy actions taken by the Committee. Although his the reasons for not be in the policy record submitted to the Congress, he reasons would had voted for renewal of the directive on the basis that he had just explained, as clearly shown by the minutes of those meetings. He wanted the minute record of this meeting to make it doubly clear that, although he did agree with the economic policy specified in the language of the
policy directive, which called for encouraging monetary expansion, the direction of open market policy had not been fully in accord with his views. Mr. Shepardson expressed the view that a policy of additional ease might only stimulate a sudden burst of growth that would be incompatible with the longer-run objective of sustainable economic growth. Continuing, he said that his concern about the course of mone tary policy went not only to the international problem arising out of the balance of payments but also to the problem of fostering the sound growth of the domestic economy. It seemed to him there were certain fundamental adjustments that must take place, and that those adjustments were in process. After the 1957-58 recession a quick turnaround occurred, but shortly found itself faced with another problem, and he was the country this occasion a sudden turnaround would be desirable. not convinced that on he felt the policy the Federal Reserve Mr. Shepardson stated that and that he would strongly urge its continuation. had been following was sound to the short-term rate not only his opinion attention should be given In but because it was important in because of its international implications strive toward too sudden a the domestic economy not to the evolution of change. favorable reaction to the then commented on his Mr. Shepardson looked toward placing American industry statements of the President that
on a competitive basis in world markets. This, of course, was a longer range objective that could not be accomplished immediately. Conversely, he was concerned about some of the palliatives that had been suggested which would have the effect of removing forces that hopefully would bring about basic adjustments. As he had said, those adjustments were important from the standpoint of international relations. In addition, however, they were essential to the kind of growth that was wanted in this country, based on increased productivity and increased efficiency. After indicating that he would not favor a change in the directive or in the discount rate at this time, Mr. Shepardson said it seemed to him that the degree of ease had been fully adequate. He wished to associate himself with the view that it would be preferable if the level of free reserves were on the low side of $500 million rather than on the high side. The Federal funds rate should be somewhat below the discount rate, but it should not be in the low range that had prevailed at some times in the recent past. said that although there were many important problems Mr. King Market Committee could concern itself, he felt that with which the Open problems at present were the general state of the domestic the principal of the United States in international finance. economy and the position Committee would meet been wondering how the these problems, he had Given instructions to the by the Now, as demonstrated its responsibility. the Committee had the short-term rate, in regard to Desk, particularly
indicated that it was stopping at approximately this point in the pursuit of further ease, or that it had already stopped. In his view, it had stopped at a good point. Although, as he had stated previously, he felt that the recessionary influences in this country might well continue through this year, when the upturn occurred he believed it would be more soundly based and of longer duration than the upturn that followed the recession of 1957-58, when Federal Reserve policy appeared to have involved a greater degree of ease than had prevailed during the past several months. Mr. King went on to say that, in view of the imminent Treasury financing, it was clear to him that this was not a time for overt actions. This point of view, he noted, had already been expressed by others around the table. He would hope that the level of free reserves might be in the range of $400-500 million rather than $600-700 million. After indicating that he would not favor a change in the discount rate or the directive at this time, Mr. King concluded by saying that in his opinion the Committee's position with respect to maintenance of the bill rate represented one of the greatest contributions that the Committee could make in the present period. Mr. Fulton, in reviewing developments in the Fourth District, indicated there was nothing to cause much joy. There had been a faltering rise in the production of steel. Department store sales, on the other hand, had been adversely affected by the weather and for the year to date
were 5 per cent below a year ago. Unemployment was still high, although on a seasonally adjusted basis there had been a slight improvement. In Youngstown, for example, the steel mills were now making inventories for themselves in anticipation of having to shut down completely at a later date for the installation of a new rolling mill, so the temporary decline in unemployment could not be classed as solid improvement. The machine tool industry was going along fairly well, receiving stimulus from foreign orders for tools. Domestic orders, however, were not coming in. New orders in the steel industry in January were about 2 per cent above December, but shipments so far in Feburary had been the lowest for many months. A number of orders had been deferred from February to March In one of the large mills about 25 per cent of the employees delivery. had been laid off, and in other mills about 40 per cent, and the super had received wage reductions. Due to visors, office help, and officials and sales, that industry had been the falling off of automobile production cutting back orders from steel mills and foundries. There deferring and of hope in the fact that a number of other users of steel was one gleam orders, indicating a shortage in their inventory were coming in with rush was widespread, there could be some sub positions. If this condition However, it was understood that those stantial buying of basic metals. orders themselves. Their production were ordering did not have more who but their inventories were so low they was being maintained at low levels, to work. Many complaints were heard had to get more materials with which
about the profit squeeze resulting from high operating costs and price concessions. Turning to policy, Mr. Fulton indicated that he did not believe that the discount rate should be changed at this time. He would like to see free reserves in the neighborhood of $500-600 million, a level that he felt would give the banking system adequate liquidity. He again sug gested, as he had done at the January 24 meeting, that the language of clause (b) of the directive be changed to substitute the word "recovery" for "sustainable growth." Mr. Bopp commented briefly on weather conditions in the Third District, noting that for 16 days the temperature had nor risen above freezing. Department store sales during the week ended January 21 were 27 per cent below the previous year, and in the following week they were 16 per cent below the year-ago level. For the year to date, they were 11 per cent below 1960 figures. Unemployment was high and rising. Certainly, Mr. Bopp said, the domestic situation was not one of great hope. Unfortunately, there was the problem of the balance of payments. In terms of policy, he would not favor a change in the directive or the discount rate at this time. He felt that the present degree of ease should be maintained, and that the primary measure of that ease should be the level of short-term rates. Mr. Patterson said that the recession in economic activity in the Sixth District appeared to have continued in January. He had prepared a report on some of the District figures. However, after hearing the other
reports, there appeared to be no differences of sufficient importance to warrant going into detail concerning Sixth District developments. Mr. Johns said that although there were some in the Eighth District who claimed to discern some improvement in the business outlook, it was difficult to find facts to support such contentions. Recently, he said, the newspapers had focused attention on a report that 8.4 per cent of the labor force in the St. Louis area was now unemployed. After summarizing comments in this regard that had been made by a local employment official, Mr. Johns expressed the view that the attention directed to this matter was almost certain to affect the general feeling about the economic situation, particularly if the matter continued to receive as much attention as it had. Mr. Johns then commented on the unemployment problem that had existed for some time in Evansville, Indiana, following which he noted that although total credit at Eighth District member banks increased slightly more than $80 million in November and December, most was in bank investment portfolios as loans rose less of the increase During January, total credit at weekly reporting banks than seasonally. seasonally, with the banks selling securities on declined more than balance. Mr. Johns said that as he reviewed developments in the Eighth did not see much hope for an early upturn. District and in the nation, he continued to believe that the policy directive, which Therefore, he credit expansion, was appropriate. After called for encouraging bank that had been distributed before this referring to the reserve porjections view that "total reserves needed" he said it continued to be his meeting,
should be increased modestly. In expressing this view, however, he wished to make it clear that he was not advocating more than a moderate expansion. He did not care to suggest any specific target, and instead would say merely that he would like to see "total reserves needed" increased modestly and continuously until further order. Mr. Szymczak expressed the view that System policy had been going along in the right way. He believed it was becoming more and more clear that the thinking of the Committee was in terms of supplying enough reserves to the banking system, but, in view of the balance-of-payments problem, not going so far as to contribute to a downward movement of the short-term rate. He would subscribe to a continuation of present policy for this reason and also because the Treasury financing called for maintenance of an even keel. that he assumed an even keel should be Mr. Balderston commented maintained during the first part of the forthcoming period because of the Treasury financing, even though the pricing of the issue offered by might make the maintenance of an even keel less necessary the Treasury than usual. Once the Treasury financing was past, however, he hoped Hayes and Irons and others who had spoken in that the views of Messrs. would be followed by the Committee. While it was not the same vein possible to tell at this juncture whether the turnaround in domestic would involve a quick recovery economic conditions, when it occurred, or a slow one, it was his view that the liquidity that bad been supplied was sufficient for the present and that the element to the banking system removed from the System's policy of ease of aggressiveness should be seemed to be putting the added reserves until such time as the economy
to good use. As to tests, he suggested first the bill rate because of its international significance. He would also suggest the Federal funds rate, which he would like to see closer to the discount rate than it had been at some times during recent weeks. Further, he would suggest that the Committee watch the extent to which banks were buying bills. During the month of January, he noted, the banks had bought about $500 million of Government securities, principally bills. His own concept for the period ahead was that System policy should be one of neutrality, and such a policy might mean only small additions to bank holdings of Government terms of free reserves, the effect of such a policy might securities. In be to reduce the level below $500 million, perhaps to the $300-400 million range. However, this was difficult to determine because of the fundamental had occurred in allowing member banks to count their vault change that of required reserves. Accordingly, he agreed with those cash as part suggested that for the time being it would be better to watch who had the bill rate than the level of free reserves. Mr. King withdrew from the meeting at this point. had little to add to the dis Martin indicated that he Chairman was the crucial point. A difficult In his opinion the bill rate cussion. in the use of words such as "pegging" or "influencing," problem was involved he felt that the System should influence but under present circumstances felt that at this time the short-term rate the short-term rate. He also System policy than the free reserve provided a better benchmark of
figure, which he suggested might have about outrun its usefulness as an effective measurement. Chairman Martin said it appeared that the consensus favored no change in the discount rate and no change in the directive. It also appeared to be the consensus that the measuring benchmark of open market policy should be primarily the bill rate. The Chairman then inquired whether anyone wished to be recorded as dissenting from the consensus, and Mr. Robertson said he agreed that the statement by the Chairman represented the consensus. He did not agree, however, with the direction of System policy. Chairman Martin asked whether there were others who wished to comment on the consensus, and no comments were heard. The Chairman next referred to the policy directive, and Mr. Robertson said that he agreed with the policy directive because he felt that its language encompassed his own position. The Chairman said it was his understanding that it was on the general implementation of the directive that Mr. Robertson wanted to record his dissent, and Mr. Robertson indicated that this was correct. The Chairman then inquired whether there were others who wished to record themselves similarly, and Mr. Johns remarked that he was not at this time a member of the Committee. Chairman Martin indicated that Mr. Johns' views on open market policy, as expressed earlier during the meeting, would of course be reflected in the minutes.
Thereupon, upon motion duly made and seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to encouraging monetary expansion for the purpose of fostering sustainable growth in economic activity and employment, 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 at the close of this date, other than special short Account) term certificates of indebtedness purchased from time to time accommodation of the Treasury, shall not be for the temporary increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of Bank of New York (with discretion, in cases the Federal Reserve desirable, to issue participations to one or more where it seems Federal Reserve Banks) such amounts of special short-term certifi cates of indebtedness as may be necessary from time to time for of the Treasury; provided that the the temporary accommodation total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Secretary's Note: The Chairman then called for a session at which attendance would be limited. The minutes of that session begin on the following page.
The meeting of the Federal Open Market Committee reconvened in the offices of the Board of Governors of the Federal Reserve System in Washington at 12:20 p.m. on February 7, 1961, with the following in attendance: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Fulton Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Irons, alternate for Mr. Bryan Messrs. Leach, Allen, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Deming, Erickson, and Johns, Presidents of the Federal Reserve Banks of Minneapolis, Boston, and St. Louis, respectively, and Messrs. Ellis, Wayne, Clay, and Swan Presidents-elect of the Federal Reserve Banks of Boston, Richmond, Kansas City, and San Francisco, respectively Mr. Young, Secretary Mr. Thomas, Economist Mr. Rouse, Manager, System Open Market Account In opening this session, Chairman Martin noted that Mr. Bryan was absent on account of illness and that, in view of the meeting of the Ad Hoc Subcommittee called for yesterday, he had requested Mr. Irons, who is the alternate for Mr. Bryan at the regular meetings, to serve for him at the Subcommittee's meeting. Chairman Martin then stated that he had called this Committee meeting to receive an interim report from its Ad Hoc Subcommittee. The
Subcommittee, he said, had held two meetings, had had the help of documents submitted by Mr. Young and Mr. Rouse for its consideration, and had taken into account the very heavy barrage both from within and outside Government, against the System for the uncompromising position it allegedly took towards its own operating procedures and policies. In the light of its discussions and evaluations, the several members of the Subcommittee were unanimous in the view that the System had to give some further tangible indication of open-mindedness and willingness to experiment. The whole issue of operations, they agreed, had become one of conceptual contention and, therefore, no progress could be made in resolving it by the device of papers, studies, or committee reports. There had to be evidence accumulated from actual experiment or testing to enable the System to escape from the charge of doctrinaire commitment to a laissez faire, free private market position in confining operations to short-term securities. Therefore, the sooner the System got busy at the task of obtaining empirical data the better it would be. Since that was the Subcommittee's undivided view, Mr. Rouse had been requested to propose an appropriate program of action and to set forth the requisite implemental procedures for carrying it out. Accordingly, he would ask Mr. Rouse to report on his recommendations shortly.
Chairman Martin next observed that, while the Subcommittee was unanimous in feeling that inauguration of a period of experiment was the only feasible course, feelings were mixed as to what the experiment would demonstrate. He himself had doubts about the outcome; at the same time, he could not prove at this time that these doubts were justified. From his discussions with dealers, he would gather that they were divided in their judgments as to whether the area of operations should remain limited as in the past eight years or should be broadened. The Subcommittee members, the Chairman further stated, were particularly concerned about what experimental transactions outside the bill area involved with regard to System relations with the market. After all of these years of operating primarily in bills, how could the System, in experimenting with transactions outside the bill area, be fair to the market? Even if the Federal Open Market Committee had stated that its procedures could be changed or superseded at any time, was there in fact a commitment not to change without publicly-issued notice? Chairman Martin then asked the several members of the Ad Hoc to offer any comment they cared to about their own views. Subcommittee commented to the effect that any market experiment Mr. Mills would have the objective of seeing whether the long rate undertaken now could be moved down relative to the short rate in the present market While he had consistently supported the limitation of Federal context.
Open Market Committee operations to short securities, he now felt that experiment to move long relative to short rates had to be made. The Subcommittee was only divided as to its views about how the experiment should get under way--whether cautiously or boldly. Personally, he favored a bold approach. Mr. Irons commented that Subcommittee member differences related mainly to degree of experiment. While he believed strongly in present Federal Open Market Committee procedures, he still felt that we must explore pragmatically possibilities of operations in longer sectors. Such probing should be accomplished without publicity or at least with publicity as possible. His counsel in undertaking experiment as little would be to begin in the 3-to-5 year area, then try the 5-to-8 year sector, to the 8-to-10 year maturity. Further stretching out and finally move could be pursued if desirable, but it was quite possible objectives could be reached within the intermediate range. as he saw it, the problem had two Mr. Balderston remarked that, experimentation with market procedure; second, public sides: first, understanding of the Open Market Committee's procedures. The Ad Hoc recommended experimentation with the Committee's Subcommittee has reporting only with respect to the first procedures and is, therefore, half of the problem, and not the second. The latter should be given attention at the Committee's organization meeting in March. In con ducting the experiment, he favored operations in Governments of
intermediate term. Avoidance of public announcement would be desirable in his opinion, and he would strongly favor leaning over backward to be fair to dealers and using the go-around for any transactions engaged in outside the short area. Mr. Hayes reaffirmed the position he had earlier expressed to the Committee favoring flexibility in Federal Open Market Committee operations, and he stated that any experiment and demonstration under taken in present circumstances would be altogether consistent with his views. Experiment now, he felt, was both urgent and timely. Experiment was urgent because of the System's public relations problem and timely because it might serve to lift some of the down-pressure on the short rate and put some down-pressure on the long rate, and so stimulate some long-term borrowing. He stressed that any experimental operations should be limited, be of nudging character, as regards both short and long rates, and should give no hint of pegging; pegging or establishing a pre determined level of rates was the last thing that the Federal Open Market Committee wanted. The problem of public announcement troubled him greatly, Mr. Hayes said, because experiment constituted important, even if temporary, departure from what was now long-established Committee operating policy. As to maturity area that might serve as a limit to experiment, he thought maybe 10 years was long enough because market impact here should certainly communicate through the rest of the maturity range. If results of
initial experiment should suggest a need for transactions in still longer maturities, experiment could be extended then to that area. At this point, Chairman Martin asked Mr. Rouse to present his plan for experiment, and Mr. Rouse reported as follows: In line with the discussion yesterday afternoon at the meeting of the Ad Hoc Subcommittee, the following program is submitted. In this outline I have endeavored to follow what seemed to me to be the trend of thinking in the Subcommittee. The program is based on the conviction that at this time the interest rate structure in relation to the balance of payments is paramount and that current short-term interest rates must be maintained and, preferably, allowed to rise somewhat. While it is conceivable that this might be accomplished by reducing somewhat the availability of reserves to the banking system, the needs of the domestic business situation may render this impracticable, thus pointing to the necessity of making purchases in areas outside of the shortest maturities. The advantage of such procedure is further pointed out by the Subcommittee's wish to make a cautious test of the feasibility of influencing longer-term rates in a downward direction in recognition of the widespread comment on the Committee's procedures and alleged doctrinaire inflexibility. current The suggested program, which obviously must be experimental, follows: FIRST--The Desk would be authorized to extend its oper ations to securities having maturities up to perhaps ten years, but initially it would be made known to the market in terms of only up to five and one-half years by means of a "go-around" in which all dealers would be asked for offerings in the range of one to five and one-half years. The amounts purchased would not need to be large. It is anticipated that the dealers there to keep the Desk informed of current bids and after will tend offers in that range and beyond. They will not be surprised as something of this sort in view of the press they are expecting comment of recent days. It is not contemplated that probing operations in the five to ten year range be begun until after the market and one-half has become somewhat used to the changed frame of operations. Nevertheless it might develop that such experiments could be to the next meeting of the Committee. The Desk started prior in mind that all such operations are to be is to keep clearly modest in amount and only for the purpose and in the manner indicated,
SECOND--The prospective amount of additions to the System Open Market Account in the next few months is small, and most of the gross purchases or sales will need to be offset fairly promptly. Therefore if this program is to be carried out, the logic of removing temporarily at least, the prohibition against "offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System portfolio" becomes apparent, i.e., if longer securities are to be purchased, shorter securities will have to be sold or run off in order to make room. Futhermore, it may be noted that such purchases are designed primarily to affect the rate structure rather than to provide reserves. THIRD--As an illustration--the general idea of the proposed operation is to encourage the development of a slightly higher 91-day Treasury bill rate and Federal funds rate (but still under the discount rate) and at the same time to direct purchase operations of the System Open Market Account toward somewhat longer-term securities. This does not mean that we would ever try to, or ever could, peg rates or determinedly hold them within particular ranges. Any result will be the combined product of our influence and the market's reactions. FOURTH--As I have stated, this approach is experimental and carried out in relatively modest amounts. I figure that is to be the new authorization should include the power to purchase up to $400 million securities maturing beyond fifteen months and up to years, and an additional $100 million securities five and one-half maturing beyond five and one-half years and up to ten years. In suggesting these figures I assume that our next meeting will take place on March 7th. These operations are to be handled with the utmost care so as to avoid charges of unfairness to any one dealer or group of dealers and so as to avoid any charges or Detailed records are to be kept of implication of favoritism. all transactions. I recommend that the Secretary of the Treasury and the Chairman and Vice Chairman of the Joint Economic Committee be advised promptly if this or a similar program is adopted. Incidentally, in light of the "open mouth operation" in the press the past few days and the expectations which it has engendered in the market--that is--of System operations through maturity range--I suggest that the Committee consider out the the issuance of a statement--for the news ticker in the first instance--such as the following: of changes in the international and "In the light the F.O.M.C. in recent months has domestic situations been examining the implications of its operating objectives and procedures. It is suspending its
existing operating policies in this respect pending the conclusion of its review. In the meantime operations may be carried out in an extended range of maturities." FIFTH--Referring again to the intermediate range of maturities (five and one-half to ten years), it is in this area that the System could be most helpful to the Treasury, having in mind the Treasury' s urgent need to do successfully a sizable junior advance refunding at the earliest feasible date. SIXTH--Finally, the execution of the proposed program will be difficult and must be delicately handled. The Desk will need all the help it can get and all the tools at the disposal of the System. Following Mr. Rouse's report, Chairman Martin suggested a round with Mr. Allen volunteering to comment first. Mr. Allen table discussion, stated that he was not at present a member of the Committee, and so was not entitled to vote, but he gathered that it would be in order for him to express his opinion. He assumed that, since the Chairman had stated that the Subcommittee was making only an interim report, a final report would be forthcoming at a later date and he welcomed the prospect of having time to study the recommendations which he had just heard on such an important subject. Martin then said that no such time would be available Chairman a decision would have to be made at the present meeting. and that his statement by saying that since the reacti Mr. Allen resumed vation of the Subcommittee on January 10 he had studied the subject under that time and his eyes permitted, and that he discussion to the extent report of the Subcommittee, a great deal of had read again the original the Chairman's testimony on the subject before various Congressional committees, Mr. Riefler's paper delivered in Minneapolis on May 3, 1958, including that of Mr. Thomas dated November 23, 1960. and other memoranda
Mr. Allen said that in the light of what he had been able to find on the subject, as well as his own experience, he did not favor the proposed operations. He mentioned that the word "nudge" did not appeal to him, for he thought it could result either in simply annoyance or in an avalanche, neither of which would be desirable. Mr. Allen referred to the assertion that empirical evidence was lacking, and stated that Mr. Riefler had mentioned empirical evidence in supporting his argument that the Committee should not operate in long-term securities. Mr. Allen concluded by saying that if the Committee decided to follow the recom mendation of the Subcommittee he shared what he understood to be the feeling of Messrs. Hayes and Rouse that a public statement regarding the change in area of Committee operations should be made. Mr. Erickson stated that he would favor the experiment but thought that a public announcement was quite unnecessary for a temporary deviation from established practice. Chairman Martin observed that he really leaned against a public announcement himself, but thought that everyone should express his view before any voting was done on it. stated that he thought market experiment in the Mr. Szymczak present environment was wise but that any public statement about it would because the Federal Open Market Committee wanted the be injudicious market to be affected by operations and not by any statement.
Mr. Johns expressed himself as being sympathetic to experiment though doubtful as to its efficacy. If the Committee did engage in experiment, he definitely thought that it had a responsibility for making some statement to inform the market and the public. Chairman Martin noted that there was really not much that a Federal Open Market Committee statement could add to the publicity that had already been given to the possibility of System experiment to influence interest rate paterns through recent Administration statements and press commentary. But Mr. Hayes doubted whether this disposed of the question of System statement or announcement because once the press knew that trans actions in the intermediate or longer area had actually transpired, there would be questions put to the Board and Reserve Banks that would have to be answered. To this, Chairman Martin replied that the risk in a statement was that it might be interpreted as making a commitment to continue indefinitely the operations in the long terms and as a commitment to support the whole market. Mr. Deming commented that, while favorable to experiment, he did hope that our instruction to the Manager of the Account would be in terms of amount of operations and not in terms of effect on market From the discussion that he had heard and despite interest rates. protestations to the contrary, he thought the Federal Open Market Com awfully close to a peg of market interest rates. In mittee was treading
view of all the risks of mininterpretation and misunderstanding, it would be most unwise in his view to issue any statement. Who does the Committee want to inform? he asked. Foreign financial observers? The System condition statement would do this. Market dealers? The Desk's go-arounds would do this. The public? In his opinion, the System had better have "no comment" for the public. Mr. Leach observed briefly that, in his judgment, the time was ripe for experiment, but that no statement should be issued since, as Mr. Szymczak had noted, we didn't know what to say. experiment, was of the opinion that a Mr. Bopp, while favoring public statement would be essential. Questions will be numerous, he said, and we can't afford not to respond to them. Furthermore, he stressed that the initial reaction to a given operation that reflected a change of procedure might differ significantly from the reaction to the same operation that was part of a standard procedure. Consequently, that significant conclusions could be drawn in a matter he did not feel of weeks. He felt also that no relevant conclusions could be drawn from a program that was launched with an announcement that it was experimental. The announcement that he had in mind would state that the new procedure was undertaken to stimulate the domestic economy without aggravating problems concerning our balance of payments. Chairman Martin again expressed reservations against a statement, that the Committee was on record in its continuing operating saying
procedures and policies, reaffirmed each year, as being prepared to change policies at any time. He also noted that the language of the Committee's directive adopted at each meeting was flexible enough to embrace transactions outside the short area. But Mr. Hayes interposed that it was not a question of a very elaborate statement; in fact, the less formal and elaborate it was the more satisfied he would be with it. Mr. Robertson stated that he would like to At this juncture, his views. In his opinion, he said, there would be justification present for experiment (a) if the Committee in its own view had doubts about the and reason of its existing position, or (b) if the Committee substance was threatened with dire political consequences if it were unable to bring forward empirical evidence favorable to its view. Neither of of experiment is present, he contended. The real danger to these bases the Committee, he felt, was retrogression. There is no reason why the Committee should feel that the burden of proof was on it rather than on its critics. regards the matter of public announcement, Mr. Robertson As expressed himself as strongly favoring some statement to press, saying was under way to deal in all areas of market. What that an experiment really disturbed him, he said, was that no one at the table thought but they were still be accomplished by the experiment, that much could willing to engage in it.
Mr. Leedy observed that the System confronts an unprecedented operating problem stemming out of balance-of-payments developments. Since the System has done all that it can to provide adequate reserves to the banking system to foster economic recovery, the fact that it has to make some adjustments now to deal with the balance-of-payments problem should meet with sympathetic reception. The System would be in a defensible position, as he saw it, and the System should not hesitate to defend itself. Mr. Shepardson stated that he felt the present policy had been a correct one. He recognized, however, the difficulty of proving its validity and that some experimentation might be necessary to demonstrate the effect, if any, of a different approach. Mention had been made of a cautious as compared with a bold approach. It seemed doubtful to him that a cautious approach would produce any measurable results and that if we were to experiment it should be done on the more extensive basis. Furthermore, it seemed to him that some statement was necessary if we were to avoid serious misunderstanding. At this point, Mr. Mills emphasized the great difficulties in compromising in a public statement the different points of view and shadings of opinion that had been expressed. Chairman Martin next asked Mr. Rouse how he thought sophisticated investors would respond to knowledge that the System was operating out side the short area, whether they would respond by testing System
position, and whether there was any hazard of such tests reaching avalanche volume. Mr. Rouse responded by saying that, in his opinion, there would be testing but that it would be cautious and not avalanche in character. Mr. Allen stated that he continued to have a worry about the press relations angle of the matter. Either the Presidents should have a common line in writing from which to answer press queries or there should be a spokesman for the Federal Open Market Committee to whom the queries should be referred. From his standpoint, the only answer he could now give to any queries would be: "I am not the spokesman for the Federal Open Market Committee." Mr. Szymczak observed that it was only necessary to admit that in intermediate- or longer-term securities were a departure transactions practice and to point to the country's balance of from established payments as justifying it. stage, Chairman Martin stated that he thought the At this discussion had proceeded far enough and if there was no further comment that members considered to be important, he would like to put the issue to a vote. There followed some roundtable discussion about the scope of the be given to the Federal Reserve Bank of New York for directive that might operations in the Account. The discussion consensus was that the provide adequate latitude for an effective testing. directive should
This was resolved to be an authority for change, between this date and the next meeting of the Committee to be held on March 7, 1961, in the Account's holdings of intermediate- and longer-term securities not to exceed $500 million and an authority to acquire securities of this category up to a maturity of 10 years. Question was raised of Mr. Rouse whether his plan would be first to probe in the shorter intermediate range and then later to probe longer, to which his answer was in the affirmative. Both Chairman Martin and Mr. Hayes individually emphasized that the authority was not intended to change monetary policy and that any transactions carried out need to be consistent with the general monetary policy expressed in the Committee's directive approved at the regular meeting just held. In the absence of the need for net additions to the the operations would involve, it was explained, either System portfolio, concurrent sales at the short end to offset purchases in the longer operations after an interval probably not longer area or offsetting than a few days. Chairman Martin polled the members of the Committee, Thereupon, the alternate members present, and the other Presidents present concerning their views of the Ad Hoc Subcommittee's recommendation and program of action proposed by Mr. Rouse. the Votes favoring the recommendation: Members Martin, Hayes, Balderston, Bopp, Fulton, Leedy, Mills, Shepardson, and Szymczak;
Alternate Members Irons, Leach, and Mangels; and nonmember Presidents Deming, Erickson, and Johns. Votes against the recommendation: Member Robertson and Alternate Member Allen. In voting against the recommendation, Mr. Robertson argued along the following lines, which he later submitted in written form: It was his opinion (1) that the established operating procedures and policies of the Committee were, in fact, the product of careful empirical and analytical study, (2) that they had proved in practice to be sound both in terms of monetary policy and in terms of fair dealing with the market, (3) that in deviating from its established policies Market Committee was asserting, without reason or the Federal Open conviction, that it made a critically incorrect judgment eight years pursued incorrect operating practices since, and (4) that ago and had present methods of operating in the market were relying on critics of the simplest theories of determination of market interest rates and making allegations on postulates having little if any basis in empirical fact. further stated that he, for one, believed that Mr. Robertson from established operating techniques would not con this departure influence market rates, and he gathered from the discussion structively that not many (if any) at the table were confident of such a result. of, however, was that the Committee was running What he was confident (a) of undermining domestic and foreign confidence in the serious risk
System's integrity and judgment, and the reliability of the new Administration's assertions of an intent to maintain the stability of the dollar, (b) of impairing the market for Government securities by placing dealers and investors in the position of having to guess which area of the market the Federal Reserve was going to enter and hence affect prices, and (c) of impeding Government financing by making it extremely difficult for the Treasury to determine objectively appropriate market rates for future intermediate- and long-term financing. It was his view that these risks were too large to run. He also felt that the reversal of such a fundamental position as this should not be taken without a public announcement of the nature Market Committee's future operating procedures and the of the Open there would be grave doubt concerning reasons therefor, for otherwise and extent of the System's operations in other than the the purpose area of the Government securities market with a consequent short-term on general public confidence, the diminution of which adverse effect can be ill afforded at this time. it to be inadvisable for the Committee In addition, he believed to abdicate its authority and responsibility by giving virtually to the Manager of the Open Market practically unlimited authority securities in any area of the market up Account (1) to buy and sell for the stated purpose of affecting rates to 10 years, as he saw fit, reserves from the banking from providing or withdrawing as distinguished
system, and (2) to engage in "swap" transactions--i.e., buying securities in one maturity area and selling in another--to effectuate changes in rates and hence marshal the System's portfolio of Government securities against market forces. Chairman Martin then put the question as to whether a statement should be issued explaining the departure from established operating procedures of the Federal Open Market Committee. From the roundtable discussion that had preceded and which then further took place, the majority sentiment, the Chairman thought, was clearly against such a statement and, without objection, he so ruled. In this concluding discussion, it was brought out and strongly emphasized that there was a real risk that this test might be frustrated if word got around the market that System purchases of longer terms were just an experiment. For the test to provide useful empirical evidence, the market needed to look upon the transactions as a change in Federal Open Market Committee practice. In concluding the discussion, Chairman Martin stated that the documentation that the Subcommittee had had before it would be distributed to all of the members and nonmember Presidents for their information. The meeting then adjourned. Secretary's Note: The Manager of the Open Market Account commenced open market operations in longer-term Government securities on the after noon of February 20, 1961. At that time he issued the following statement:
of the Chairman of the Open Market Committee At the direction of the Federal Reserve System, the following announcement was made today by the Manager of the System Open Market Account for the information of the public and all participants in the market for Government securities: "The System Open Market Account is purchasing in market U. S. Government notes and bonds of the open varying maturities, some of which will exceed 5 years. "Price quotations and offerings are being requested of all primary dealers in U. S. Government securities. Determination as to which offerings to purchase is being governed by the prices that most advantageous, i.e., the lowest prices. appear of all transactions for System account Net amounts be shown as usual in the condition statements will issued every Thursday. "During recent years transactions for the System in correction of disorderly markets, Account, except in short-term U. S. Government securities. have been made transactions in securities of longer Authority for granted by the Open Market Committee maturity has been System in the light of conditions of the Federal Reserve economy and in the have developed in the domestic that with other countries." U. S. balance of payments a statement, which The decision to issue reached at the reversed the understanding February 7 meeting, was made in the light of discussions between Chairman Martin, subsequent Mr. Rouse, Manager of the Vice Chairman Hayes, System Open Market Account, and Mr. Roosa, Secretary of the Treasury. The consider Under heavily in the decision was ation weighing most the desirability that all market participants at the same time that the Trading be informed transactions outside the Desk was engaging in short-term sector and that no market group usual in the operations by gain any trading advantage not known by the whole virtue of information market. Secretary
Also: Record of Policy Actions