April 18, 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, April 18, 1961, at 10:00 a.m. PRESENT: Mr. Hayes, Vice Chairman, presiding Mr. Allen Mr. Balderston Mr. Irons Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Swan Mr. Wayne Messrs. Ellis, Fulton, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Clay, Presidents of the Reserve Banks of Philadelphia, Atlanta, Federal and Kansas City, respectively Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Garvy, and Noyes, Associate Messrs. Einzig, Economists System Open Market Account Mr. Rouse, Manager, Assistant to the Board of Governors Mr. Molony, Adviser, Division of Research and Mr. Koch, Statistics, Board of Governors Adviser, Division of International Mr. Furth, Finance, Board of Governors Chairman, Board of Knipe, Consultant to the Mr. Governors Government Finance Section, Mr. Yager, Economist, Board of of Research and Statistics, Division Governors Office of the Special Assistant, Mr. Petersen, Secretary, Board of Governors Francis, First Vice Presidents Messrs. Heflin and Banks of Richmond and of the Federal Reserve St. Louis, respectively
Messrs. Eastburn, Hostetler, Baughman, Jones, Parsons, and Tow, Vice Presidents of the Federal Reserve Banks of Philadelphia, Cleveland, Chicago, St. Louis, Minneapolis, and Kansas City, respectively Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston Messrs. Holmes and Stone, Managers, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Assistant Cashier, Federal Reserve Bank of Atlanta Prior to this meeting there had been distributed to the members of the Committee the revised drafts of minutes of the Committee meetings on March 7 and 28, 1961. In presenting the minutes for approval by the Committee, Mr. Hayes said that, while he did not want to labor the matter, he had suggested upon circulation of the preliminary draft that the minutes of the March 7, 1961, meeting be revised slightly at two places. However, his suggestions were not incorporated in the revised draft because they involved some change in substance, and he wished to bring them to the Committee's attention at this time. On page 4, last paragraph, Mr. Hayes noted, the minutes read: it was the suggestion of the (Ad Hoc) Subcommittee that con "Therefore, sideration of possible changes in the operating policy statements be that everyone might have an opportunity to review and tabled in order of the material compiled by the Subcommittee." On study carefully all page 8, paragraph 3, they read: "There being no further comments, it was agreed to table the consideration of the possible changes in the operating policy statements." * Fourth sentence.
Mr. Hayes commented that this language seemed to carry the clear implication that the Committee had not changed the operating policy state ments, whereas he thought that that was at least doubtful. Accordingly, he had suggested that the preliminary draft be revised to state that the question whether to renew the existing statements of operating policy or make changes therein had been tabled. Mr. Balderston stated that if the change in wording Mr. Hayes had suggested would not alter in substance the meaning of the original word ing in the preliminary draft of minutes, he (Mr. Balderston) would not wish to consume the time of the Committee by interposing objection. On other hand, if the proposed changes were changes of substance--and the Mr. Hayes that they were so intended--then he would he understood from was desirable. As he understood it, the question feel that clarification the Committee had agreed at the March 7 meeting to table the was whether (2) reviewing the operating policy statements. question of (1) renewing or "renew" was used, then it might be construed that in the If the word of the Committee to renew the action on the part absence of affirmative statements had been abandoned. However, operating policy statements, those imply that, pending further word was "review," that would if the proper part of the Committee, the statements remained in force, action on the such as that approved at the course to any special authorization subject of permitting operations in at each meeting since then February 7 meeting and securities as well as "swap" transactions. longer-term Government
In reply to a question by Mr. Robertson, Mr. Hayes said that specifically his suggestion had been to substitute the following for para graph 3 on page 8: "There being no further comments, it was agreed to table the consideration of the question whether to renew the existing operating policy statements or to make changes therein." The suggested change on page 4 was of a similar nature. Mr. Hayes went on to say that, as he had indicated at the outset, he would be content to have his observations recorded in the minutes of today's meeting. While he felt that there was a substantive question in volved, he doubted whether it could be resolved at this meeting. Mr. Allen suggested that inclusion of Mr. Hayes' comments in the minutes of today's meeting would afford the Committee members an opportunity to review the matter. Personally, he would prefer to look at the suggested changes in the context of the minutes as a whole before deciding whether any change should be made in the March 7 minutes. whether it was the thought of Mr. Hayes that Question was raised the March 7 minutes would be deferred, and Mr. Hayes said that approval of approval of the minutes subject to the he would have no objection to the he had made. Mr. Balderston noted that it inclusion of the comments that assistance to the Committee members in reviewing the matter if might be of memorandum were furnished by Mr. Sherman, following which Mr. Shepardson a question whether it would be appropriate to approve the minutes raised the at this time if it was contemplated that they would be subject to further
consideration. Mr. Sherman commented, in this regard, that a decision to make changes in the minutes subsequent to their approval would not be without precedent. In further discussion, Governor Mills suggested that perhaps too much importance was being attached to the matter. As he understood it, in effect the operating policy statements were being continued, subject to the deviations occasioned by the special authorization to conduct operations in longer-term Government securities, pending such time as the Committee made a decision with respect to such recommendations for changes in the operating policy statements as might result from the study currently being made by the Ad Hoc Subcommittee. Mr. Hayes agreed that from a practical standpoint no obstacle to the current program of operations was presented. He then reiterated that he would be content to approve the minutes of the March 7 meeting and merely to have his observations recorded in the minutes of today's meeting. Mr. Hayes inquired whether there were additional comments, and Mr. Wayne said it was his understanding that what the Committee had done was to continue the operating policy statements in effect, subject to the deviations inherent in the special authorization, which was subsequently renewed for the period until the following meeting. The Committee had of any report from the Ad Hoc Subcommittee that would tabled consideration lead to reconsideration of the operating policy statements, and thus had continued the statements in effect. He felt that the Committee could
approve the March 7 minutes, with a notation in today's minutes of the views that had been expressed, and not do violence to what actually transpired at the March 7 meeting. Mr. Shepardson commented that he had not meant to infer by his previous question that he would not be willing to approve the March 7 minutes as they stood. He had only wished to raise the question of the appropriateness of approving those minutes if it was contemplated that they might be changed later. Mr. Balderston said that the point stated by Mr. Mills was precisely the point that he (Mr. Balderston) had attempted to bring out earlier. How ever, he felt that the statement of Mr. Mills and his own observations were somewhat at variance with the point originally made by Mr. Hayes. Mr. Robertson suggested that it was important only that the record show that the operating policy statements had been continued until changed, and that possible changes therein were under consideration. in this regard, that he felt the Committee, in Mr. Hayes commented, granting the special authorization covering operations in longer-term securities, had changed the operating policy statements so radically, not in which operations were authorized but also as to only as to maturities misleading for the minutes to convey the swap transactions, that it was continued unchanged because consideration impression that the statements of the statements, and possible changes in them, was tabled. according to his understanding, the Mr. Robertson then said that, had authorized an in granting the special authorization, Committee,
exception to the operating policy statements. This had been done within the context of those statements, which specify that such exceptions may be made. It was in that posture that he thought the statements now stood. Consequently, he would concur in the suggestion that the March 7 minutes be allowed to stand in their present form, with the statement of Mr. Hayes included in today's minutes. Mr. Swan commented that the changes in the minutes that had been suggested by Mr. Hayes appeared to carry the implication that the Com mittee presently had in effect nothing except the policy directive and the special authorization covering transactions in longer-term securities. He did not think that that was the case, so he would prefer to let the minutes stand as drafted. suggested that the March 7 minutes be approved, with Mr. Hayes then foregoing discussion included in today's minutes. This contemplated the wished to look into the matter at greater length, or to that if anyone pursue it further, he could do so. Mr. Hayes also suggested that anyone the matter might wish to study the language on page 52 of the reviewing draft minutes for the meeting on March 28. Thereupon, upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on March 7 and March 28, 1961, were approved, with the understanding that the comments of Mr. Hayes regarding the March 7 minutes would be incorporated in the minutes of today's meeting.
Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period March 28 through April 12, 1961, and a supplemental report covering the period April 13 through April 17, 1961. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Rouse made the following comments: A good degree of ease in the bank reserve picture has been maintained while at the same time unduly low levels of short term rates have been avoided. The demand for short-term issues, especially Treasury bills, has been notably strong in the past week, the demand coming to a large extent from nonbank sources. on the short-term rate was reflected in The underlying pressure yesterday's Treasury bill auction when an average rate of 2.29 per cent was established for the three-month Treasury bill and rate of about 2.46 per cent for the six-month bill. an average were about 10 basis points below the rates estab These rates lished in the auction three weeks ago and 20 basis points below Bidding was particularly aggressive for the six two weeks ago. offering, which was for only $400 million, and it ap month bill many banks were unsuccessful in their customer bids. peared that awards small and concentrated, further pressure on With dealer be surprising. If this buying continues, as rates would not even greater System efforts maybe needed to pre seems likely, rates from declining further to levels which vent short-term of short funds. Activity in foreign could inspire new outflows York Bank continues heavy, reflecting the accounts at the New activity in the foreign exchange market. continued issues have not moved much, but there Rates on longer-term evidence that borrowers, both private and public, is mounting these levels; also, that funds are are willing to commit at capital market to meet this demand flowing into the long-term of some lenders to hold back for some despite the inclination is not surprising in view of the what higher rates, which business conditions. Although some recent prospects for better flotations have moved slowly and there is a fairly capital of unsold municipal issues, there is no indi sizable overhang blockage in this market. It is likely that cation of a serious
some of the stickiness arises from the offering of $300 million United States Steel Corporation debentures today or tomorrow which should give a good clue to the capital market. Initial indications were that it would move well at a rate around 4.55-4.60 per cent. It now appears that the issue, due in 1986, will carry a coupon of 4-1/2 per cent and will be reof fered at 99-1/4 to yield 4.55 per cent. A successful deal should help to clear up the rest of the market, possibly with some price adjustment. Our operations in the longer-term market have progressed smoothly since the last meeting. Some dealers continue to talk about the one-sided artificial state of the long-term market, but seem to accept our buying as a "fact of life." Statistics on dealer volume indicate a substantial volume of trading away from the System, from which we conclude that comments of that kind cannot be given too much weight. The publication of dealer statistics, plans for which were reported to the Committee at the March 7 meeting, got under way since we last met without any further complications. Some of the dealers have already stated that they have found the reports The press has not yet made as much use of them to be useful. as we hope it ultimately will. The Treasury will be coming to market shortly with its May maturities of $7,752 million, of which financing to refund total Open Market Account. The million is held by the System $2,754 Treasury is expected to announce today that holders of the matur the Federal Reserve System) will not be ing issues (excluding rights to the new securities, which should work given pre-emptive out well in the current market atmosphere. The auction of $2 billion of one-year bills last Wednesday was quite satisfactory. stockpile this issue and the Treas The dealers seemed anxious to ury received a satisfactory rate. asked what weight Mr. Rouse would put on the following Mr. Mills bill yields were under pressure in a situation where Treasury two factors had been since the last meeting. First, Fed almost constantly, as they rates well below the discount rate. eral funds were freely available at abrupt increase in dealer positions, Second, there had been a rather especially in bills.
Mr. Rouse replied that he thought a good deal of weight should be given the first factor. The low rate on Federal funds encouraged the banks to invest in bills rather than to sell Federal funds. On the second point, while there had been a steady increase in dealer positions, he was not sure how much weight should be given to that factor. Mr. Rouse added that an attempt had been made to find out what had been done with the pro ceeds from sales of longer-term Government securities. It appeared that they were going largely into municipals and corporate issues rather than Governments. There had not been much net change in the into short-term free reserve situation; one bank apparently was selling and another buy this did not seem to be a factor of great consequence. ing. In substance, Thereupon, upon motion duly made and seconded, the open market trans actions during the period March 28 through April 17, 1961, were approved, ratified, and confirmed. statement with regard to economic Mr. Noyes made the following developments: about the economic situation is now centered around Concern related questions: First, how vigorous will the recovery, two which seems clearly underway, turn out to be; and, second, how is it to reverses which might come in the next few vulnerable months? would seem to support the widely held So far, the facts be closer to the pattern of 1954 view that this upturn will than 1958. improvement in business in March was certainly moderateThe activity in some sectors continued to fall off a little. in fact, showed some real improvement. Personal in However, key factors up $3-1/2 billion; housing starts were up for the third come was to a seasonally adjusted annual rate of consecutive month, stocks are not improved, and now Automobile sales 1,336,000.
abnormally large for this time of the year. Recently unemploy ment claims have declined more than seasonally, and there are other indications of moderate improvement in the labor market. Exports appear to be holding at unusually high levels. The limited number of leading indicators for which March figures are available are up again, and final data confirm the strong February showing of the leading series. Taken altogether, we can say that we now have some real gains in output and employment to add to anticipatory and ex pectational evidence we had a month ago. So far, however, these signs do not suggest anything more than an orderly and healthy recovery, with one exception. Such a pattern of mod erate recover; is hard to reconcile with the large further rise that has occurred in common stock prices. For all its erratic and sometimes apparently irrational behavior, the stock market reflects the current appraisal of economic prospects by an important and influential segment of the business an, financial community. It is difficult to justify common stock purchases at present prices on any assump tion other than a rapid and pervasive recovery. Yet these purchases are being made in large volume, not only by shoe string speculators but by large, responsible financial insti tutions. This leads us directly to the second of the two questions which I raised at the outset--how vulnerable is the recovery to such phenomena as the kind of break that might occur in stock prices if investor sentiment shifted? Historically, recoveries appear to be very hardy. While in each recovery there has been talk of the danger of its being "nipped in the bud" in its early stages, there does not seem to be any instance, in modern times, when this has actually happened. There were two fairly sharp breaks in the upward trend of stock prices in 1955, which had no noticeable effect on the pace of recovery in that year. The erratic movement prices around the turn of the year probably contribu of stock uncertainty and the hesitation in the economy in early ted to for more had been underway was after recovery 195 , but this than a year. that recoveries in the past have shown a In pointing out surprising capacity to weather quite large reactions in stock discouragements, I do not mean prices and similar transitory should be encouraged or to suggest that such developments No one can say where the point even viewed with equanimity. no doubt that stock prices could be bid may be, but there is the reaction could, in turn, be up to a level from which to do serious damage to orderly recovery. Just large enough
as it has been important to take into account the international repercussions of a depressed short-term rate it seems to me that it is now important to consider the possible ramifications in the equity markets of any aggressive action to depress long term rates. In fact, one might raise grave question as to whether any action which would have the effect of discouraging investment in fixed income claims, such as bonds and mortgagesand encouraging further the current boom in the stock marketcould be regarded as constructive in the present circumstances. Quite aside from the broader question of whether opera tions by the Federal Reserve in longer maturities can and should be used to promote recovery at certain stages of the cycle, this seems to be a time, in terms of the over-all economic situation, when it is singularly appropriate for general credit policy to concentrate on providing the banking system with the reserves needed to support orderly recovery and for the System to re frain from doing anything which might accentuate the situation in equity markets that already poses a threat to sustained re covery. In my judgment, any attempt to literally depress the rate of interest, in any maturity area, could lead to this latter development. On the other hand, any indication that the System might be reluctant to supply the reserves needed for seasonal expansion and normal growth in bank credit and money could be equally damaging, since it would lead to wide spread expectations of increasing rates and a consequent un willingness to invest in longer-term fixed claims at current rates. This seems to be clearly one of the times when a steadying influence from monetary policy, rather than a shift in either direction, would make the greatest possible contri bution. Mr. Allen noted that at the outset of his report Mr. Noyes had indicated that the current recovery might be closer to the pattern of 1954 than 1958. He inquired whether Mr. Noyes had in mind the 1954 recovery as it continued through 1955. Mr. Noyes replied that he would not want to go that far at this stage. In his remarks he was speaking more of the initial stages of re covery. It was too early to tell whether the present recovery would
proceed into the same kind of vigorous movement that developed in late 1954 and 1955. In reply to a question from Mr. Wayne, Mr. Noyes said that the latest available unemployment figures were for early March, when the ratio of unemployed to the total labor force was 6.9 per cent, sub stantially unchanged from earlier months. The reference in his statement was to unemployment claims, which had shown a more than seasonal decrease in late March and early April. Mr. Thomas presented substantially the following statement on the credit situation: Since mid-March, there have been no significant changes either in the level or in the structure of interest rates; most rates have generally remained a little above the lowest levels and well below the highest levels of this year. Total loans and investments at banks have declined, perhaps somewhat more than is usual in that period. Aided, however, by a large re duction in Treasury deposits, the private money supply increased in the latter part of March and has been maintained at the higher then; time deposits have continued to expand. New level reached corporate capital issues scheduled for April are in exceptionally heavy volume, and State and local government offerings continue even after withdrawal of one large issue. moderately large, Common stock prices have continued to rise to new high levels, with exceptionally active trading. out of U. S. monetary stocks have Gold movements in or There have been large shifts in foreign hold been negligible. appears to have been some in ings of dollar assets, and there holdings. Some of these changes reflect the crease in official which followed the German and effects of pressure on sterling, and involved massive movements of Netherlands revaluations been to a considerable extent absorbed by cen funds that have and governmental cooperative cushioning operations. tral bank Member bank required reserves did not show the decrease in by seasonal projections in late March and early April, dicated in U. S. Government deposits was as the substantial decline by a greater than seasonal increase in other counterbalanced
4/18/6 -14 deposits. Reserves have been supplied on balance by various market factors, with wide weekly fluctuations, partly offset by shifts in Federal Reserve holdings of securities. These holdings have been reduced on balance since mid-March by a net amount of over $500 million. In addition to $260 million of repurchase contracts made and terminated, operations included gross sales and redemptions of about $850 million of bills and of other short-term issues and gross purchases of $250 million about equally divided between bills and longer $590 million, term coupon issues. Free reserves have fluctuated between weekly averages of and $530 million, with an average of close to $700 $430 million million indicated for this week, when float is showing the usual mid-month rise and liquidity needs are large. The free reserve figure for the current week could be reduced somewhat by open market operations if the System sells today or tomorrow. In the next three weeks reserve availability will be substantially reduced by various market factors, and rather large System pur chases of securities will be necessary. Cyclical trends in the supply and use of credit revealed by newly-constructed seasonally-adjusted flow-of-funds data have considerable significance for monetary policy determina tion at this strategic stage. Total funds raised in credit markets have declined sharply and almost without and equity since the third quarter of 1959. In the first interruption quarter of 1961, according to preliminary estimates, this total, rate of $32 billion, was about half the exceptionally at an annual reached in 1959. The decline in the total continued high rate into 1961 notwithstanding a seasonally-adjusted upturn in Fed eral Government borrowing. Long-term funds raised by borrowers other than the Federal after declining sharply from mid-1959 to the second Government, have shown little further decline in the past quarter of 1960, three quarters, but for the past two quarters taken together than in any six-month period since 1956. they have totaled less The sharpest decline in the past year appears to have occurred in the first quarter of 1961 showed in short-term credit, which raised for the first time since the practically no net amount third quarter of 1958. This reflected seasonally-adjusted de consumer credit and in bank loans to business, offset creases in additions to security loans and other loans. A small by moderate short-term credit demands seems typical of periods volume of recession troughs, according to 1958 and 1954 experience. around The principal lenders or investors of funds recently have been nonbank financial institutions and commercial banks. Non financial sectors--principally consumers and businesses--have
liquidated holdings of securities on balance but have substan tially increased their holdings of fixed-value claims, principally savings and loan shares and time deposits, thus passing available funds through financial institutions. This is in contrast to their behavior in 1959, when high interest yields attracted heavy buying of securities. Demand deposits have also risen on balance since mid-1960, showing an annual rate of increase of about 4 per cent. If economic recovery that now seems to have been resumed is to continue, much larger amounts of credit will be needed than have been recently obtained. Records of the past two recessions show that resumption of credit expansion was initiated princi by increased borrowing of long-term funds, principally by pally the Federal Government but also by other borrowers, and that banks were important initial lenders. The way it worked was something like this: The Federal Reserve was active in supplying reserves In the absence of short-term credit demands, the banks to banks. invested in securities. Long-term,as well as short-term, inter est rates declined, and long-term borrowers--governments and advantage of the favorable bond market to re corporations--took fund or fund their indebtedness or to obtain new funds. Bank the money supply increased before the upturn began, al credit and was not until later in the recovery advance that short though it term borrowing demands expanded. Owing to the balance-of-payments situation of this country desire to avoid reductions in short-term in and the consequent have not been as plentifully supplied terest rates, reserves in 1954 and 1958 and the discount rate has been this time as that is being raised nowkept at a higher level. The question publicly as well as privately--is whether this sort of policy the credit expansion that an adequate stimulus to will provide However the Committee's di is needed for economic recovery. it is to be expected that an important rective may be worded, policy in the next year will be to task of Federal Reserve of money needed to foster recovery. assure the availability The Federal Government will be a net borrower, on a at least the next five quarters. adjusted basis, for seasonally be as large as in 1958 and 1959 and it will Borrowing may not in the long-term area, at least in probably not be as heavy as in those years. Thus short-term credit the early stages, this time, particularly in might increase somewhat earlier position of banks. Long-term view of the lessened liquidity however, will be essential at borrowing by the Government, serious debt-management diffi some stage in order to avoid culties in the future. in housing starts and developments The recent increase the possibility of some in the mortgage market point to in although perhaps there crease in the supply of mortgages,
also the expansion will not be as great as in 1958-59. Long term offerings by State and local governments are likely to continue as large as the availability of funds will permit, and the recent increase in corporate offerings may be a pre cursor of greater activity in that area. How much bank credit should be supplied to finance re covery? It should be at least enough to provide for cash balances that will be wanted and perhaps a little more to stimulate investment. Money supply needs are difficult to measure. Ever since the war, money supply has not expanded as much as national product, but the present ratio--at about 28 per cent--is close to the low level of the 1920's. Can any further downward drift be expected? Most current projections indicate that GNP might expand to around $530 billion by the end of 1961 or early 1962, an increase of 6 per cent from the current level but still not adequate for complete recovery. Similar increases occurred in about the same length of time in 1954 and 1958 and were accompanied by increases of 3 or 4 per cent in the money supply. Will such a relationship be adequate this time? An increase of 6 per cent in the money supply would amount to over $8 billion. Assuming it all occurred in the deposit component, divided between member and nonmember banks present ratio, this would require close to $1 billion in the reserves by late this year or early 1962, or about additional $100 million a month. Allowing for the possibility that of recovery will not be so large, or for some monetary needs reduction in free reserves as expansion occurs, perhaps an average of $70 million a month would suffice. likely that the gold outflow will not be resumed It seems on any significant scale. The seasonal increases in required demands will require large amounts of reserves and in currency Federal Reserve credit later in the year, but not much during or six months. In the process of offsetting the the next five variations in factors affecting reserves, net wide temporary additions to Federal Reserve credit of at least $60 or $70 mil be made available in the course of the next lion a month should amounts will be needed in the last few months. Much larger three or four months of the year. extent can additional reserves be supplied without To what rates or otherwise inducing a causing a decline in interest Although pressure of sensitive resumption of the gold outflow? from the dollar to the pound, the capital movements has shifted situation is by no means settled. The Germans are evidently will tend to keep down in to follow policies that endeavoring terest rates in their markets and also undertaking to make
payments both to the United Kingdom and to this country that will help to alleviate balance-of-payments difficulties. The export and import experience of this country has been remarkably favorable. Nevertheless the situation has precarious possibilities. The very large volume of funds that moved out of London and the counterbalancing official holdings of dollars and sterling pre sent threats to the reserves of the key currency countries. Continued high rates of economic activity in Western Europe and Japan and the delicate balance-of-payments situation of the United Kingdom will tend to limit any decline in interest rates abroad. Recovery in this country will probably result in an in crease in our imports and a narrowing of our favorable trade bal ance. There seems to be little prospect for much, if any, re duction in our foreign aid and military payments. Maintenance of a balanced position requires that the capital flight not be resumed. Credit demands and expectations incidental to economic re covery, however, might be expected to reduce pressures toward declining interest rates. It should now be possible to embark upon a program of supplying additional reserves for credit and monetary expansion without the risk of reducing interest rates. The more serious danger than the balance-of-payments one, may failure to make adequate reserves available will unduly be that retard recovery in this country. Interest rates will be largely determined by the strength of credit demands here and abroad; the delicate task of monetary policy will be to meet the credit demands of the domestic economy without inducing a flow of credit abroad. Economic recovery in this country should make that task easier than it has been. the following statement of his views on the Mr. Hayes presented business outlook and credit policy: evidence is increasingly strong that the The statistical been reached and that an upturn is bottom of the recession has occurring. Business and consumer senti either close or actually support the same conclusion. On the other hand, the ment seem to provide any basis for a firm judgment as to statistics do not of the recovery; and as yet there are no indica the strength a vigorous upturn is in the making. Even if the tions that were to be sharper than now expected, the gap be improvement tween present total employment and a moderately full employment could not be closed for a long time. of the labor force
The business improvement has shown itself in a wide variety of statistical series, such as personal income; retail and manu facturers' sales; new orders; automobile sales, production and inventories; steel production; average hours worked in industry; housing starts; and merchandise exports. Also, it was of in terest to note that eight out of nine of the National Bureau's "leading indicators" were rising in February. As for bank credit, according to preliminary weekly re porting member bank figures for March, business loans showed a more or less normal expansion, and, in contrast with earlier expectations, tax borrowing was heavy. The relatively weak per formance of total loans may be attributed in good part to the rather sharp contraction in loans to security dealers and fi nance companies, which in turn can be explained by special fac tors affecting these areas. The timing of Treasury redemptions and new financing was largely responsible for a drop in invest ments and in total bank credit. The significance of corporate behavior during the tax period this year is not clear, but it may well be that medium and smaller sized corporations, which are probably the more important element in tax borrowing, were not as liquid as had previously been thought; whereas larger were apparently sufficiently liquid to be able to corporations selling of Goverrment securities as has avoid a substantial in the comparable tax period in most recent years. been customary to observe that the money supply rose sub It is gratifying the drop in total bank credit; and stantially in March, despite that the rise in the money supply between the second half of and the second half of March has been at the annual December 4 per cent, as against only about 1-1/2 per cent from rate of December. Money supply plus time depositslate June to late assets--have behaved much better and also total nonbank liquid than in the two previous recessions and reached new highs at February. During the last half of 1961 the money the end of impetus from the Treas an unusually strong supply should receive heavy prospective cash borrowing program. It ury's relatively gratifying to note various signs that capital funds is also more freely into the corporate, munici have been flowing a little pal, and mortgage markets. the recent performance of the stock I feel some concern over activity concentrated particularly in low market, with very high on stock market credit in March priced speculative issues. Figures area would bear close watch yet available, but this whole are not effects of a sharp reversal in view of the possible adverse ing, in the stock market boom. Turning to policy, I think the business situation clearly need for a continued policy of monetary ease. The suggests the
very fact that we have, fortunately, avoided a flooding of reserves and extremely low short-term interest rates during the recession means that the banks are on a rather firmer rein than during previous recessions and that we can therefore well afford a policy of continued ease. At the same time, the international position of the dollar is in very delicate balance. We are all, of course, gratified by the favorable develop ment of our merchandise trade and some other elements in the balance of payments. We should not forget,however, that the improvement in the statistical situation as well as in foreign confidence in the dollar may be attributed in good part to the development of special technical arrangements, as well as to more effective cooperation among central banks. Exposed as I am to continuous contacts with foreign exchange markets and with the thinking of foreign bankers, businessmen, and government of ficials, I continue to be impressed by the fact that the dollarto defend it--continues on trial. While it is and our ability changes in the gold stock in the true that we had no significant last few weeks, it is equally true that the dollar remains at the most international exchange markets. Under these circum floor on imperative that short-term interest rates be stances, it remains range or even a bit higher. I had this point held in the present during my conversations in Basle with brought home to me strongly central bankers who have tried very hard, and are a number of interest rate differentials by bringing still trying, to reduce even though purely domestic considerations their own rates down, would suggest the exact opposite course. supplied through open market When additional reserves are next three weeks, I would hope that they operations over the through purchase of longer ma could be injected, where possible, reserves are not needed, upward turities; and that when additional through sales of short on short rates may be exerted pressure purchases of longer maturities. term securities, and equivalent be given ample leeway to to me that the Manager should It seems maintaining roughly the same de carry out such a program while that has prevailed in recent weeks. gree of monetary ease policy on reserves and in the continuation of existing With be left as it is. I also the discount rate should terest rates, left unchanged; and that any the directive should be believe that probably await both more change in the directive should future to the vigor of the business recovery and definite indications as substantive change of policy. a ahead, in the event that the economy Looking a little further political sources for lower appreciably, pressure from does expand time that the capital mar may continue at the same interest rates pressures on rates. With are creating new upward kets themselves
the Federal Government now expected to come to market more often, and for substantial amounts, together with the prospect of growing corporate and municipal demands for funds, interest rates could easily move up significantly in the next few months. The System should aim, in these circumstances, at moderating interest rate increases until business recovery has made sufficient headway; and we should work to prevent the upward ratcheting of interest rates based on expectations alone. Such a policy objective would tend to keep interest rates more closely consistent with the underlying forces of supply and demand and the basic condition of the economy. With respect to the possibility of higher margin requirements, there are good arguments on both sides of the question. A token increase of, say, 5 per cent, might be worth considering as a cau tionary signal and a logical follow-up to the warning given to the market by Mr. Funston a few weeks ago. On the other hand, the re cent pattern of stock market credit does not seem to call clearly for a change in margins, even though March may show a larger in crease in credit than recent months, and there may be some question whether a symbolic change of this kind in margin requirements would be within the spirit of the law. There is also some risk that a rise in margin requirements might reinforce expectational influences tending to push up interest rates. I don't know just what the right answer is, but it would seem useful for the Board to give the matter careful consideration. Mr. Francis reported that Eighth District business developments ap peared to have paralleled those in the nation quite closely. Improvement was seen in some of the indicators, while weakness continued in others. Steel production had been reflecting improvement each month; in April to date, weekly average output was 19 per cent over January, compared with a of 15 per cent. Department store sales in March were above gain nationally and were at about the May 1960 level. the average of the previous four months, was relatively strong. Cash farm receipts had The agricultural situation higher this year than during the comparable period of been substantially 1960; in the first two months of the current year they were 16 per cent above the year-ago level and about 8 per cent above 1959. The District
was experiencing a rather late spring and some concern had been expressed on that account, but there was adequate moisture and prospects were good. On the weaker side, residential construction contract awards during January and February were 15 per cent below the same period in 1960, compared with a 4 per cent decline nationally. The District employment situation continued to be sticky, with nonagricultural employment in the major metropolitan areas, combined, having been down in February not only from the all-time high but also from the year-ago level. The largest declines were in Louisville and St. Louis, and little Rock was the only major area showing even a slight increase in total employment over last year's level. Unemployment was at a high level in all of the major labor markets, with three of the five major areas being classified in March as areas of substantial labor surplus. Insured unemployment edged down in March and early April, but was substantially higher than at this time last year or in 1959. However, the present unemployment level was under that of April 1958 in all parts of the District except St. Louis, where the automobile industry affected the situation. In frequent layoffs in the same as at the trough of St. Louis, unemployment was approximately the 1957-58 recession period. Turning to the banking situation in the District, Mr. Francis in March, while total credit said that total deposits were down slightly was virtually unchanged during that at member banks, seasonally adjusted, seasonally adjusted, for the first quarter of the month. Total credit, year increased at an annual rate of about 7.6 per cent. Borrowing current
from the Reserve Bank was quite modest; only one bank, in the Memphis cotton market, was at the discount window regularly. Mr. Bryan presented substantially the following statement: It is increasingly clear that the economy is at least in the bottoming-out stage of its current recession. Indeed, my personal opinion is that the direction of the economy has already turned. The principal question now facing us is, how do we manage the re serve position of the banking system in a recovery? During a considerable part of last year, I was saying that we were permitting the total reserves of the banking system to diminish much too far below any proper approach to a long-term trend, judged either historically or upon a reasoned approach to the growth needs of the economy. At our meeting three weeks ago, in indicating a considerable sympathy with the point of view Mr. Allen had suggested, I was making precisely the same point fundamentally, but in response to an opposite set of facts. That is, I was trying to say that in the recovery phase of the business cycle we should strive to manage the reserve position of the banking system with a great deal more precision, and with a steadier hand, so to speak, than we have in past business cycles. The record of our handling of reserves in past business cycles is that we have permitted reserves to fall far below a trend line, whether we judged the trend on the basis of historicity or rationale; then we have overstayed our position of great ease, so that total reserves have gone far above any reasonable trend. In order that we may refresh our minds on this point I am presenting again a postwar chart of reserves. 1/ However, at our last meeting the same point was implicit in the chart presented by Mr, Balderston. Clear in that chart were the tremendous fluctuations in the free reserve position of the banking system--half a billion plus to half a billion minus, often in the space of a few months. Likewise clear in the chart presented by Mr. Balderston was the jarring effect of these large movements on the growth rate in the money supply, effects that cannot, in my opinion, be justified on any basis related to long-run considerations: the need of a growing economy, growing both in population and transactions, for a growing money supply. As I view the record, we have tended to overstay our position of tightness and to be too tight, and then to overstay our position of ease and to be too easy. I am not particularly critical of the record because we have been going through a decade of massive readjustments in response to the excess liquidity produced by the 1/ A copy of the chart is attached to these minutes.
war years and massive readjustments in interest rates throughout the whole scale from short to long. I do not believe that anyone would have the prescience necessary to do much better than we have done. At the same time, I am saying that from here on we need a steadier hand at the wheel. We will have zigs and zags, of course; but I believe that we will be wise if we make every endeavor to dampen down the amplitude of the zigs and the zags. What has happened in the past, as I see it, is that by overstaying a posture of great ease, we have been compelled, finally, to clamp down hard, just in time to get credit for producing the ensuing recession. Be that as it may, no such argument is needed for the point I am making. The amplitude of the fluctuations in the reserve position of the banking system, as our Chairman and others of my colleagues have heretofore noted, has caused both short and long rates to fluctuate in an even greater amplitude. They have behaved like a bronco with a bee in his ear. Partly, that has been attributable to what I have massive readjustment of rates in the postwar period. called the But can anyone doubt that the result has in some measure been by our own rather unsteady handling of banking reserves? produced Can anyone doubt that the amplitude of these fluctuations has had influence on the intermediate and long market? Can a debilitating anyone doubt that the failure of the long market to respond to the of ease in the degree that we would have System's recent posture the precision of arbitrage and timing that we might liked, and with expected, is in some part attributable to the third-degree have burns that the long investor has thrice suffered in recent years? now see the situation, we are confronted by certain As I major considerations: The total reserve figure is back practicallyshy a mere couple of hundred million--to its long term trend line. We may expect, whether fast or slow, some influ ence of business recovery in expanding bank credit; and, in any event, we are rapidly approaching the of the calendar year in which demands second half for bank credit will increase. We will have large Government borrowing in the second half of this calendar year, some part of provided for by an expansion of bank which must be credit, which in turn must be in some part supported by an increase of bank reserves. Our present posture of ease has produced a reasonable adjustment in long rates, considering all circumstances, and is now producing an adjust ment in mortgage rates.
Our actions have produced large excess reserves; large free reserves; and the liquidity of the banking system has been greatly improved, as can be attested by a single figure, the prodigious increase over the past year of nonborrowed reserves, an increase extend ing far beyond any seasonal considerations; and non banking liquidity has also increased. In the light of these circumstances, I believe we will mis handle the situation if we force additional reserve ease on the banking system. Indeed, speaking in terms of total reserves and of a period covering several months, I can presently see no cause whatever for doing more than adjusting to seasonal variations with, perhaps, a slight growth element; but I wish here to recall that the growth factor on any trend basis would certainly not be over a month, a minuscule figure. In terms of free reserves $50 million and of the next three weeks, I notice that the blue book gives us a free reserve base of $492 million for what is called the present base period--the daily average for the three weeks ending April 12. I cannot but believe that this figure is ample, and, if I were to give an instruction in terms of free reserves, I could see no reason for advocating, speaking on a daily average basis for the next three weeks, any increase in free reserves as measured by the $492--say $500--million of the present base period. The fact is. I think we must be alert in the coming weeks to any indications that the level of free reserves should be adjusted downward. If we are not so alert, we may again find ourselves being reserve figure. All we need to do is to keep on misled by the free level of free reserves through a period of expanding with a constant credit demands--each time required reserves go up, supplying the amounts necessary to maintain the level of free reservesadditional run the total reserve figure and the money supply figure and we can out through the roof. business in the Third District seemed to have Mr. Bopp said that declined as far as it was going to in this recession. However, there was no evidence of a vigorous rebound. Steel production had increased, but not sensationally; construction, particularly of homes, showed little improvement; carloadings were rising, but remained low; all labor force indicators pointed to a continuance of unemployment at nearly the highest period; and department store sales, after a good levels of the postwar
start, had dropped below 1960 totals. Manufacturers still maintained they would spend less for plant and equipment this year than in 1960. The banking picture did not yet indicate any upturn in business activity. Loans had been relatively stable since early February, and bank reserve positions appeared to be fairly easy. Reserve city banks had not borrowed at the discount window and actually had been lending some Federal funds. Their basic reserve position was about in balance. Some country banks had been borrowing for special localized reasons. In his view. Mr. Bopp said, policy should remain the same as it had been for the past several weeks. Developments and prospects in the economy did not justify any departure from that position. If any departure were to occur inadvertently, he would prefer that it be on the side of In view of occasional congestion in capital markets and more ease. cessation of the gold outflow, he felt that a slightly greater degree of ease could be permitted with safety. If this were to mean rather of free reserves or somewhat lower bill rates from plentiful amounts time to time, he would not be disturbed. But essentially he recommended from present policies and no change in the discount rate. no change some more fundamental decision concerning the directive, Pending in the wording of the present directive would Mr. Bopp felt that a change it had been suggested that recog be desirable. In the past few meetings, period. In his view, such a be given to the start of the recovery nition of the historical record and would change would be purely for purposes
imply no change from current policy. However, this would seem to be about the last opportunity to make such a change without the Committee appearing to be unduly slow in recognizing the new developments in the economy. In this connection, he referred to the statement on page 14 of the staff memorandum on recent economic and financial developments, distributed before this meeting, that incomplete data for March and fragmentary data for early April suggested that cyclical recovery had begun. If the Com mittee believed a change in the directive would be desirable, he would suggest the following wording for clause (b): "to encouraging economic recovery and increased employment opportunities, while continuing to take into consideration current international developments." If such a change were made, Mr. Bopp said, he thought the policy record should note that until recently the Committee had been concerned with arresting the recession, that for some weeks evidence of recovery had with the present amount of economic slack there was no been emerging, that and that the Committee continued to be con immediate threat of inflation, unemployment and the international situation. cerned about the high level of note that in many of these respects the Committee The record should also this recovery period differently from the similar period was approaching in 1958. said that although Fourth District indicators reflected Mr. Fulton business improvement, the improvement was still quite limited. over-all Activity was rising, but slowly. At a recent meeting of business economists,
the participants reported an improvement in orders in their respective businesses, and increased production was anticipated a little later. There had been a moderate decline in unemployment, at least as measured by new insurance claims, but in the main the reductions were in only about seasonal proportions. A substantial labor surplus remained in the larger cities; 14 of the District's 15 major labor market areas were classified in the sub stantial labor surplus category, along with 38 of the smaller labor market areas. The volume of building had expanded in Cincinnati and Cleveland; this sector of activity was beginning to look up, but there was nothing in the way of vigorous improvement as yet. The weakness noted recently in department store sales was felt to be largely the result of cold and dismal weather. Auto sales had brightened considerably, but they were still 20 to 25 per cent below last year. In steel, persons in the industry were stating that the decline bottomed out in January and February, with some upturn in March as the result of minimum inventories in the hands of custo mers and the general seasonal pattern. In March the number of orders increased in relation to tonnage, indicating that more users were actually running out of steel. Although the auto industry was still lagging in taking tonnage, the industry was no longer deferring deliveries. In the rubber industry, inventories of tires were at their highest point, reflecting somewhat the anticipation of a strike as the labor agree to wages, were up for review. As to iron ore, stocks in ments, except as the hands of the mills were high, and it appeared probable that only about
half as much ore would move down the Lakes this year as last year. As to paper and paperboard manufacturing, the growth rate was stated to be about 2 per cent, against an expected growth rate of about 5 per cent. A lot of production in finished forms was in the hands of retailers and whole salers, and that would have to be moved before manufacturers ordered more containers. All in all, Mr. Fulton said, the Fourth District was slowly seeing the light of some recovery. As to policy, Mr. Fulton said he would not wish to change the dis count rate or the directive at this time. In his opinion the Committee had overstayed the time for a change in the directive, and the present wording seemed to fit a recovery period about as well as it did the period of going into a recession. He concurred with the view that System posture as to the availability of credit should continue to be about as at present. As he of recovery should not be regarded as a signal saw it, the current signs to reduce the supply of reserves available to the banking for the System system. Instead, reserves should be supplied as needed, and without stinting. The Account Manager should be given every opportunity to accomplish the objectives of the Committee in all sectors of the market. Mr. Bryan's appraisal of policy in the past, Mr. King stated that and his suggested philosophy for the including the results of that policy, future coincided closely with his (Mr. King's) own thoughts. It was that that had whetted his interest in the Federal Reserve System very philosophy
a number of years ago, and he would endorse, he believed, everything that Mr. Bryan had said. While he also agreed generally with the suggestion that had been made by Mr, Noyes about remaining steady in the boat, he believed that such pressures as might develop in the short-term market could be tolerated to the extent of a slight decline in the bill rate. While he any substantial relaxation of the policy that had pre would not suggest that it would be possible to allow the short-term rate to vailed, he felt reflect market forces and seasonal forces without disturbing anyone unduly. In making this comment, he was not unmindful of the point brought out by that the System should remain cognizant of the cooperation this Mr. Hayes country was receiving from friendly foreign sources but, as he had said, relatively insignificant change in the short he did not believe that any term rate would be unduly disturbing. been in the habit of suggesting free Mr. King noted that he had wide ranges. Today, however, he had reserve targets in terms of fairly he realized that it would not state a specific target. Although decided to to meet such a target pre to expect the Account Management be reasonable the volume of additional reserves in order to indicate cisely, nevertheless, should be supplied to the market, he would suggest a figure that he thought $575 million. of Mr. King said he would not recommend Turning to the discount rate, discount rate seemed relatively unimportant any change at this time. The under 3 per cent, funds rate continued considerably as long as the Federal
as it had during the past three weeks, and the only real effect of a change in the discount rate might be to disturb many people. Mr. King commented that many people had been misled by stock market developments in the past, and this would probably also be true in the future. One could easily come to the conclusion that he could understand the trend of events by watching the stock market closely. In Mr. King's opinion, however, a person could be led into serious error if he attached too much importance to the recent rise in the stock market as an indication that business was about to expand with great vigor. Many highly optimistic appraisals of current business indicators had come to his attention, but he noted that business failures were still at a high level. To single out one area of activity, he mentioned that since the beginning of the current calendar year the lumber business in a part of the country with which he was familiar had experienced several turns of sentiment depending on the volume of orders on the books, with the most recent indication being on the pessimistic side. This situation, he felt, might be quite indicative of developments in many other businesses. by saying that he found himself in agreement with Mr. King concluded the change in the directive suggested by Mr. Bopp. encouragement in the signs of Mr. Shepardson stated that he found upturn. He hoped that the upturn would continue to be gradual economic gradual. One of the unfortunate aspects of the previous recession and upturn was the precipitate nature of the reversal, which occurred before
it was possible to achieve the corrections that one would normally hope for at such a phase of the business cycle. He was also encouraged by the reports indicating that the balance-of-payments situation seemed to have improved somewhat, but there still appeared to be a delicate balance. With reference to the promotion of sustainable economic growth, Mr. Shepardson commented that some fundamental adjustments appeared to be taking place gradually. More were needed, and there should be an opportunity for them to work out. This did not mean that he would want the System to be in a position of restraining recovery and growth. At the same time, however, appropriate time for the System to be he questioned whether this was an hard, in contrast to affording an opportunity for some of the pushing too other forces in the economy to develop in a manner that would assure growth. Therefore, he would continue the present longer-run sustainable his opinion was adequate. The situation in the degree of ease, which in not seem to be restrictive, if one could judge by the money market did at the general availability of credit and Federal funds rate. Looking and near-money substitutes, it appeared the growth of the money supply a good position, and he would favor main to him that the System was in indicative of a continuation of the taining free reserves in a range plus or minus. He saw no of ease; that is, $500 million present degree would not be inclined to favor the discount rate, and he reason to change a change in the directive.
Mr. Robertson said that he continued to feel critical of monetary policy. In his opinion, System operations had been entirely too tight to carry out the language of the policy directive. The significant fault he saw in the analysis of Mr. Bryan was that the latter's long-term program would start with what he (Mr. Robertson) considered an inadequate volume of total reserves at the present time. In his own analysis, the System should have been easier up to this point, and the current volume of total reserves was not adequate. Mr. Robertson repeated that he would like to see monetary policy easier than it was at present. He felt that a mistake had been made in over-emphasizing the international aspects of the situation, particularly the importance of holding up the short-term rate. He would agree with Mr. Bopp to the extent of sharing the latter's view that doubts should be resolved on the side of ease. In his (Mr. Robertson's) opinion, that requirement, for he regarded this as a time when there should be a minimum could be further injections of reserves without upsetting the applecart. could go a long way toward correcting some of In his view the Committee the mistakes of the past by taking advantage of what might well be its last clear chance to increase the volume of reserves before a real upswing took place. The upswing, he thought, was likely to be more in the economy rapid than most of those who had spoken thus far had suggested. In terms of free reserves, Mr. Robertson said he would favor a level in the neighborhood of $600 million, and that he would not be con-
4/l8/61 cerned if the figure went as high as $650 million. He would not attempt to offset the natural increase in reserves that was going to occur next week to the extent that had been suggested. It would be possible, he thought, to move up to $600 million, or even $650 million, without too much of an impact on rates anywhere along the line. In any event, it would not be of concern to him if the bill rate went down somewhat. Mr. Robertson expressed agreement with Mr. Bopp that this was a time when the policy directive should be changed. There had been a change in the economic outlook, and the directive should not be the same during an upswing as during the preceding downswing. The language for clause (b) that Mr. Bopp had suggested seemed to him satisfactory. If those specific words were not used, however, he would favor some other phrase that would indicate that the Committee was trying to encourage economic recovery. Mr. Robertson also said that he would not favor a change in the discount rate at this time, because he thought the point when such action should have been taken had passed. In his opinion the discount rate should have been reduced several months ago. However, this was not the time to risk changing the rate because psychological reactions would be adverse. If the rate were changed, the System would appear to be showing less confidence in the recovery movement than he would like to display. Mr. Mills commented that the economic intelligence reaching the Board and the Committee gave clear and substantive indications of a recovery. However, it remained to be seen whether the recovery was more
than seasonal or whether it would be vigorous enough to survive the summer doldrums without relapse. To correlate monetary and credit policy with that estimate of the outlook, it was his opinion that the reserve climate that had been developed over the past several weeks was appropriate to the economic circumstances. Judging from the trend of Treasury bill yields, the trend of the Federal funds rate, and the increase in the money supply, the System's objectives were being realized. The System, he thought, had provided a lead to the financial community that, with a lag, should produce greater effects than were apparent at the present time. In that connection, Mr. Mills observed, it was welcome to hear belated attention being given to the extremes of System policy in previous between tightness and ease. He felt the System should be years in moving wary at the present time about attempting to repair the damage that resulted from what he considered an overly restrictive policy a year or two ago, one which forced an untimely contraction in the money supply. To substi tute for that policy one of extreme ease could produce evils of great it seemed to him that at the present time a consequence. Accordingly, level of net free reserves averaging around $500 million was adequate, more than adequate, for the existing economic circumstances. or perhaps that it might be more than adequate went again to the The presumption matter of recognizing the leverage that resides in maintaining a given level of positive free reserves or negative free reserves. Such a policy implied that at any time the level fell below the target, reserves would
be restored to the original target. This produced the kind of leverage, up or down, that had resulted in the inequities of recent years in System monetary and credit policy, and it provided an object lesson as to what should be avoided in the future. Mr. Mills said that he would not recommend a change in the discount rate at this time. Also, looking at the hazy economic horizon, he would feel that the policy directive should likewise be left unchanged at the present time. Mr. Wayne reported that favorable trends in business activity were clearly gaining in the Fifth District. In some sectors they were predominant. Thus, it appeared that the economy of the District had turned the corner and that a slow but steady recovery was beginning. Manufacturers reported moderate improvement in new orders, and the work week was stable or rising. Insured unemployment declined a little more than seasonally in March, and bank debits showed steady improvement except in West Virginia There were encouraging signs of strengthening in the building and the lumber industries. Construction activity was fairly stable, and some tex tile markets had strengthened slightly. However, there were also some elements of uncertainty, as, for example, with respect to bituminous coal. As to banking developments, Mr. Wayne said that most types of busi ness loans had been rising more than seasonally in recent weeks. District banks appeared to be in a relatively easy position, however, and seemed able to accommodate increases in credit demand with no difficulty.
With respect to the national situation, Mr. Wayne said he was impressed by the extent to which economic data for February showed stability or some improvement. The data for March showed continued improvement, small in most cases but rather general and widespread. There seemed to have been no major development of an unfavorable nature except the failure of unemployment to decline. He was led to the conclusion that the low mark of business activity had been reached and that the country might be in the of recovery. However, it was always possible to be mistaken, first month especially at a time of seasonal rise. As to policy, Mr. Wayne advocated continuance of the degree of for the past six weeks. He would not favor a change ease that had prevailed at this time, and he still considered the international in the discount rate situation sufficiently precarious to require continued consideration. He for a change in the wording of the direc agreed with Mr. Bopp's suggestion with Mr. Bopp's reasoning in regard to the explanation for such tive, and a change. that recent economic developments lent support to Mr. Clay noted the low point of the recession was behind us. Ahead lay the the view that of the recovery and the goal of an economy employing unknown configuration more fully than during the last upswing of the business cycle. its resources the task of the Federal Reserve System continued Under these circumstances, monetary policy with a view to encouraging economic to be that of conducting called for a continuation of the policy of expansion, and this objective monetary ease.
In view of the international flow-of-funds problem, it appeared to him essential that open market operations be so conducted that the Treasury bill rate would remain within the range of recent weeks. But it also appeared that with resource utilization at low levels and with interest rates high in comparison with other recessions, appropriate policy involved more than supplying some given volume of reserve funds without depressing the Treasury bill rate. It called for an added endeavor to bring about lower interest rates in the intermediate and longer sectors of the maturity struc ture, with the expectation that those developments would be reflected in other credit and security markets. At times when the System had been free to allow the short rate to and long-term rates had been brought down during a decline, intermediate the shift in investor demand toward longer maturities as recession through the shorter rates declined under the joint impact of open market operations in Treasury bills and of greater reserve availability. During the current type of development had been impeded by the System's desire episode, that falling too low in view of the inter prevent the Treasury bill rates from to At the present time, then, the System had national flow-of-funds problem. the added burden of attaining its objective in the longer maturity sectors market without being free to encourage this development through of the lower short-term rates. tightening of the longer end of the market Preventing premature serve a useful purpose, Mr. Clay commented, but the System would in itself
should endeavor to do more than that. Insofar as this could not be done in the course of making necessary additions to reserve funds, the Federal Open Market Committee should undertake additional operations by offsetting purchases of longer maturities with sales of shorter maturities. Mr. Allen said he felt there was no longer any question that the economy touched bottom early this year and had since been moving gradually upward. Based on what had happened in previous periods of recovery, he expected that the durable goods industries of the Seventh District would, as a group, make larger gains in the months ahead than would general business. Steel production had risen since February and sources in the industry expected the trend to continue through June, probably through the year. The steel production index, nationally, rose from 75 in December to 88 in early April, at which time the rate was 92 in Chicago and 100 in Detroit. In farm machinery, both production and sales were continuing to increase. Inventory liquidation might be continuing on balance, but it was probably nearing an end. The Purchasing Agents of Chicago had just issued a report that orders, production, and hiring were now on the uptrend. Chicago housing permits issued during the first quarter were up nearly 30 per cent from last year, according to figures from one authority. The Detroit Branch had provided a table covering the years 1955 to 1961 which showed, first, the average daily sales rate of domestically made automobiles for the period January 1 to April 10 in each year. Then it projected sales for the year on the basis of the sales during that early
period. Next, for the years 1955 through 1960, it compared the projections with actual sales for those years. Lastly, it showed the discrepancies between the projections and the actual results. It was interesting to note that the average discrepancy for the six years was only 2.5 per cent. If sales from January 1 to April 10, 1961, were projected through the year 1961, the figure for total 1961 sales would be 4,899,000, considerably less than actual sales in any of the preceding six years except 1958, when sales were only 4,298,000. Average Daily Rate Projected Actual Discrepancy in Year Jan. 1 - Apr. 10 Annual Sales Annual Sales Projection 1961 15,957 4,899,000 1960 19,701 6,068,000 6,142,000 -1.2% 5,485,000 -2.2% 17,467 5,362,000 4,287,000 4,298,000 -0.3% 1958 13,965 5,824,000 +2.7% 1957 19,482 5,981,000 6,238,000 5,838,000 +6.9% 1956 20,319 7,375,0 0 -1.6% 1955 23,638 7,257,000 Mr. Allen reported that no evidence of a pickup in loan demand had From March 15 through April 5, outstanding loans at been found as yet. reporting banks declined $66 million compared with $46 Seventh District most of the decline in business loans. The report million a year ago, with reduce their holdings of intermediate and long ing banks had continued to but their holdings of "other securities," term Government securities, exempts, had risen by almost $100 million over the last presumably tax there was an absence of reserve pressures on the month. Not surprisingly, The net deposit and reserve drains on Chicago banks over the larger banks.
April 1 tax date were smaller than usual; last week those banks were net sellers of Federal funds for the first time since September, and sellers in larger amounts than at any time for at least many years. Mr. Allen recalled that at the March 28 meeting he suggested the importance of giving timely evidence in operations to the Committee's sense of the business situation. It now appeared certain that the economy was experiencing a move upward, gradual thus far, in fact so gradual that there had been no pickup in net loan demand and bank reserves were in sufficient increase in loans and investments. Under supply to support a substantial the circumstances, he favored going along for another three weeks "about as we have since the last meeting." He would prefer that the net free reserve figure stay around $500 million, or, if a choice must be made, that it be less than that figure rather than more. He would not change the discount he did not feel strongly about the directive. rate or the directive, although It might not have been obvious from his choice of words, Mr. Allen added, but he was in agreement with the position stated by Mr. Bryan. He was glad had used more erudite and persuasive language than his own. that Mr. Bryan little new to report about general economic Mr. Deming said there was except that the moisture situation had developments in the Ninth District, appreciably in recent weeks and that the outlook for iron mining improved bleak. It seemed highly likely that ore ship activity in 1961 was quite Range in 1961 would be smaller than in either 1959 or 1960, ments from the be as small as in some of the prewar years. Aside from the mining and might
sections, and one or two other small areas, however, the general picture was fairly good and improving. So far this year, District banking developments had been mixed, with no clearcut trends indicated. In January, loans at city banks declined far more than seasonally; in February they rose contraseasonally; in March they declined by almost the same amount as they rose in March 1960. At country banks, loans had been growing rather steadily this year. As he had noted at the March 28 meeting, the seasonal decline in deposits apparently reached its low earlier this year; deposits were now above year-ago levels by 6 per cent at city banks and 4 per cent at country banks. With these loan-deposit developments, bank liquidity positions had varied; in general, city bank loan-deposit ratios had improved so far this year, while those in country banks had remained about the same. And, except for the peaks attained in of 1960, loan-deposit ratios at both classes of banks were the spring now significantly higher than at any time in the 1950's; 4 and 6 at city and country banks, respectively, than they were points higher at the peaks in 1957. This situation led him to believe that monetary policy could to, and in fact should, aim at providing somewhat more well afford to the banking system. He would not want to press liquidity liquidity banks, but he would think, along the same lines as indicated upon the
by Mr. Thomas, that the System could continue to pursue, perhaps increase slightly, its program of supplying ample reserves. To accomplish this purpose, and at the same time avoid undue declines in short rates, would require, as he saw it, that considerable latitude continue to be given to the Manager of the Account. So far, he thought the Account has done very well. He would hope that growing recovery would make the job easier insofar as interest rates were concerned, and thus permit the furnishing of adequate reserves without so much danger of rate declines at the short end and with more opportunities to hold down rate advances at the longer end. Mr. Deming commented that he had listened with interest to the remarks made by Mr. Bryan and, in a general way, believed that Mr. Bryan's cautions should be heeded. As he saw it, however, there was far less danger this time than in previous post-war recovery periods in continuing a policy of ease after recovery had begun. In other words, he did not see the problem at present as one of "overstaying" the market, but rather as one of being sure of not "understaying" it. Thus, Mr. Deming said, he would hope that the System could continue to operate in a $500-$600 million range of free reserves. He the discount rate. With respect to the directive, would not change considerable sympathy for Mr. Bopp's suggestion, particularly he had that such rewording reflected could be made to show if the policy record
state of the economy than a change in more a recognized change in the the direction of policy. that some further indications of improvement Mr. Swan reported seen in the Twelfth District in the past three weeks. However, had been not particularly vigorous, and they were still somewhat they were scattered. On the unfavorable side, the unemployment situation was still quite unsatisfactory. On the favorable side, conditions in improved in March. Orders for Douglas fir steel, copper, and lumber in March, but there was no attempt to expand production commensurately rose Therefore, unfilled orders increased with the increase in orders. rather rapidly, and there was some reduction in inventories at the construction was strong, and new car registrations mills. Nonresidential in the first half of March from the in California were up substantially first half of February. The large banks of the District appeared to be in quite an easy position. They had been net sellers of Federal funds for several weeks, and last week they were net sellers on a somewhat larger scale. It was indicated that they expected to be able to continue in that position during the current week. Loans at weekly reporting member banks declined in the three weeks ended April 5, as in most other areas. However, a small sample of large banks indicated a noticeable pickup in business loans, this being the first time in many months that such comments had been made. Savings deposits continued to rise in the week ended
April 5, which included the quarterly interest date, compared with a drop a year ago. Turning to policy, Mr. Swan said it seemed to him necessary to bear in mind that the vigor of the upturn, if an upturn was in prospect, was still much in question. While he had no major disagreement with the policy of the past three weeks, he continued to feel that the Committee should try to be a little easier than it had been whenever the opportunity arose. It appeared to him that the Committee could well attempt to increase total reserves somewhat. In saying this, he recognized the point made by Mr. Bryan regarding the ultimate result of maintaining a constant level of free reserves. Like Mr. Deming, however, he felt that in the present climate the situation was very far from going through the roof. In summary, he would favor a slightly easier position, even though that might mean for some period of time an increase in free reserves toward the $600 million level. As to the short-term rate, while he realized the importance of guarding against any abrupt decline, he would not be worried about fluctuations around the 2-1/4 per cent level. He saw no reason why it was necessary to the bill rate up from present levels. exert pressure to move he would not argue for any overt In conclusion, Mr. Swan said in the discount rate, at this time. change in policy, such as a change with Mr. Bopp's suggestion regarding the directive, However, he agreed
if such a change could be qualified by an explanation of the fact that no appreciable change in policy was involved. Mr. Irons stated that conditions in the Eleventh District had not shown much change. There had been mixed movements within the District, but any changes that had occurred were minor. In effect, this was a continuation of what had been going on for some time; the Eleventh District did not have too much trouble throughout the recession, with activity holding at levels not far from where it had been earlier. Nonagricultural employment was holding steady, and the unemployment figures were remaining quite steady. There were fewer initial claims at present for unemployment benefits. The industrial production index had moved pretty much in line with crude oil production; that is, down a bit in February and up a bit in March. If there should be a cutback in crude oil production in April or May, the index might again drop a bit, but the other elements in it were quite stable. Construction was increasing about seasonally, and department store sales to the first of April were about 2 per cent above the previous year. However, the Easter business was not much above a year ago. There would probably be a decline in days allowable on crude oil production, which now stood from the figure of 10 that prevailed for one at 9, having been dropped month.
During the past three weeks, figures of reporting banks showed that loans were down slightly, while demand deposits, time deposits, and investments were up. District banks had been net sellers of Federal funds, with the weekly average running about $300 million on the buying side and $400 million on the selling side. Dallas banks were doing the buying, and Houston banks the selling. There was no borrowing of any significance from the Reserve Bank. In short, there was no evidence of tightening in the banking situation that was causing any trouble. Loan demand showed a little drop in the past three weeks, but in general there was not much change. Mr. Irons said that the District was expecting a gradual increase in business activity. Conditions in agriculture looked quite promising. There was a cautious optimism on the part of businessmen; they were not too unhappy about what was happening, but they were looking for some slight improvement. Mr. Irons commented that he was rather well satisfied with Account operations during the past three weeks. In his judgment, reserves had been adequate. The money market had reflected some ease, and with loan demand lagging somewhat, the liquidity degree of banks was slightly better than it had been. The rate position of the satisfactory and had been fairly stable in structure seemed reasonably spite of some strong forces that were at work during the past period.
The System, it appeared, might be making some progress toward the objectives of current policy; namely, to keep the short-term rate up and the long-term rates down. While long-term rates had not been nudged far, there were signs of an increased flow of funds into the long-term market, and at the same time reserves had been quite adequate. Mr. Irons suggested continuing to maintain about the degree of ease at which the Committee had been aiming. As to free reserves, he noted that his own thinking had been a little lower than that of some others. At present he would like to see free reserves in the range of $400-$500 million, giving recognition to the point made by Messrs. Bryan and Mills that the very process of maintaining free reserves, with replenishment as reserves were used. could produce expansion. In his view, free reserves in the area he had mentioned would avoid a restrictiveness that would be damaging. Mr. Irons also commented that in this recession the bill rate had not been driven down to 5/8 per cent and the discount rate had not been reduced to 1 per cent. Therefore, the System would not have so far to go to get back to what might be regarded as normal levels. Thus, it might develop that the caution exercised in protecting the short-term rate structure would turn out to have had some blessings in disguise. Also, there was a difference in the liquidity position of the banks as compared with earlier recessions. As he recalled the
1954 period, and the antirecessionary measures taken by the System, it subsequently took some eight months before the banks became illiquid enough for System measures of restraint to exert any appreciable effect, but that would not be so this time. In summary, Mr. Irons suggested that it might be desirable to proceed in terms of meeting seasonal growth and necessary demands rather than to pump in reserves too fast. It would be his thought to go along with free reserves in the range of $400-$500 million and see what the difficulties might be. He considered the international situation as of major importance, just as the sustaining of the recovery was of major importance. Therefore, he felt that the System must "play both sides of the street." As to the discount rate, he thought that there should be no change at this time. Turning to the directive, Mr. Irons commented that he had mixed feelings. On balance, however, it seemed to him that the Committee might get itself in a rather embarrassing position if it did not make some change in the directive at this time. Essentially, he liked to think of the directive in terms of stages of the business cycle. The economy had gone through the declining phase of the cycle and the bottoming-out period, and it now appeared that the economy was beginning to move into another stage of the cycle. Accordingly, while he did not feel too strongly about the matter, he was rather apprehensive about waiting another three weeks. If a change were deferred, the economy
might be rather well along in the recovery stage before the Committee got around to making a change in the directive. It seemed to him, Mr. Irons said, that three things ought to be recognized in the directive. First, the Committee wanted to achieve expansion of the money supply and bank credit consistent with economic recovery. Second, it wanted to facilitate, encourage, and stimulate the forces of recovery. Third, there were international factors that gave the Committee cause for concern. In the current directive and in certain previous directives, Mr. Irons said, there were some things that he did not like. First, the language of the directive tended to center around the desirability of economic growth, something that everyone wanted at all substainable In this respect, therefore, the directive seemed to him rather times. Second, there was the inclusion of specific reference to meaningless. employment. In his opinion, there was going to be a substantial amount of unemployment that monetary and credit policy could not correct. The levels might be higher than they had been in the past, and he did not the directive an implication that System policy was care to have in toward correcting something that he did not think it could directed correct. then stated that he would suggest changing clause (b) Mr. Irons operations with a view to so that it would call for of the directive
encouraging expansion of bank credit and the money supply to contribute to strengthening the forces of recovery which appeared to be developing in the economy, while giving appropriate consideration to international factors. Mr. Ellis commented that last week the Boston Reserve Bank held its semiannual business outlook conference of regional economists. The views expressed at that time, he said, reinforced the prediction that there would be an expansion of gross national product by the fourth year. The consensus was that the expansion would be quarter of this about 5 per cent from the first to the fourth quarters, with about half attributable to personal consumption expenditures. business picture in the First District conformed generally The heard around the table this morning; it appeared that to what had been had been reached and that recovery trends the low point of the recession in at the moment. The New England manufacturing index had were setting for the last two months (January and February), and all been increasing increased in February. The March survey four components of the index England purchasing agents indicated further production increases of New rose in February. Thus, on the month, and the man-hour index in that low point of the recession had side, it looked as though the production awards, the trend was obscured passed. As to construction contract been during which month erratic February performance, by a poor and probably
the figures were down in all major categories. Unemployment was still serious, but the recent trends were mixed. In February, total unemployment in New England, without seasonal adjustment, was almost equivalent to the rate for the nation as a whole, yet the First District did not at present have any of the "F" labor market classifi cations for which it was quite noted in years past. Business loans were down slightly in the past three weeks, Mr. Ellis said, but in general the banking picture was good. The banks had adequate reserves, and they were net sellers of Federal funds to a small extent during the past few weeks. Demand deposits were rising, and bill holdings also had turned upward. been a good deal of ease, Mr. Ellis said, and yet bill There had rates had not been unduly low. As to the period ahead, he expressed the view that it would be desirable to make the most use of credit to stimulate recovery that was possible without putting undue pressure on meant, as he had stated at the March 26 short-term rates. To him that whether reserves could be used a little more meeting, exploring previously. The System, he with a little more ease than effectively, noted, was trying to answer the question whether or not it was supplying growth, at a time when it had enough reserves to provide for adequate supplying of reserves that was imposed the limitation on the accepted flow of gold and short-term capital. by the potential impact on the
He endorsed the suggestion that considerable latitude be given to the Management of the System Account, and felt that the Desk should probe toward a little higher level of reserves where possible, again recognizing the importance of avoiding significant declines in short term rates. As to the directive, Mr. Ellis said he felt much the same way as Mr. Irons; that is, that the directive was valuable to a large extent in retrospect as a record of the ability of the Committee to recognize changes in current economic conditions. If the directive was to be changed on such a basis, it probably should be changed now, and he would favor the language Mr. Bopp had suggested. noted that in the ten months since May 1960 the Mr. Balderston had grown at approximately the same rate as during active money supply the comparable phases of the two previous business cycles. However, the money supply had contracted at in the ten months prior to May 1960 an annual rate of 2.9 per cent. As he saw it, the problem before the Committee today remained that of giving such appropriate stimulus to as was within its power, without on the other hand driving recovery cause interest-sensitive funds to flow abroad bill rates so low as to or to suggest to observers that monetary policy was not prudent. Three weeks ago he suggested that developments warranted some probing efforts toward increasing the money supply. Data now available pointed to a
gain in the money supply in March, and if that trend continued he would be more confident that the System was helping to foster recovery through such powers as it possessed. However, the money supply figures tend to vary so greatly that it would require a longer period for him to reach a conclusion as to whether the System was causing the money supply to rise fast enough to provide adequate liquidity, even if some allowance was made for time deposits. The turn in business may have come, Mr. Balderston said, but no one could foretell either the rate or the extent of recovery. The System was pleasantly surprised in June 1958, he recalled, when the valley of that recession turned out to be V-shaped. What the contour of the 1961 valley might be was still unknown. However, there was the absolute certainty that an increasing number of school children would be coming to working age, and this made it imperative to provide more job opportunities than was the case in past business recoveries. It for him to appraise whether the recent level of free was not possible reserves would have sufficient cumulative effect to discharge the Committee's responsibilities as they related to domestic needs. That level of free reserves, if high enough in relation to the phase of the cycle, bank credit, and the discount rate, might have a greater cumulative effect the longer it continued. He thought it probably would. However, whether under current conditions a level of free
reserves of $500 million would produce growth in the money supply seemed uncertain. Therefore, he would favor pushing the level somewhat higher through probing actions. Mr. Balderston said he would consider it a mistake to change the discount rate at this time in the face of the foreign situation. However, he would change the directive, and he believed that he would favor the suggestion of Mr. Irons. In conclusion, Mr. Balderston suggested that if time remained at the end of the meeting the Committee might like to ask Mr. Hayes to comment informally on his recent trip to Europe, during which he attended a monthly meeting of the Bank for International Settlements. Secretary's Note: Other Committee members having concurred in that suggestion, Mr. Hayes made brief informal comments at the conclusion of the Committee meeting. In summarizing the meeting, Mr. Hayes said that although some differences of view existed, it probably would not be too hard to reach a consensus. First, however, he felt that it might be appropriate that a majority would like to to deal with the directive. It appeared change the directive, and two specific suggestions had been made. Mr. Bopp had suggested changing clause (b) to provide that open market operations should be conducted with a view: "to encouraging economic recovery and increased employment while continuing to take into consideration opportunities, current international developments."
Mr. Irons had suggested: "to encouraging expansion of bank credit and the money supply to contribute to strengthening the forces of recovery which appear to be developing in the economy, while giving appropriate consideration to international factors." As the result of subsequent suggestions, it was agreed for purposes of discussion to change the language suggested by Mr. Irons in certain minor respects, as follows: "to encouraging expansion of bank credit and the money as to contribute to strengthening of the supply so forces of recovery that appear to be developing in the economy, while giving consideration to international factors." that the essential difference between the two Mr. Hayes noted was that the suggestion of Mr. Bopp mentioned employment proposals and did not mention the money supply, while the suggestion specifically of Mr. Irons mentioned the money supply but not employment. Hayes having inquired whether a possibility of compromise Mr. the latter would be Mr. Robertson asked Mr. Bopp whether was seen, a reference to encouraging the to incorporate in his proposal willing expansion of bank credit and the money supply. this would be agreeable to him. He noted Mr. Bopp replied that he was not at present a member of the Committee. that discussion during which Mr. King There followed further Irons be left intact in order that suggested that the proposal of Mr. whether or not it wished to accept such the Committee might decide language for the directive.
Mr. Hayes then stated that he would call for a go-around to determine how many would prefer the language suggested by Mr. Bopp and how many would prefer the suggestion of Mr. Irons. First, however, he turned to Mr. Rouse and asked whether from the Account Manager's point of view there would be any substantial preference. Mr. Rouse replied that as Manager of the Account it would make no particular difference which proposal might be adopted. Mr. Bryan said that he liked the point made by Mr. Irons. The System could influence credit conditions and thereby encourage recovery, but the effect on employment was indefinite. He had been uneasy about having anything concerning employment in the directive. Mr. Fulton stated that he would prefer the language suggested by Mr. Irons for the same reason. Mr. King said he appreciated the danger in seeming to imply that monetary policy could resolve the unemployment problem. But neither did he like to create the impression that the money supply was as easy to turn around and move in one direction as the other. He added that perhaps he was basing his views somewhat on the manner in which the directive might be read by less sophisticated persons. Although he recognized the point Mr. Bryan had made, and found it he would like to write the directive in terms that persuasive, still took into account the way the average person might read it.
After the others around the table had expressed their preference, Mr. Hayes said it was clear that the majority preferred the language suggested by Mr. Irons. Mr. Hayes then referred to a possible compromise suggested by Mr. Robertson, which would call for operations with a view to encouraging expansion of bank credit and the money supply so as to contribute to strengthening the forces of recovery that appeared to be developing in the economy and increasing employment opportunities, while giving consideration to international factors. Mr. Irons said that the question of including a reference to employment was the only point about which he felt strongly. He did believe, for reasons he had expressed earlier, that the Committee not in its directive that open market operations were to should indicate be undertaken with a view to increasing employment opportunities. Mr. Hayes inquired whether anyone who had expressed a preference for the language expressed by Mr. Irons also would like to accept the compromise suggested by Mr. Robertson, and Mr. Deming replied affirmatively. Mr. Deming said that he had some sympathy for the position that the Committee should not include in the directive language indicating that a direct objective of monetary policy was to increase employment. However, in the manner in which the suggestion of Mr. Robertson was stated, the matter was put more in the nature of
a hope that increased employment opportunities would result from achievement of the objectives of Committee policy. He felt that this would do no harm and that it would do some good. Mr. Bopp said he felt it was important that a reference to increased employment opportunities be included in the directive, in terms of this being one of the hoped-for results of System policy. The proposed language, he noted, did not pretend to say that the System could produce full employment. Mr. Clay pointed out that a reference to the fostering of employment was included in the current directive. He stated that he would like to find a way of easing that reference out of the directive. However, he was not sure whether this was an appropriate time. At the request of the Chair, a poll was then taken on the question whether to include in the directive a reference to employment, in the manner suggested by Mr. Robertson. From this poll it developed that of the members of the Committee, Messrs. Hayes, Balderston, Robertson, and Wayne favored the inclusion of such a reference, while Messrs. Allen, Irons, King, Mills, Shepardson, and Swan did not favor it. was understood that the majority of the Committee preferred Accordingly, it the suggested reference to in clause (b) of the directive not to include the encouragement of increased employment opportunities. Mr. Hayes next inquired whether any member of the Committee voting against the directive in a form in which wished to be recorded as
clause (b) would be phrased in the manner suggested by Mr. Irons, subject to the minor editorial changes that had been agreed upon. Mr. King said that he did not want to record a dissent. As be had brought out earlier, however, this was material that would be read by the public when the record of Committee policy actions was published. Further, he supposed that the directive, as adopted today, would probably remain in effect for some time. In these circumstances, he raised the question whether it was felt that the directive was appropriately phrased to fit prospective developments in the national economy. During a brief discussion that ensued, Mr. Irons commented that he thought the Committee would be well advised to avoid getting itself in a box at this time insofar as the language of the directive was concerned. Mr. Hayes then said that he took it the directive, as proposed, would be unanimously approved, and no dissent was indicated. 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 (includ ing 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 expansion of bank credit and the money supply so as to contribute to strengthening of the forces of recovery that appear to be developing in the economy, while giving consideration to international factors, and (c) to the practical administra tion of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the ac count of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Mr. Hayes said it seemed quite clearly the consensus to continue substantially the same policy that had been in effect during the last period or two. This meant continuing to maintain approximately the same degree of ease, with some attention given to short-term rates, and with leeway given to the Manager of the Open Market Account to accomplish these purposes. He inquired whether there was any disagreement that this was the consensus. In view of a question raised by Mr. Robertson, Mr. Hayes called members of the Committee as to the accuracy of his for a poll of the of the consensus. From this poll it developed that statement
Messrs. Balderston, Robertson, and Swan favored increasing the degree of ease while Messrs. Hayes, Allen, Irons, King, Mills, Shepardson, and Wayne favored continuing to maintain substantially the present degree of ease. It being clear, therefore, that the consensus favored maintaining the existing degree of ease, Mr. Hayes inquired whether any member of the Committee wished to be recorded as dissenting from the policy indicated by the consensus, and Messrs. Balderston, Robertson, and Swan stated that they wished to be recorded as dissenting. Secretary's Note: Mr. Robertson subsequently submitted the following statement for inclu sion in the record of the meeting in explana tion of his dissent: Mr. Robertson voted against the decision to implement the directive by maintaining about the same degree of ease in the money market as in the past. He felt that to continue to supply reserves to the banking system only in the amounts that had been made available in recent weeks would not be adequate to encourage or support credit and monetary expansion needed for economic recovery at a rate that would be desirable and possible. The risk that additional reserves might cause a decline rates and encourage a movement of funds from in short-term this country with a loss of gold, Mr. Robertson believed, was likely to be much less than it had been in the past. There had been a resurgence of confidence in the future of the dollar, the lack of which had been an important cause flight of funds from this market; interest of the earlier rates in some foreign markets had been lowered; and the balance-of-payments problem and the outflow of gold had been Moreover, economic recovery and expectations of alleviated. such a recovery might be expected to bring about a rising rates, or at least act as a damper on further trend in interest
decline. Additional reserves, therefore, would not be likely to cause an undue decline in interest rates, but might instead be needed to prevent an undue rise. Failure to supply adequate reserves for monetary expansion might retard recovery with undesirable economic consequences for the early return to fuller utilization of human and material resources. Mr. Hayes then referred to the question of renewing the outstanding special authorization for operations in longer-term United States Government securities. This authorization, originally given by on February 7, 1961, was renewed on March 28 in a form the Committee that removed the previous restriction against operations in securities longer than 10 years. Accordingly, on March 28 the having a maturity Bank of New York had been authorized, between that date Federal Reserve meeting of the Committee, within the terms and limitations and the next issued on March 28, to acquire intermediate and/or of the directive securities of any maturity, or to longer-term United States Government change the holdings of such securities, in an amount not to exceed $500 million. stated that they would dissent from Messrs. Allen and Robertson for the reasons that they had renewal of the outstanding authorization, most recently on March 28, 1961. stated at previous meetings, raised the question whether In this connection, Mr. Robertson be unnecessary to record a apparent by which it would any method was long as the special authorization Committee meeting as dissent at each the original action of the Mr. Hayes commented that was continued.
Committee on February 7 contemplated that the Committee would review the special authorization at each meeting and determine whether to renew or amend it. Mr. Robertson agreed and indicated that in the circumstances there would seem to be no alternative to recording his dissent at each meeting. Mr. Rouse commented that in the Committee's policy directive, which had just been adopted in amended form by unanimous vote, there was a provision that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, should not be increased or decreased by more than $1 billion. The special authorization covering operations in longer-term securities contained an authority, within the terms and limitations of the directive, to acquire intermediate and/or longer-term United States Government securities, or to change the holdings of such securities, by an amount not to exceed $500 million. He suggested that the portion of the policy directive to which he had referred be augmented so as to specify that holdings of and/or longer-term United States Government securities intermediate were not to be increased or decreased by more than $500 million. As this suggestion, he stated that the proposed addition to reasons for
the policy directive would satisfy the auditors working on the Open Market Account and that it would make the people who do the actual purchasing and selling of securities for the Account a lot happier. Mr. Hayes commented that the incorporation of the suggested language would make it clear that the $500 million figure came within the $1 billion figure. In addition, inclusion of a more rigorous statement of the special authorization in the policy directive would serve to avoid any possible misunderstanding on the part of the auditors. There followed a discussion during which it was brought out that reference to actions taken on the special authorization as well as on the policy directive would be made in the record of policy actions of the Committee. In other words, actions on both the special authorization and the policy directive, including the votes, would be included in the public record. Mr. Sherman said that he would see no objection, from the standpoint of stating the substance of the authority given by the Committee, to incorporating in the directive language such as that suggested by Mr. Rouse. It might be desirable to have an explicit $500 million figure pertaining to operations in statement that the longer-term securities was within the $1 billion total limitation, essential. The record could be made clear although that did not seem that the authority for operations in longer-term securities would
continue to be a special authorization, and if the Committee should change this special authorization the language that Mr. Rouse proposed could be dropped from the directive or modified in whatever way was Mr. Sherman noted that it would, of course, be necessary appropriate. for any change in wording of the directive in to explain the reasons the policy record to be published in the Board's Annual Report. Also, if this addition were made to the directive, Messrs. Allen and Robertson presumably would wish to be recorded as voting against the directive, at least as far as this portion was concerned. With reference to the last comment by Mr. Sherman, Mr. Robertson said he would wish to be recorded as voting against the directive for indicated, if Mr. Rouse's suggestion should be adopted, but the reason that he would prefer to leave only in that respect. Mr. Allen indicated the suggested language out of the directive. whether there was any opinion that Mr. Wayne raised the question or desirable from a legal standpoint, the suggested change was necessary However, Mr. Rouse again was no indication to such effect. and there in the directive would be for the stated that the proposed change any misunderstanding on the part of the auditors, purpose of avoiding in the purchasing and selling of and that the personnel engaged securities for the Account would like it, it would be possible to conform Mr. Robertson commented that with that of the policy of the special authorization the wording
4/18/6l -66 directive without incorporating in the policy directive the suggestion of Mr. Rouse, following which Mr. Hayes commented that the Committee might be reluctant to change the wording of the special authorization because it had taken action originally in that manner and since that time had twice renewed the special authorization on the same basis as far as the particular wording in question was concerned. Mr. Robertson observed that if the special authorization had been adequate for the period to date, it would appear that it might also be adequate from this point forward. Mr. Hayes then suggested that it might be advisable to afford opportunity to think further about the suggestion of the Committee an and to bring the matter up again at the next Committee meeting. Mr. Rouse After others indicated concurrence, Mr. Wayne suggested that before the next meeting there be distributed to the Committee a memorandum on the matter which would include a statement of the reasons why it was felt language such as proposed be incorporated in the policy desirable that directive. There was agreement with this suggestion, and it was understood that Messrs. Sherman, Hackley, and Rouse would prepare such a memorandum for the Committee. Committee authorized the Thereupon, the Bank of New York, between Federal Reserve meeting of the 1961, and the next April 18, the terms and limitations Committee, within issued at this meeting, to of the directive
acquire intermediate and/or longer-term U. S. Government securities of any maturity, or to change the holdings of such securities, in an amount not to exceed $500 million. Votes for this action: Messrs. Hayes, Balderston, Irons, King, Mills, Shepardson, Swan, and Wayne. Votes against this action: Messrs. Allen and Robertson. Mr. Hayes inquired of Mr. Rouse whether the latter had any further comments or questions in the light of the discussion at this meeting, and Mr. Rouse replied in the negative. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, May 9, 1961. Secretary's Note: For the reason discussed at a brief meeting of the Board members and Presidents that followed the Open Market Committee meeting, it was agreed that the May 9 Committee meeting would be held at 9:00 a.m. It was pointed out that if Committee meetings were held at three-week intervals, the meeting after May 9 would fall on Tuesday, May 30, which would be a holiday at most Federal Reserve Banks. After which reference was made to preliminary arrangements discussion, during been made for meetings of the Presidents' Conference and the that had the period June 19-21, it was Trustees of the Retirement System during that meetings of the Open Market Committee would be tentatively agreed June 6, and Tuesday, June 20. scheduled for Tuesday, The meeting then adjourned. Assistant Secretary
Member Bank Reserves -Board Series Total (Monthly Averages of Daily Figures) Billions of Dollars March 1961 Millions of Dollars Trend Line: 19.273 Reserves Unadjusted March 1961.
Also: Record of Policy Actions