August 22, 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, August 22, 1961, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Allen Mr. Balderston Mr. Irons Mr. King Mr. Mills Mr. Robertson Mr. Swan Mr. Wayne Mr. Treiber, Alternate for Mr. Hayes Messrs. Ellis, Johns, and Deming, Alternate Members of the Federal Open Market Committee Mr. Bryan, President of the Federal Reserve Bank of Atlanta Mr. Young, Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Messrs. Coldwell, Garvy, Noyes, and Ratchford, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Holland, Adviser, Division of Research and Statistics, Board of Governors Mr. Knipe, Consultant to the Chairman, Board of Governors Mr. Hilkert, First Vice President, Federal Reserve Bank of Philadelphia Senior Vice President, Federal Reserve Mr. Hickan, Bank of Cleveland Eastburn, Baughman, Jones, Parsons, and Messrs. Vice Presidents of the Federal Reserve Tow, Banks of Philadelphia, Chicago, St. Louis, Minneapolis, and Kansas City, respectively
Mr. Willis, Economic Adviser, 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 Mr. Runyon, Economist, Federal Reserve Bank of San Francisco Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on July 11 and August 1, 1961, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period August 1 through August 16, 1961, and a supplemental report covering the period August 17 through August 21, 1961. Copies of these reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse presented substantially the following statement in supplementation of the written reports: As indicated in the written reports, the money market has been firm during the greater part of the period since the last meeting, largely in reflection of a persistent tendency for free reserves to concentrate in country banks. In the past few days the money market has eased as free reserves increased, and the market may ease further--despite our large sales of yesterday--if country banks move large amounts of funds toward the money centers with the approach of their reserve settlement date tomorrow. The market has been influenced by the same background factors that were affecting the market at the time of the last meeting. The major influences continue to be rising activity and the prospective budgetary deficits business associated with the accelerated defense program. These factors, together with the reduced free reserve levels of the August 2 and August 9 statement weeks--due, as you will
remember from the weekly reports, to the necessity of deal ing with unmanageable numbers--led to a feeling in the market that the System may already have made at least a slight move away from the degree of ease that had been maintained in recent months. This feeling, which was partly reversed by the appearance of free reserves of $547 million last week, in turn played a role in the increase in yields that occurred during the period. In the case of three- and six-month Treasury bills, these yield increases amounted to about 20 basis points. The average rates in yesterday's auction, for example, were 2.50 per cent and 2.79 per cent, against average rates of 2.30 and 2.56 three weeks ago. Incidentally, dealer awards of six-month bills in the auction yesterday amounted to only $27 million as a large New York bank won $250 million of the six-month issue on a bid at a single price. Dealer awards of the three-month bills were about normal at $342 million. ahead, there will be a heavy schedule of Treasury Looking financing over the balance of the year. The Treasury is con sidering a $2 billion cash issue shortly after Labor Day, and contemplating an additional cash issue toward the end is also of September. Also, the possibility of an advance refunding period cannot be ruled out. In October, the Treasury in this will have to roll over the $1.5 billion maturing annual bills, as though an additional $500 million cash will be and it looks raised at that time. The Treasury will announce tomorrow that an additional $100 million in the regular bill it will raise auction next Monday (thus bringing the total amount of that auction to $1.7 billion); and it is likely that the Treasury will raise an additional $200 million through two regular in October, which will bring all issues weekly bill auctions within three months to $1.7 billion. Finally, the maturing Treasury will be announcing in late October the terms of its and following that there will be another November refunding, of new cash to raise before the end of the year. billion or two cent increase in bankers' acceptance rates The 1/8 per last Thursday reflected in part expectations on the part of increase in the supply of these dealers in acceptances of an obligations that would be coming into the market. With demand not especially robust, and with Treasury summer loan acceptance rates earlier in the summer, bill rates well below been a tendency for accepting banks to hold the there had rather than to sell the bills they had accepted as investments the market (indications are that the amount of bills into
acceptances involved is about $750 million). There have been recent indications, however, that these banks will move their acceptances into the market as their loan demand picks up, and the increase in supply from this source would come at a time when the volume of acceptances would be increasing seasonally in any case. Thereupon, upon motion duly made and seconded, the open market transactions during the period August 1 through August 21, 1961, were approved, ratified, and confirmed. Mr. Noyes presented the following statement with regard to economic developments: You will recall that at the last meeting I reported that it was too early to tell whether the heightened international tensions, and the steps proposed by the Administration to deal with them, might impair what seemed otherwise to be an exceed ingly satisfactory recovery. Most of the statistical informa tion that has become available since the last meeting still the period prior to the President's July 25th address, relates to of course, the recent developments in Berlin. It confirms and, was proceeding at a rapid rate, but generally that recovery without overtones of an inflationary character. increase to a new record rate of 112 Despite its rapid in July, production remained well below capacity levels. Both the consumer and wholesale price indices were generally steady, and even sensitive industrial materials leveled out after a 2-1/2 per cent rise early in the recovery period. at durable goods manufacturers rose further in New orders especially for aircraft and electrical machinery. Sales July, also rose, but remained below new orders, thus adding to the backlog of unfilled orders. Further information on labor market developments confirms the earlier observation that employment has been expanding historical standard, but that even so the level rapidly by any of unemployment has remained near the recession high. Total retail trade was down 1 per cent in July, due the automotive group, which to a 5 per cent decline in largely is probably related to the earlier model changeover this year,
Consumer spending for housing and durable goods as well as consumption items and services has, of course, risen as the recovery has progressed, but it has shown less than a typical upsurge for this stage of the cycle. For example, while industrial production has increased 10 per cent from the February low, retail sales are up only 1-1/2 per cent. Furthermore, buying intentions, as measured by surveys taken in mid-July, appeared to be relatively weak. The Board Census survey showed some slight improvement in auto demand, as compared to a year ago, but nothing of substantial pro portions, while expressed intentions to buy houses and most household durable goods continued to lag behind relatively depressed year-ago levels. One independent survey, of untested reliability, has shown a dramatic decline in combined buying plans for housing and durables throughout the whole first half of 1961, to well below year-ago levels. of strong demand in any important area of This absence expenditure is in sharp contrast to the two preceding consumer You will recall that in 1954-55 the strong surge recoveries. purchases by consumers played a key role in the in automobile stages of recovery, and that residential housing played early a similar part in the 1958 recovery. It is especially difficult to generalize about an area the normal problems of economic analysis are overlaid where conceptual difficulties, as they are in the case with special attitudes toward spending and saving. Neverthe of consumers' commands attention in the present circumstances. less, this area All of the evidence seems to suggest that, up to the present, have been willing--in fact, even anxious--to devote consumers part of their increasing incomes to saving, in the form a large of debt repayment and the acquisition of financial assets, than increased current consumption or the accumulation rather of physical assets. of this development in the flow of funds There is evidence Most striking perhaps is the growth in so-called accounts. claims--savings accounts, savings bonds, fixed value redeemable but conservative, estimates for the and the like. Using rough, it appears that for the twelve second quarter of this year, June 30, consumers' holdings of such claims months ended billion in the second half increased by over $17 billion--$8.2 in the first half of this year. of 1960, and $8.9 billion twelve-month period on record. This far exceeds any previous
At the same time, while they are above the very low rate of growth in late 1957 and 1958, consumers' financial liabil ities have expanded less than in other recent periods. The net increase in financial investment for the consumer sector; that is, their acquisitions of assets less their increase in liabilities, was about $3 billion in the first half of the year. While there is, of course, no single or simple explanation of these develop ments, the fact that the $17 billion increase in fixed value redeemable claims that I mentioned is twice the amount for the preceding twelve months suggests the extent to which the infla tionary psychology of late 1959 has been liquidated. It is an interesting sidelight that our data also do not seem to support the commonly held view that there has been a substantial increase in holdings of equity securities by the public at large in recent months. Our estimates are too rough to be precise, but it appears that the increase in outstandings was just about matched by the increase in institutional holdings. reasons, people in the United States do not For whatever seem to have been behaving as if they expected inflation, up to the end of July--and there is not yet any evidence that they have shifted their behavior since then. The one private intentions survey I mentioned does show a rise in buying plans since the but not to extraordinary levels. Department President's address, store sales are likely to be down, if anything, from July to August--although up, of course, from a year ago. There is no of inflation can be created, and created doubt that expectations quickly, but it does not seem that the deed has yet been done. Mr. Holland presented the following statement on financial developments: As has already been indicated, the signs of business recovery continue to be strong and broadly spread throughout the economy. this renewed business expansion has had little Thus far, however, counterpart in accelerated demands upon the financial system. Loan demand, while perhaps not quite as soft as in some earlier months, lacked the vigor usually associated with this has nevertheless Such bank credit expansion as has stage of cyclical expansion. occurred has been chiefly in purchases of Federal and municipal usual recessionary pattern. The trend of the securities, the money supply has been phlegmatic at best, with net deposit expansion being channeled by the public into time deposits. About the only
aspect of financial markets which has responded to recent economic events has been the pattern of interest rates, and even here the response has appeared to be more a product of adjustments in expectations than of change in current needs for, and supplies of, funds. Since the last meeting of the Committee, the predominant movement of yields on U. S. Government securities has been upward, as the market continued to reappraise the interrelated implications of the improved economic outlook, the higher defense expenditures triggered by the Berlin situation, and the antici pation of new and larger Treasury borrowing. Such upward rate movements were reinforced, particularly in the short end, by the reduced free reserve pattern of the banking system in the first part of August. Toward the middle of the month, however, first in longer-term issues and then in the short-term market, some buying interest appeared and yields recovered a portion of their preceding advance. In part, this recovery may also have been technical. In any event, it was fostered by the easier bank reserve position which became apparent after midmonth. Other securities markets were more quiet in tone, with yields on seasoned corporate and municipal issues showing modest net changes. New issue flotations in the corporate market were quite light, as is often true in August. In the municipal market, what first appeared to be a fairly large volume of financing scheduled for the month assumed more moderate dimensions with the cancellation of more than half of the large California package of bond issues. At banks, both business loans and total loans declined less in July than in some earlier years, but in part this reflected the weaker increases during the preceding June, with its tax date and other special financial influences. Over June and July combined, total bank loans were up only $400 million, the smallest rise in recent years, while business loans appeared unchanged net. This lack of net change in business loans did offer a slight contrast to the small net contraction reported in the summer months of the recession years of 1958 and 1960. Something of this same pattern also has appeared to continue in the city bank the last three weeks, with the advent of the period reports for of seasonal rise in these credits. Business loans were up some $200 million, substantially more than last year's recession-slowed advance, although less than in the same season of earlier years. companies borrowed a substantial sum from city banks Sales finance during these weeks. This increase was more than offset, however,
by large retirements of securities loans, both those secured by Governments (which had bulged over the Treasury financing dates) and those for purchasing and carrying common stocks and other securities. City bank holdings of Government securities have declined since late July, and banks have sold bills amounting to roughly one-third the amount taken up at the time of the sale of tax anticipation bills last month. On the other hand, average portfolio maturities of these banks were lengthened appreciably sizable exchange of maturing issues for the over one-year by their notes offered by the Treasury on August 1. Over-all, bank credit at city banks has declined since the last week in July. This has been matched by drops in both privately-owned and Government demand deposits. Time deposit totals have shown some further advance thus far in August. The daily average money supply, seasonally adjusted, is estimated to have dropped $100 million in the second half of July $4OO million in the first half of August. This and an additional decline brings the money supply back roughly to the average level for March and only 1-1/2 per cent above the figure for a year ago. Time deposit totals were estimated to have increased as much, seasonally adjusted, in the first half of August as the money supply declined. This continues the strong growth trend shown in the time deposit component in recent months, and imparts an annual rate of growth on the order of 5 per cent to the total of money supply plus time deposits since last winter. Because of the sharp parallel recovery in national output, however, both the ratios to GNP of money supply and money supply plus time deposits have undergone declines. The recent contraction in the money supply developed in with reduced ease in bank reserve positions. Free conjunction reserves ranged downward toward the $400 million mark in the reserve weeks in August, before recovering to levels first two in the last statement week and the in the $550-600 million range The reserve decline of early August was partly a current week. absorption to support deposits created in reflection of reserve financing, and partly also a reflection of large the Treasury cash dimensions and of market additions market drains of unforeseen funds which did not materialize in the full amounts anticipated to operations. As a consequence, available and allowed for in System even though System open market operations reserves declined million of reserves, on a weekly average supplied a net $734 the last four weeks. Data for the basis, to the market over
last complete reserve week of August show actual reserves falling over $150 million short of the total projected in the staff memorandum as necessary in order to meet seasonal needs, to cover Government and interbank deposit changes, and to provide an annual growth factor of 5 per cent in the reserve base. The weeks immediately ahead of us will call for heavy injections of reserves by the System. Market factors are expected to drain large amounts of reserves in the next two weeks, including the Labor Day holiday, necessitating net additions of Federal Reserve credit of about $575 million to maintain free reserves unchanged. This reserve injection by the System will need to be reversed in the mid-September weeks. Required reserves are expected to increase substantially later in September, reflecting net expansion in both private and U. S. Government deposits, Smaller net increases are projected for October and November, followed by the usual large expansion in required reserves in December. would need to increase by about $1.1 billion Total reserves from now to the end of the year to provide for projected seasonal increases in required reserves plus a 5 per cent expansion of private deposits and the maintenance of excess reserves at around $600 million. This increase would include $155 million needed to make up the short-fall of current total reserves below projected levels. During this period market factors may be expected to alternate between supplying and draining reserves in large volume, although they may supply about $400 million of reserves on balance through the end of the year. Most of the net expansion in reserve needs will require System action, as is usual in this part of the year. The question arises as to the ability of the market to absorb System purchases of securities in the dimension implied by these projections without a resulting undesirably low bill rate. Some offsetting upward pressure in the short-term rate structure will be created by prospective Treasury financings. summer the Treasury had announced that its financing Earlier this for the remainder of the calendar year would range between $5 and $6 billion. The latter figure now appears to be more appropriate be exceeded, inasmuch as present projections suggest a and could Treasury cash deficit of as much as $9 billion for fiscal 1962. Present tentative plans call for the Treasury to provide for its remaining 1961 cash needs in several trips to the market, as has outlined, beginning with an announcement shortly Mr. Rouse after Labor Day.
As this prospective schedule suggests, the Treasury will be contributing some pressure upon the short-term market this fall. But this Treasury schedule poses other problems for the Federal Reserve, since it provides only a few short gaps, chiefly in October and December, during which System policy could be altered without risking adverse consequences for debt management operations. Even the range for immediate adjustments in reserve availability since it would be desirable to move into an "even is limited, keel" reserve position by early September. Thus, in contemplating immediate reserve recommendations, attention must be given as well to shortly attaining levels of reserve availability which would be appropriate for some span of ahead to the fall, thoughts of appropriate monetary time. Looking policy for that stage of economic recovery may be influenced by anticipated lags in the effect of monetary actions. Depending upon the strength of expected developments, the possibility might be raised of early monetary action, in order to forestall the ramification of maintained monetary ease and prevent its spreading spans of time for which it would be regarded as well beyond the On this point, however, it might be noted that the appropriate. evidences of lags in monetary effects pertain primarily documented capital goods, in which considerable slack for to markets for future expansion currently exists. Lags are much less apparent markets, and probably least apparent of all in in the financial the short-term interest rate structure, If, therefore, the monetary policy through the end of the year are with concerns of problems which could be dealt with by upward short-term potential anticipatory actions in this direction by the rate adjustments, System would not seem to be required. Mr. Young presented the following statement regarding the United States balance of payments and related matters: Major international financial markets continue in a highly sensitive state, reflecting in part investor disquiet over the a lack of firm confidence in the future Berlin crisis and in part relation of international currency values. The Berlin crisis generated a large flow of funds from The main beneficiaries of the Germany into other currencies. outflow of funds were not the reserve currencies but rather France, and Italy. The most recent Switzerland, the Netherlands, news from European markets indicates some quieting of financial
fears. This is attributed to market response to last week's show of strong U. S. position, with the concurrence of other NATO powers, regarding a Berlin settlement. The British program of financia retrenchment has apparently halted the flight of funds from sterling, but there are few signs yet of a large reflow to London. While the spot pound has strengthened some, the forward discount on sterling has widened, thus offsetting the incentive effect of the higher short-term yields in London. British bond yields, which rose sharply following the discount rate increase, have since declined moderately but hold at a level close to that for Treasury bills. The high British bond yields, it is reported, have been attracting some, though not large, foreign buying. Recent developments regarding the U. S. balance of payments can hardly be described as cheering. Preliminary data on gold and dollar transfers to foreigners for July would indicate a July payments deficit about twice the monthly rate of deficit for the second quarter. The July deficit reflects in part temporary and seasonal influences, but over-all payments tendencies would suggest a real worsening of the U. S. deficit position. Imports, as shown by June data, are beginning to rise, as they should be expected to do in a period of vigorous cyclical recovery. On the other hand, exports in June were up only a little and there is small hope for much rise above recently prevailing levels over the balance of the year. With the trade balance thus tending to deteriorate, the main area for compensating payments adjustment would have to be the long-term capital outflow. Balance-of-payments data for the first two quarters of the year fail to show any contractive tendency in the long-term capital outflow, although such contraction might be expected on cyclical grounds. Currently available data, moreover, give no indication that this outflow is presently tending to abate. It may be concluded, therefore, that the short-run outlook for the U. S. balance of payments is one of continuing and somewhat worsening deficit, with the deficit for the whole year possibly in the neighborhood of $2 billion. In addition, payments flows among European nations are currently altering the ownership of foreign dollar deposits, particularly in the direction of ownership likely to convert them into gold. In the light of these circumstances, and barring uncertain repercussions of an unforeseeable mishap in overcoming the Berlin crisis, we must be prepared in the months ahead to see some further reduction in the U. S. monetary gold stock. A resumed
gold outflow of moderate volume should not be alarming as long as renewal of large outflows of volatile funds is avoided and as long as there remain good grounds for belief that real progress is being made towards better basic equilibrium in international payments Mr. Treiber presented the following statement of his views with respect to the business outlook and monetary policy: On the domestic scene, the economy continues to move forward. Industrial production has attained a new high. Consumer spending is moderate in the light of record personal income. So far, prices have continued relatively stable, but there are a few signs of upward pressures. We are moving from a period of recovery into one of expansion. Nevertheless, there is a good deal of unused resources, both men and plant capacity, and the high level of unemployment continues to present a challenge. Bank credit has been expanding moderately with some signs of renewed strength discernible during the last week or so. Business loans made by banks this year have been offset by a larger than usual amount of repayments, presumably as the result of the sale of large amounts of refunding capital issues by the borrowers. this light, the record of business loans by banks has Viewed in We may expect substantial bank credit expansion during been good. the remainder of the year not only because of the increased seasonal need for bank loans but also because of large borrowing by the Federal Government. The general liquidity position of the economy is good. In the period since the last meeting of the Committee the money market has been less easy than in preceding periods, but it been tight. In the preceding period the unexpected has not of several market factors brought about a condition confluence ease than was expected. Conversely, in the last couple of greater weeks several market factors worked in the opposite direction of more than was expected. Federal Government spending seems to be in prospect, More throwing the budget more out of alignment and requiring more Treasury borrowing. People are raising questions here and abroad danger of the prospective deficit spending to as to the potential economic stability and confidence in the dollar. As greater further stimulates the domestic economy, there deficit spending will be less need for a policy of monetary ease.
Within the next few weeks, possibly before the next meeting of the Committee, the Treasury may announce new cash borrowing and perhaps also an advance refunding. The latter would afford the Administration an opportunity to underline its concern for fiscal responsibility in a period of a rising deficit. Since the Treasury will need to borrow shortly, it is desirable to avoid upsetting developments in the securities markets in the next few weeks. Our international financial position has been deteriorating. Our balance of payments is worsening. In the first quarter of the year we did well, but since then the deficit has progressively widened despite heavy outflows of funds from London. Our trade as exports have fallen off and imports have surplus has declined With further economic expansion at home, imports are increased. rise further. We have made little progress toward a likely to long-run solution to our balance of payments problem. Failing to be vulnerable to shifting winds of sentiment that, we continue which could eventuate in a substantial demand upon us for gold. The demand for gold has been increasing and the price of rising gradually in the London gold market. The gold has been at the fixing on Friday was the highest since February. price demand is due to international political tensions. Some of the The aggravation of these tensions will likely raise the demand Climbing gold prices stimulate specula for gold still further. tion. Some European central banks are concerned about the of a run-up in the price of gold such as occurred possibility last October. They fear that such a development would be as a first step toward the devaluation of the dollar interpreted People abroad are watching carefully and other currencies. in the United States. They are watching our monetary developments and especially the way in which we policy and fiscal policy, It behooves us as a nation to do handle the Federal deficit. we can to promote sound policies and to demonstrate everything to the world our resolution in this respect. business and credit situation still calls for The domestic be alert, however, to the of monetary ease. We must a policy defense spending and related expansion possibility that stepped-up may place excessive pressures on the price in private spending economic stability. Large wage increases structure and endanger now under way or in the offing growing out of wage negotiations on prices. The international picture also could also put pressure We should seek to avoid any calls for continuing alertness. short-term interest rates. substantial decline in
We believe that in the coming period the System should continue to follow about the same monetary policy it has in the last period. Doubts should be resolved on the side of less ease. The so-called "feel" of the market is especially important. It would seem desirable that the effective rate on Federal funds be a bit below the discount rate, ranging between 2 per cent and 3 per cent, perhaps averaging about 2-1/2 per cent. We think that it is desirable that the rate on three-month Treasury bills continue within the range of 2-1/8 to 2-5/8 per cent which has been in existence for about a year. In the light of both domestic and international conditions it is desirable that the rate be in the upper part of the range. We believe that the authority to engage in transactions in longer-term securities should be continued and that the discount rate should not be changed. At the last meeting of the Committee it was suggested that the time was approaching when a change in the directive would be in order. As we move now from recovery into expansion, we think a change would be appropriate, and we suggest that clause (b) be revised so as to read as follows: "to encouraging credit expansion so as to promote fuller utilization of resources, while guarding the international position of the dollar." Mr. Johns commented that Mr. Holland had covered in such detail the facts pertaining to the behavior of reserves, total and otherwise, in the recent past as to permit proceeding at once to what seemed a reasonable conclusion; namely, that total reserves had not been expanding rapidly enough to allow for the continued expansion of total deposits at about a 5 per cent annual rate. The rate of expansion of total reserves had been so slight recently that bank credit expansion had been dependent to some extent, perhaps primarily, on a decline in excess reserves of about $80 million in the past four weeks. He would not want to depend on a further redaction of excess reserves as a basis
for continued deposit expansion; therefore, he would suggest that the Committee be diligent about increasing total reserves in an adequate amount to continue deposit expansion at at least the rate that had prevailed since March. He had some doubt whether it could be assumed that the rate of expansion of time deposits would long continue. If this doubt proved valid, he thought it was unquestionably true that the System would have to provide more reserves in order to support an expansion in demand deposits, and there had been no such expansion in recent months. In the circumstances, he was inclined to recommend that total reserves be increased about in line with the staff projection set forth in the memorandum that had been distributed under date of August 18, more particularly in the column of total reserves projected found in table 3 of that memorandum. This would include a $15 million weekly increment in order to provide for expansion in demand deposits adjusted and time deposits at an annual rate of 5 per cent, and it would also make up the short-fall of total reserves that had occurred recently. With alternating periods of about two weeks each in which the projections contemplated the necessity of buying heavily, then and then buying heavily again, it appeared that there selling heavily, should be possibilities of catching up the short-fall without dire repercussions in the market, and he would like to see this done.
Mr. Johns said that he would not recommend a change in the discount rate at this time. Although he had not come to this meeting prepared to argue for a change in the directive, he was attracted to the suggestion made by Mr. Treiber and thought it was a good one. Mr. Bryan said there had been no developments in the Sixth District that seemed worthy of a detailed report at this time. The District seemed to be going along about the same as indicated by the national figures, and in any event only fragmentary new data had become available since the August 1 meeting. As to the national picture, it seemed that the recovery was going ahead. It also seemed that the $542 million figure of free reserves reached in the most recent statement week was one that would permit credit expansion. However, as he saw it, the situation actually had tightened rather substantially in a couple of the weeks of the past period. He did not believe that at the moment a tightening in the money situation could be justified; therefore, he would suggest aiming for free reserves between $550 and $600 million. Such a range, he thought, would be compatible with a more than seasonal increase in the total reserve figure. Mr. Bryan said he saw no reason for changing the discount rate to the directive, he would have no objection to at this time. As
changing it in the manner that had been suggested, but he was not sure there was any real point in making such a change. Mr. Hilkert reported that the pace of recovery in the Third District had quickened in recent weeks. Construction contract awards were now moving up at about the same rate as nationally, steel production had increased, along with output in most lines of manufacturing, and goods were selling well at retail. In July, total bank credit at District banks increased, with loans showing no significant change but investments rising. More recently there had change. Reserve positions of District banks were easy. been little Reserve city banks had been net sellers of Federal funds, and country bank borrowing at the discount window continued to be small. Mr. Hilkert's appraisal of the national business picture was in brief: (1) the rise in business activity was broad-based that, and was continuing at a good pace; (2) excess plant capacity, a still of unemployed, and keen competition, both domestic and large number foreign, provided fairly strong restraint on any important upward movement of the price level; and (3) although evidence of inventory building and anticipatory buying was not yet seen, the stepped-up defense program and growing international tension had added fuel which, of inflation psychology, could lead to a if sparked by a resurgence boom and rising prices.
Mr. Hilkert expressed the view that recent business and financial developments did not call for any change in monetary policy for the next three weeks. Rising market rates and lower free reserves indicated some tightening in the past three weeks, and he would favor maintaining about the same general degree of ease as had prevailed during this period. More specifically, he would like to see the Federal funds rate comfortably below the discount rate, market rates at about the present level, and, if consistent with these two objectives, reserve positions in the same general range as during the past three weeks. He would favor continuation of the authority to conduct open market operations in intermediate and longer-term securities. With the recent rise in intermediate and long-term rates, it appeared that be desirable to supply some of the reserves, when needed, it might through purchases of the longer maturities. He would not favor changing nor would he suggest a change in the directive at the discount rate the present time. after some hesitation caused by Mr. Hickman reported that the Fourth District, most economic indicators vacation shutdowns in economic expansion evident since last now showed a resumption of the was back by mid-August to the highest levels spring. Steel output shipments at Pittsburgh and mid-June, and outbound freight since of year-ago figures, whereas they Cleveland had recently moved ahead
were still lagging for the nation as a whole. As a result of warm weather and stronger industrial demand, electric power output had risen sharply, and on a seasonally adjusted basis had averaged higher in major centers than at any time this year. Recent changes in bank credit in the District had been dominated by the July Treasury financing, as banks continued to liquidate bills acquired in the last week of July. Banks generally appeared to be in an easy reserve position, as indicated by the low level of borrowings from the Reserve Bank, although net purchases of Federal funds had increased in recent weeks. Commercial and industrial loans of weekly reporting banks expanded by about $12 million in the three weeks ending August 16, about twice the expansion indicated in the comparable year ago, but the general belief among bankers in the District period a was that the expansion this year will be no more than seasonal. Despite recent improvements, Mr. Hickman said, there was of excess capacity and high-level unemployment in widespread evidence the Fourth District. Since the District is dominated by the heavy industries, output usually contracts more sharply during recessions than in the nation as a whole, and this had been true in the recent recession. Similarly, the recovery from recession lows is usually sharper than in the nation, since the District starts from a lower
base. The recent advance in the Fourth District had conformed to this pattern, but there was still some way to go before previous cyclical peaks were regained. as a base, steel output was still about 5 Using 1957-59 percentage points below the national average, and was lagging particu larly in the Youngstown and Pittsburgh areas. Manufacturing employment also had exhibited the cyclical sensitivity of the District and the slower rate of recovery. Manufacturing employment declined by about between May 1960 and March 1961, against a decline of only 12 per cent 6 per cent nationally. By June 1961, the United States had regained about half of the decline, while Fourth District employment had recovered only one quarter. pace of the recovery thus far, Fourth Despite the lagging and businessmen were optimistic for the fourth District economists quarter and looked for further improvement in the first half of 1962. production (20 million tons in the first quarter of this Steel ingot the second quarter) would exceed 25 million year and 25 million tons in a good showing in view of the seasonal tons in the third quarter, period, and would come close to 30 million weakness normal for this with the greatest strength exhibited toward tons in the fourth quarter, of a price increase in the steel end of the year. There was talk the upward on October 1, but feelings industry after wages were adjusted
were mixed as to whether a general upward price adjustment could be made to stick at this stage of the cycle. It was perhaps indicative that the automotive industry was still buying steel on a hand-to-mouth basis. In conclusion, Mr. Hickman said that District automotive economists continued to look for production and sales of U. S. built cars of about 5-1/2 million this year, with total sales (including foreign) of 5.9 million; and they were predicting total sales in 1962 of about 6.5 million, roughly comparable to the performance in 1959. The higher level of disposable personal income projected for 1962 was a plus factor for the automotive industry, but sales expectations were tempered somewhat by the relatively small number of cars three to five years old now on the road. Cars in that age group are the best candidates for trade-ins, and the small number now in this age group might retard sales next year. Mr. King presented the following statement with regard to System operations in longer-term securities: It appears that the System has, if for the present only, accomplished its purpose of helping slow the gold flow through purchases of longer-term securities instead of bills. The bill rate has remained slightly above two per cent, and I believe our departure from the "bills only" policy helped reduce downward pressure on the bill rate. This being the case and with the past three weeks' upward trend of the bill rate in mind, it seems this might be an appropriate time to cease operations under the special authorization to the Manager of
the Account. I do not mean that I would terminate the authorization now, nor does this imply that it might not be reactivated within the next few weeks or months, possibly for selling as well as buying. As an advocate of a more flexible approach than the "bills only" policy afforded, it seems to me that we have no need at the present time to supply reserves through purchases other than bills. Disengagement at this time would in no way repudiate our policy of the last six months, nor would it make us appear unsure of ourselves. Rather, it would indicate that we are decisive and have no fear of being bold when circumstances warrant boldness. What better evidence of flexibility could anyone have than to be flexible in two directions instead of only one? I believe it would not be desirable to make an announcement if this action is taken. If we did, it might be necessary in a few months to make another announcement that we were re-entering the long-term market to buy or to sell. To state now that we are getting out and to possibly reverse our statement in the next few months would be difficult for many to understand. Our withdrawal would become obvious in a matter of weeks, and I believe it would be better to let the financial community draw its own conclusions. Action in this manner should have a healthy effect on our domestic financial community as well as on those abroad who have an interest in our decisions. In further comments, Mr. King said the rise in the bill rate of the market as reflected by the Federal funds rate and the tone somewhat less ease than he believed desirable. What he had suggested was intending to do was to stay where it was, believed the Committee but in fact it had moved toward less ease. His vote would be to move degree of ease that prevailed during July and to back to about the resolve doubts on the side of ease. A level of free reserves ranging
from $500 to $600 million would seem to him appropriate. He would not recommend a change in the discount rate at this time. As to the directive, Mr. King indicated that he would be inclined toward no change at this time, even though the suggested language might be perhaps more appropriate to the existing circumstances than the present language. The figures, he noted, did not suggest that there had been any great success in meeting the objective, as stated in the current directive, of encouraging the expansion of the money However, he questioned whether the omission of the pertinent supply. words would serve any particular purpose at this stage. He would be inclined to leave them in the directive rather than to have readers of the policy record speculate that the System had given up on that score. Mr. Robertson expressed the view that the recent record of the Committee in providing reserves had hardly been in keeping with the existing directive, which provided for encouraging expansion of bank credit and the money supply. Therefore, he felt that the directive should be changed or, in the alternative, that the Committee should change its policy and its instructions to the Desk. He had found himself concerned, upon returning to his office yesterday, about the degree of tightness that seemed to have developed in the first part of August, with free reserves averaging $401 and $435 million, respectively, in two of the statement weeks. When he reviewed the record, however,
he found himself unable to criticize the Desk; instead, he thought the record indicated that the Committee ought to be more specific in its instructions to the Desk. Also, he realized that some of the tightening had been caused by conditions that could not be completely controlled by the Desk. Still he felt that the amounts of reserves that had been to meet the present directive or to meet the supplied were inadequate needs of the economy. Mr. Robertson suggested that the System should be acting now, while it still had latitude for action, to increase the money supply. Because of the Treasury operations, there would only be short periods in which the System would be uninhibited during the balance of the year. Accordingly, for the next period he would suggest striving toward a level of free reserves from $550 to $600 million. During the first two weeks that would create what he thought would be a condition of ease adequate to implement the existing directive, the suggested directive, or alternative wording that he intended to suggest shortly. During the third week there would be a rise in float. Thereafter, if it seemed desirable, free reserves could be dropped slightly to a level, perhaps in the $500 million range, that could be held during the Treasury financings in September and October and perhaps over the major part of November and December.
Mr. Robertson then suggested, though not with the thought of proposing action at this time, the advisability of keeping watch on developments in the stock market so that margin requirements could be increased, if necessary, rather than to permit any increased activity or speculative tendencies in the stock market to swerve the policy of monetary ease too far toward tightness. He saw no such indications today, but there had been earlier, and he felt that an eye should be kept on the situation. Mr. Robertson also suggested that care be exercised to see that the international situation did not panic the System into adopting a tighter policy than called for by the domestic situation. At the moment he saw no immediate prospect of inflationary developments; although there were potentials, there continued to be a large amount of unutilized manpower and productive capacity. As to the directive, Mr. Robertson expressed the view that the time had come to recognize the change in economic conditions since the directive was first adopted. While he was not opposed to the language suggested by Mr. Treiber, he would like to suggest alternative wording; namely, that clause (b) be amended to provide for operations looking toward the maintenance of economic growth and monetary stability adequate to meet the tensions and strains arising out of the prevailing international situation. In making this suggestion, he was trying to
indicate the great need to maintain confidence in the dollar and to act in a manner that would recognize the existing strains and tensions. In his opinion, this kind of language probably could not be carried in the directive too long, because tensions and strains vary. However, he felt it was desirable to amend the directive from time to time in the light of changing conditions, whether international or domestic. Turning to System operations in longer-term Government securities, Mr. Robertson made the following statement: I feel compelled to turn again to the issue of our opera tions in longer-term securities. These operations pose serious problems, and they cannot be resolved by avoiding discussion of them. the environment in which these operations are Consider being conducted. Interest rates have risen, and prospects for continuing increases in rates are cited in all quarters. In such circumstances it is difficult for the market, even when operating without Government intervention, to carry through orderly adjustments of prices which will keep supply and demand factors in balance. If Federal Reserve purchases of longer-term securities intrude upon these market adjustments, they are likely to hold prices at an unviable level at which the System will be the only substantial buyer. Around this table, on a number of occasions, critics of the special operation (myself included) have endeavored to express the logic of adverse market effects which could flow from these activities. Let me call to your attention this morning some of the concrete evidences of such ill effects which have begun to emerge. Some Government securities dealers tell us that it is becoming common practice for them, whenever they are offered longer-term bonds by a customer, promptly to make a correspond ing offer to the Desk. By this means dealers check to see if the bonds can be passed to the System, before they themselves will buy any substantial amount. Thus, System Account buying, and the prices at which it is or is not done, have become an immediate market influence.
Statistics reported by dealers indicate that private buying interest in the long-term Government market has shrunk drastically. Buying of over-10-year issues by commercial banks and nonbank investors, which was averaging nearly $10 million a day in the latter part of 1960, dropped to a $7 million average in the first quarter of this year, to under $4 million in the second quarter, and to only $24. million thus far in this quarter, barely one-fourth of the rate less than a year ago. In the weeks around the turn of this month, precisely when the last System purchases of any consequence were made in this area, total purchases of over-10-year issues by nonbank investors dwindled to an average of only $100,000 a day. To be sure, current figures could be expected to be lower than average because of the season of the year and the stage of the cycle. However, after all reasonable allowance for these factors is made, I think one still finds the decline in investor demand proceeding to such low levels as to display a baleful influence from Operation Nudge. If there were some major offsetting advantages being obtained through our purchases of long-term securities, perhaps there would be some grounds for arguing that the Committee should risk the ill effects I have mentioned. But there are no clear economic gains which are being realized. system purchases of long-terms in recent months have been so modest as to have had no reserve effects of consequence. Our entire special purchases of issues maturing in beyond 10 years have aggregated only $79 million. If, alternatively, we had endeavored to provide this amount of reserves through bill purchases, it is inconceivable that any perceptible further downward movement in bill rates would have resulted; yet this is the rationale on which we undertook the special operation. In summary, our continuing to buy dribbles of long-term issues cannot be justified on the grounds of the balance-of payments situation, the need for additional reserve inlets, or any salutary influence exercised on the market. I think we would be well advised to recognize this evidence produced by our own operation, and accordingly to withdraw the special authorization to the Account Management to deal in long-term securities. Although I still feel that prompt cessation of the whole special operation would be the wisest course, I am aware of the desire on the part of some members of the Committee that disengagement be a gradual process. In keeping with that
desire, I suggest that the Committee begin by returning to the initial standard set last February in barring Account operations in securities maturing beyond 10 years. It is to operations in the over-10-year area that the arguments I have expressed earlier apply most strongly. Avoiding future System purchases in this truly long-term sector would be a good beginning, and it would lay the foundation for progressively further limitation later as, in the Committee's view, conditions make it appropriate. Mr. Mills suggested that the Open Market Committee hark back in its thinking to its fundamental responsibility--providing an adequate base of credit availability to the commercial banking system--and that it avoid straying off into other areas and citing objectives on extraneous points as the criteria for policy-making. He noted that in policy judgments to some specific level of the past a tendency to tie or negative free reserves had been criticized, and it seemed positive to him that at the present time the Committee should think twice and a new sighting based on some projected level of total avoid taking reserves as the correct answer to policy-making. It also seemed that an occasional tightening in the market should desirable to remember forebodings and fears into the policy-makers in situations not throw when the supply of reserves remains sufficient to develop and preserve an adequate base of credit availability. He suggested that in such circumstances the Committee should not be either impatient or appre hensive that it had fallen into error and should remember that there is a lag in time before the market can become acclimated to a lower
reserve position. The policy considerations that would tie into the kind of reasoning he had outlined were set forth in the following statement, which Mr. Mills then read: It is never easy to foresee economic developments from a summer mid-point of seasonal slackness in activity. Despite that fact, a fair estimate of the present position of the economy might be that to date the strength in the recovery movement has been more on the side of production than consumption and, therefore, the test to be met during the fourth quarter of the year is whether enough economic power has been generated at the level of production to carry over into a measure of consumption sufficient to move the expanding plant output into final hands and in that way to insure lasting recovery. A Federal Reserve System monetary and credit policy suitable to this kind of economic situation would supply the commercial banking system with sufficient reserves to permit the further expansion of commercial bank credit. Such a policy, in supplying only enough reserves to permit an expansion of commercial bank credit truly evoked by natural market demands, would avoid the mistake of forcing reserves onto the commercial banks in a superfluous quantity that would result in dragging down the interest yields on U. S. Treasury bills at a time when international considerations demand a Treasury bill rate high enough to hold foreign investment funds in the United States. Moreover, oversupplying reserves at a time of international financial tensions could lead to the impression abroad that the United States was embarking on inflationary programs that would tend to weaken the purchasing power of the dollar. Adoption of the policy recommended would also take into account the fact that under present conditions, the rapid growth occurring in time deposits must be related to the lesser rate of growth that has occurred in the money supply as conventionally defined. The present justification for taking time deposits into partial context with the conventional money supply is that the growth in time deposits is in part a reflection of a slack demand for commercial bank credit, which demand, if it should come to life rapidly, would be accompanied by a conversion of time deposits into more highly charged economic factors having an inflationary bias. It is consequently advisable to combine in view the
growth of the money supply and time deposits as being the foundation on which a massive expansion of commercial bank credit has been built in the past year, whose structural components, in being susceptible to variation and exchange as between the commercial banks and other lenders, are fully adequate to accommodate the growth needs of the economy. In essence, the kind of monetary and credit policy now called for is one of moderation that will encourage reasonable commercial bank credit expansion and, in so doing, avoid the mistakes of the recent past in overdoing both the supplying and withdrawing of reserves which so disturbed the state of the money markets. To allow reserves to be supplied inordinately at this time would be inadvisable for the reasons previously mentioned, and also because the appearance of a high level of positive free reserves could lead to investor expectations of a steady rise in the prices of U, S. Government securities which, in turn, could incite harmful speculative activity. No change is necessary in the discount rate and continuation of the special authority is recommended on the basis that it used when practicable to reduce the System Open Market will be Account's portfolio in securities other than U. S. Treasury bills. It is suggested that subsection (b) in the directive issued to the Federal Reserve Bank of New York be revised to read, "to permitting an expansion of bank credit that will serve as a propelling force to the momentum of economic producing unstabilizing influences in the recovery without field of the foreign exchanges." Mr. Wayne said that the upward course of business activity in had apparently gained a broader footing in the past the Fifth District man-hours were continuing to rise, In three weeks. Employment and industry, cost increases were expected to create a difficult the textile this fall, and in anticipation there had been small profit situation Thus far, demand seemed strong enough to but general price increases. sustain the higher prices and activity had continued at encouraging levels, although this was due in part to Government buying and the
placing of orders in anticipation of price rises. The lumber industry seemed rather pessimistic, but a rising level of construction contract awards was noted. In a recent check, Reserve Bank contacts commented favorably on such items as manufacturers' orders, shipments, the trend of profit expectations, and retail trade. In summary, the Bank's contacts were generally optimistic about the outlook for the remainder of the year. Continuing, Mr. Wayne said that business and other loans at District banks had been unusually strong in the past three weeks and that the agricultural outlook was for further improvement. Early sales of tobacco were marked by price increases above last year. District banking developments, other than as noted previously, had been fairly routine, with gross loans following about the same pattern as in 1958 and investment portfolios moving slightly downward. The larger banks had continued to be heavy sellers of Federal funds and there was little use of the discount window. Turning to policy, Mr. Wayne commented that developments of note had occurred in two areas. First, the balance-of-payments position had shown further deterioration. Second, there was the substantial increase in short-term rates, especially the three-month bill rate. Although recognizing that monetary policy could make only a limited contribution to the solution of the balance-of-payments problem,
Mr. Wayne noted that the System must be alert not to aggravate the situation. The market causes of the sharp rise of interest rates were not entirely clear, but possibly the situation reflected a misinter pretation of System policy by the market. The relatively sharp drop in free reserves in the early part of the month, which reflected mainly unanticipated and uncontrollable market factors, seemed to have been interpreted by the market to mean that the System might be reducing the degree of ease. Perhaps it was only natural that the market should be looking carefully for such evidence at this time. In any event, condition could feed upon itself unless System actions in however, the no reduction in the degree of ease. the weeks ahead clearly indicated there was no valid basis for tightening In Mr. Wayne's view, Retail sales lacked vigor, prices remained at this particular stage, showed only normal increases. In quite stable, and business orders the circumstances, he felt that any further rise in short-term rates and in fact might be harmful, unless there were would be unwarranted, more signs of inflationary forces or speculative influences, and he would favor a policy that would not encourage any further increase in In fact, he would not be disturbed if short-term rates such rates. tended slightly downward. It would be necessary to inject a substantial future, and he would be inclined to amount of reserves in the near inject those reserves through the purchase of bills, if possible,
unless there was some significant shift in market conditions in the meantime. The staff estimates of reserve needs seemed appropriate to him, and he felt that a level of free reserves around $550 million would be desirable. After stating that he would not recommend a change in the discount rate at this time, Mr. Wayne turned to the directive and said that he was inclined to endorse the change proposed by Mr. Treiber. he would favor renewing the special authorization covering operations in longer-term securities. Mr. Tow commented that nonfarm employment in the Tenth District reflects the predominance of nondurable goods employment in the region. The composition of employment was an element of resistance to the recession and led to the -rerecession level of nonfarm employment being regained earlier than in the country as a whole. This same factor, resulted in little change in nonfarm employment in recent however, had months--though at a level above that of a year earlier. The agricultural sector of the Tenth District appeared to be year. Farm cash receints in the first having a rather satisfactory the year were well above a year earlier, out at a much reduced half of midyear. Lower cattle prices were one factor in this rate toward margin over a year earlier. Another was the rather narrowing of the speculative holding of wheat off the market. The winter widespread
wheat crop this year was excellent, even though 4 per cent below a year ago, and crop conditions generally were very favorable in the District at this time, The performance of the domestic national economy in recent weeks had been very good, Mr. Tow felt, especially when account was taken of price behavior since the beginning of the Berlin crisis this summer. While the direction of economic activity might not be in doubt, the pattern and timing of future developments were more uncertain. The situation would require close watching, particularly as to indi cations not yet apparent of strong anticipatory response on the part of business and consumers. Mr. Tow noted that the changes in the level of interest rates since the last meeting of the Committee indicated greater tightness in money and capital markets. In part, this reflected an expectational the response on the part of those markets. It also reflected, however, more restrictive System open market operations, for various reasons at this meeting, and it would not appear to him already mentioned at this time. Rather, he appropriate to add to this restrictiveness Committee, for the present, should provide reserves for felt that the expansion at a seasonally adjusted rate about in line with bank credit the first half of this year. Or, if the statement was made in terms in terms of free reserves, operations should of recent operations or
be conducted more nearly in line with the most recent week rather than the two previous weeks. In view of the international flow-of-funds problem, it would seem well to maintain the Treasury bill rate within the range of recent weeks, and in his view purchases of longer-term securities should be undertaken to the extent necessary to maintain the bill rate within that range. Accordingly, he felt that the special authorization with respect to operations in longer-term Government securities should be renewed, and without restriction as to maturities. No change would appear to be in the discount rate. While the directive apparently would called for need to be changed presently, he did not consider that any particular importance attached to whether the change was made at this meeting or the next. If a change should be made today, he would be inclined to favor the New York proposal. the rapidity of the economic upswing had seemed Mr. Allen said to him impressive, more so than to those who were saying that this year's rise was about in line with those of 1949, 1954, and 1958. He that those judgments understated the vigor of the uptrend. believed was more elbow room in the economy, more Although he agreed that there than in those earlier years, this did potential for expansion, in 1961 not justify underratirg the movement thus far.
To elaborate in terms of the Seventh District on what he had called elbow room, 11 of 23 District centers remained in the "substantial labor surplus" class with six per cent or more unemployed. In the four weeks ended August 12, District department store sales were just even with last year, compared with two per cent higher for the nation. Steel production was running below the June level, although production would increase if auto firms ordered in line with their anticipated fourth quarter production of 1,800,000 cars, A fourth quarter of that dimension would mean total 1961 auto production of 5,600,000 cars, compared with 6,700,000 in 1960. The automobile labor contracts would expire next week, Mr. Allen noted. The most important information--what the companies would give and the union take--should become clearer soon. As of the contract termination date, August 31, it appeared that about 150,000 1962 models, an average of five cars per dealer, would be on hand. Twice that number, or 300,000, was considered the minimum for so-called proper new car announcements. On August 31 there would be 500,000 to 600,000 1961 models on hand. Bank credit, as shown by the figures of Seventh District weekly reporting banks, expanded substantially in July, when acquisitions of Government securities and increased loans on securities far more than a decline in other types of loans. In the two weeks ended offset
August 9, however, the pattern was reversed. Total credit declined as the security loans made in July were paid down and the Government security portfolios were reduced. But loans except on securities rose in this latter period, and Chicago and New York banks reported further loan growth in the week ended August 16. Thus the weekly reporting member bank figures suggested that business loan demand was strengthening, and it seemed likely that both seasonal influences and the increasing pace of business activity would bring a continued uptrend through the rest of 1961. Mr. Allen pointed out that it was too early to judge the vigor of the loan demand he had mentioned. And there was still the elbow room in the economy to which he had referred, as evidenced by unused resources, both human and material. Under the circumstances he felt that it would be advisable to carry along for the next three weeks as the Committee had been doing and continue to supply reserves necessary to accommodate seasonal credit expansion and maintain about the existing degree of ease. He would not change the discount rate. He did feel, however, that the time had come to delete the words "strengthening the forces of recovery" from clause (1)(b) of the directive. The suggestions made thus far, particularly those of Mr. Treiber and Mr. Robertson, seemed to him to imply a responsibility in the foreign area which the Committee should not accept. He would
favor the first clause of Mr. Treiber's suggestion, "to encouraging credit expansion so as to promote fuller utilization of resources," but he would prefer at that point to use the "while" clause in the existing directive, namely, "while giving consideration to international factors." As in the past, he would like to see the special authori zation discontinued, and for the same reasons, Mr. Doming said that he saw no significant change in the Ninth District economic picture over the past three weeks, which meant that mixed trends continued. The drouth had cut and would continue to cut at a guess, the cash income loss from the damaged small farm income; grain crops would approximate $350 million, and the effect of this loss would be felt over the course of the next twelve months. Iron mining weak. Perhaps the best way to picture this weakness was also continued that the number of small centers with substantial unemployment to note increased to 21 in July from 9 in June. Most of these were in the mining areas, but some were in lumbering and trade centers. On the other side, there had been continued general improvement and trade. While total nonfarm employment continued in manufacturing to run behind year-ago levels, manufacturing employment was higher than a year ago and industrial use of electric power was up. trends in the District could be The net of those contrasting in capsule form through the personal income series. The expressed
July figure was just equal to the January figure (both seasonally adjusted), but it was 3 per cent ahead of July 1960. Looking ahead, some gain could be seen in personal income, but a much smaller increase than probably would occur in the nation. In banking, a contraseasonal decline in loans in July continued into August. This movement was evident in both city and country banks, and in each of the States of the District. No other July since 1946 showed such a weak loan picture. Relative to a year ago, however, city and country bank loan movements differed. Both total and business loans of city banks were below comparable 1960 levels, while country bank total loans were significantly higher than at the same date in 1960. Deposit behavior had been about normal. With weak loan demand deposit trends, loan-deposit ratios had improved and general and normal bank liquidity had improved, particularly at city banks. The Ninth District, Mr. Deming observed, obviously was not typical of the nation at present. But the national economy, while expanding significantly, was still far from operating under the pressure of full resource utilization. On the national evidence, he would advocate staying "just about where we are" in monetary policy posture three weeks. By that, he meant providing reserves adequate for the next to maintain a free reserve level of about $500-$550 million, and a significantly below the discount rate, while at the Federal funds rate
same time continuing to be concerned over the bill rate. On this latter point, however, he would not be worried about a bill rate that ran somewhat below 2-1/2 per cent. He saw no reason to change the discount rate, nor would he favor discontinuance of the authority to operate in longer-term securities. The foregoing, Mr. Deming pointed out, was obviously a continuation of "wait and see." Consistent with this, he would not change the directive at this meeting, although he did agree that the wording of the present directive seemed somewhat dated. Mr. Swan commented that the extent of the upward movement noted in the nation as a whole in July did not seem to have been paralleled in the Twelfth District. He could summarize by noting simply that nonagricultural employment, seasonally adjusted, in the Pacific Coast States, which represents a major part of total District employment, appeared to have been down slightly in July from June. This was only a small fractional decline, and to some considerable extent it was related specifically to labor stoppages. However, the fact remained that employment, after going up in June, did not increase further in July, and the drop extended to every major industrial group except finance and Government. In the banking picture, Mr. Swan said, the demand for bank loans to be quite weak. However, the large banks were still still appeared
anticipating a pickup in the fall. The major city banks were under some pressure in early August, but in the week ended August 16 and in the current statement week they became net sellers of Federal funds on a rather substantial scale and seemed to be in a relatively easy position currently. Turning to policy considerations, Mr. Swan said he felt that one must be cognizant of the inflationary overtones in the present situation. However, they did not seem to be imminent. The speculative outlook generated in late July did not seem to have intensified in the past few weeks. Consequently, it seemed to him that the results of the latest statement week, and apparently the current statement week, were in accord with the kind of policy that would be suitable for the period ahead, rather than the results of the second week of the past period. He would recommend aiming at free reserves of about $550 million, with the definite hope that the level would not go below $500 million, and he would not like to see the bill rate above 2-1/2 per If the rate were a little below that, he would not be concerned. cent. Reserves would have to be supplied in rather substantial amounts in the next few weeks, especially the week ending September 6, and it desirable not to fall as short as in early August. Although would seem in the first week of each month reserves tend to be he recognized that somewhat lower in relation to the previous week or the following week,
it seemed to him that the experience in the first two weeks of August should be given consideration and that it would perhaps be even more important in the period immediately ahead than in the past to offset the factors absorbing reserves, Mr. Swan stated that he would not favor a change in the discount rate at this time and that he would favor continuing the authorization covering operations in longer-term securities. special If there was any hesitancy about supplying the substantial amount of reserves that would be needed through the purchase of bills because on the bill rate, then he would certainly go of excessive pressure into the intermediate-term area to supply those reserves. With regard to the directive, Mr. Swan said he did not feel strongly on the matter. He thought a change would be desirable at some point, and if the directive were to be changed at this time he with Mr. Allen's suggestion. On the other hand, in terms would agree hesitant about making a change at this of timing he would be a little particular point, after a period in which some tightness had occurred, be drawn at a later date. On of the inferences that might because be inclined to suggest letting the directive balance, therefore, he would stand until another meeting. Eleventh District conditions could be summarized Mr. Irons said was going on, but not at an excessive by saying that economic expansion
rate, Probably the picture in the District was not too much different from the national picture, with most of the major indicators moving upward. The components of the industrial production index were up generally. Construction activity was good and improving, and one factor in the picture was the release of highway money that the Government was going to turn loose a little ahead of schedule; the State of Texas was ready to use the money for highways and roads. Employment had moved up; unemployment, not seasonally adjusted, stood at 5.5 per cent for the District. Income and trade were up a bit and the agricultural situation looked quite good. Thus, the District picture was generally satisfactory. Turning to policy, Mr. Irons expressed himself as quite pleased with what had been going on in the past few weeks. He felt that the System had been about as nearly right as one could reasonably have what had been going on could not be charac expected. In his opinion, as firming or tightness, for he could not associate those terized where there was virtually no borrowing at the terms with a situation Reserve Banks, the Federal funds rate was under the discount Federal under the discount rate, and free reserves rate, the bill rate was well $500 to $550 million. There might have been a move from averaged but the System was still providing reserves aggressive ease to ease, system in reasonable accordance with the demand for to the banking
loans. Banks in the Eleventh District were in a fairly liquid position and were not borrowing from the Reserve Bank, all of the recent borrowing being of a seasonal nature and on the part of smaller banks. District banks had been net purchasers of Federal funds, but this was because of the activity of two banks. In talking with bankers, he heard that loan demand was off a little, but the bankers were not concerned about being in a tight position. They could make loans as needed because the banks were reasonably liquid. Mr. Irons commented that three notable forces had developed. First, there was the improvement in the domestic economy. Second, the international situation was still uncertain, with a slight deterioration. Third, a month-to-month increase in Federal deficit spending had been occurring. Each of these forces suggested to him the same sort of credit policy; namely, less ease. If they continued, sooner or later the System would be moving in the direction of more firmness. For the immediately ahead, however, he would think in terms of continuing oeriod about what had been done, on average, over the past three weeks. He hoped that the Federal funds rate would move at about 2-1/2 per cent, give or take something, with the bill rate in the area of 2-1/2 to 2-3/8 per cent, and he would watch loans and investments closely to see what the banks were doing with the funds that the System made available to them. He would favor renewing the special authorization
covering operations in longer-term securities, with no specific limitations placed on the Account Management. In his opinion the Committee should leave considerable discretion to the Desk, with the understanding that the Manager would be governed largely by the feel of the market. In summary, Mr. Irons said, he would maintain the status quo for the time being, watch closely for the rest of the summer period, and see what developed with the advent of the fall season. As to the directive, Mr. Irons said he had no strong feeling. On balance, he would be willing to wait another three weeks, with the thought that perhaps the suggestions already made, and any others that might be submitted, could be studied by the Committee Secretary and blended into a suggestion that the Committee could consider when it met three weeks hence. Mr. Ellis commented that the broad upward trend in New England that he had reported in June may have moderated somewhat in July, although the July figures were not yet firm enough to be sure. Some industries, including apparel, jewelry, and silverware, had not shown the recovery that seemed typical of the area in general. Production, construction, and total employment had yet to regain 1960 levels, so there was still a process of recovery in New England rather than a movement into a period of expansion. In the past two weeks, in
particular, loans of weekly reporting banks improved noticeably. Demand deposits had increased 7 per cent since the start of the year, and time deposits also had shown some further advance. District banks were still expecting a vigorous loan expansion in the fall and perhaps they would be selling off some of their short-term Governments. Mr. Ellis exoressed agreement with the view, stated by Mr. Balderston at the August 1 meeting, that the Committee should follow total reserves as a basic guideline unless there was some reason to diverge one way or the other. The projections that the staff had presented for the Committee's consideration at this meeting involved a steady expansion of reserves in response to cyclical and seasonal that would obtain in the coming months, and he would accept patterns the projections as an appropriate goal for policy, especially during three weeks. He would favor a free reserve target of around the next $500 million, resolving doubts on the side of restraint, but with the there might not be as many doubts as in the past three weeks. hope that Mr. Ellis expressed the view that it was time to change the directive. The version proposed by Mr. Treiber, as amended by Mr. Allen, he thought it was something the Committee had for him the most appeal; appropriately adopt as a guide. could commented that as he looked ahead to the fall and saw Mr. Ellis a need to supply $1.1 billion of reserves for seasonal needs, he would
expect that most of them could be supplied through the bill market. Yet it might be desirable to supply some through participation in the longer end of the market, and with that in mind he would renew the special authorization. In fact, he would want the Desk to continue its contacts with the longer-term sector of the market so that if it was necessary to put funds into the market in this manner in the fall, that would not cause unusual speculation or concern. He would not recommend a change in the discount rate at this time. Mr. Balderston presented the following statement: Before giving you my views as to the monetary policy appropriate for the next three weeks, I shall ask you to bear with me long enough to deal with two matters pertaining to Committee practices and methods. The first of these is the pattern of thinking, or the long-term philosophy, that should guide the Committee's determination of policy actions. In discussing its decision-making, I shall be using the language of total reserves, adjusted to eliminate both Government and interbank deposits, and corrected for seasonal. I shall then turn to the second matter: the translation of Committee decisions from the language of total reserves into that of free reserves, so that the Committee's instructions to the Desk may be couched in language that is not only definite, but of practical usefulness. The guiding philosophy that I favor for the Committee's decision-making is to proceed steadily, week by week, toward whatever goal seems appropriate at the time for the fostering of recovery and economic growth without inflation. On the chart that is before you, a consistent pattern of policy decisions might be guided, for several meetings, by a straight line like those labeled "5 per cent" and "3 per cent".1/ The particular phase of the cycle will influence 1/ A copy of the chart is appended to these minutes as Attachment A.
the Committee's choice of such a guide. The Committee may follow a certain growth rate for a considerable time, as was the case for some four months last spring, and then veer gradually to another guideline considered more appropriate. The point I am making is that monetary policy should be flexible but not erratic. To be administered with consistency, changes in the guideline should not be violent but gradual. The chart portraying what has actually taken place in recent weeks indicates to me that the Committee may have changed its long-run objective from a 5 per cent growth rate to a 3 per cent growth rate without full realization as to what had happened, and that since the last meeting the implementation of Committee policy has resulted in a radical departure even from the lower growth rate. If an analogy be permitted, we should have been operating in recent weeks as if we were driving a truck across the desert on a straight course toward a goal that we had picked out in the distance. We should have departed from such a direct course only to avoid obstacles or depressions in the sand, and should have waited for any obstacle or depression to become actually visible before deviating. In short, we should let the forces of the market indicate when departure from a direct course is appropriate and necessary. How can such a guiding philosophy of steady consistent forward movement toward an agreed-upon goal be brought to bear upon the Committee's decision-making? Perhaps its goals and its progress toward them will stand forth in clearer relief if one cuts through the blurring influence of changes in Treasury and interbank deposits, and purely seasonal shifts in privately-owned deposits. These changes tend to hide what we really care about, namely, the cyclical expansion of bank deposits in the hands of the nonbank public. its performance, the Committee may well ask: To appraise in providing reserves for these how well have we been doing cyclical needs? The decision-making of recent months may be by reference to the chart. As mentioned already, appraised the reserve figures used in it are adjusted to exclude the reserves of changes in interbank and effects upon required and seasonal patterns in private deposits. Government deposits The chart shows the actual movements in total reserves, so of February 1961 compared with two adjusted, since the end growth lines. One of these embodies a steady 5 per cent annual rate; the other, a 3 per cent rate. It is not suggested growth
that either of these percentages represents revealed truth. They are used simply to compare what we were doing earlier in the year with our performance in recent weeks. The line of actual reserves portrays the vacillating nature of our provision for cyclical expansion; and, since early July, the slowing down, and indeed the net contracting, of reserves made available for such purposes. We have lost, since the week preceding our last meeting, the equivalent of 10 weeks' growth at the 5 per cent rate and over 16 weeks' growth at the 3 per cent rate. Even if the Committee now resumes the supplying of total reserves in accordance with a 3 per cent growth line, it would not restore the $120 million difference between the actual at this moment and the 3 per cent growth line on the chart. Now I turn to the problem of translating policy decisions expressed in total reserves into the language of free reserves. Such translation cannot be precise. It is affected by the rate at which bank deposit expansion proceeds, and this in turn by the impact upon bankers of customer demands, ease of reserve positions, and appraisals of the future course of events. The best that can be done is to rely upon norms derived from experience. Since the end of February, the free reserve figures associated with weeks of net monetary expansion have averaged about $54O million. Thus the market place supplies a crude measure of the free reserves needed for private monetary expansion during an average week. But in reality, weekly conditions differ from the average. Some refinement of this measure is called for to deal with those weeks containing bulges in float. Generally speaking, a dollar of reserves supplied by float has a less expansive effect than a dollar of reserves from other sources. For example, during the weeks of net monetary expansion since the end of February, the free reserve figure characterized by high float averaged $625 million; in weeks without a float bulge, $80 million, or a difference of $145 million. (In contrast, there have been other high-float weeks within this period that have been associated with net monetary contraction, even though the free reserves of these weeks averaged about $520 million.) At long last I add my view as to policy for the next three weeks. To promote moderate monetary expansion between now and our next meeting, I recommend a target of about $500 million for the two-week interval ending September 6, and above $600 million for the week ending September 13 when the
reserve figures will be more influenced by float. If pursued for perhaps 6 weeks, these targets should restore total reserves (adjusted) to the 3 per cent growth line portrayed in the chart. They have been stated in round figures to avoid "false accuracy," like that introduced when the value of pi is carried out to many places, even to 3.1416, when some figure in the computation, such as the price of copper, be approximated. Nonetheless, I am deeply concerned can only that the course of action determined by the Committee should be clear cut and should be adhered to as closely as possible by the Desk. In further comments, Mr. Balderston said that he would favor renewing the special authorization covering operations in longer-term securities. He would be inclined not to change the directive at this meeting, with the thought that perhaps some study between now and the next meeting might save time in determining the actual wording. A change at this moment seemed to him relatively unimportant, although he recognized that wording along the lines suggested was probably more to the current situation than the present language. appropriate Chairman Martin commented that he felt rather good about the way monetary policy was developing. Upon reviewing the minutes for the current year, it seemed to him a policy was gradually evolving that would be understandable to the country and effective in helping the economy. A year ago at this time, he recalled, he had entertained some doubt as to whether those factors were at work. The Chairman said that it appeared to him that almost all of those who had spoken this morning were in favor of continuing about the
same degree of ease that had prevailed, although some questions as to the way to achieve that degree of ease had crep into, the discussion. The shades of opinion expressed today seemed really to center around the fact that although the System might be moving, in its thinking, in the direction of a more restrictive policy, tre Committee had not yet arrived at the point where it wanted to be more restrictive. That, he thought, was about where the discussion had cone out, Chairman Martin commented, in this connection, that the point had been made well this morning about giving the Desk more precise instructions than in the past. The Committee had not yet arrived at the means of fully achieving that objective, and it would be necessary to continue work on the matter. The minutes of this meeting ought to be read carefully, and everyone should study wether any better means could be devised of stating the Committee's instructions to the New York Bank. Upon reading through the minutes of past meetings and then reading the directives, he must admit to a degree of ympathy with some of the criticisms that had been made by persons outside the System. Unless one had the benefit of the full flavor of the Committee discussions, it must be rather difficult to analyze the decision-making process. immediate question of a change in the directive, the As to the the view that the first part of Mr. Treiber's Chairman expressed for clause (b)--to encouraging credit expansion so suggested wording
as to promote fuller utilization of resources--probably was more appropriate to the present situation than the language of the existing directive. The Chairman added that he was favorably inclined toward Mr. Allen's suggestion for retaining the words "while giving consideration to international factors," since those words would not put the Committee in the guise of alone being able to defend the integrity of the dollar. Chairman Martin inquired whether such a change would be favored or whether it was the consensus that the Committee should hold the matter in abeyance, with the thought of perhaps obtaining additional suggestions. Mr. Mills moved the adoption of a revised directive in the form mentioned by Chairman Martin, and Mr. Robertson seconded the motion. Chairman Martin then inquired whether anyone would wish to vote against a directive containing such language, and there were no indications to that effect. Accordingly, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities off without replacement) for the System Open Market to run Account in the open market or, in the case of maturing with the Treasury, as may be securities, by direct exchange in the light of current and prospective economic necessary
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 credit expansion so as to promote fuller utilization of resources, while giving consideration to international factors, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in seems desirable, to issue participations to one cases where it Reserve Banks) such amounts of special short or more Federal term certificates of indebtedness as may be necessary from time time for the temporary accommodation of the Treasury; to amount of such certificates held at provided that the total Reserve Banks shall not exceed in any one time by the Federal the aggregate $500 million. question of the special authorization for Turning to the securities, Chairman rtin said he felt that operations in longer-term Ma both the proponents and the dissenters, would have to continue everyone, matter and study the available data. A memorandum from to work on the had been prepared for the Committee, pursuant to a the New York Bank at the August 1 meeting, attempting to trace the proceeds suggestion longer-term securities to the System Account. This of sales of the Committee some basis to go on, but there was memorandum had given / experience on which to make definitive judgments.- still a lack of real was to a memorandum from Mr. Rouse dated August 18, I/ The reference memorandum of August 11 from the New York 1961, and an attached Bank's Market Statistics Department.
Personally, he felt that it would be a mistake to remove from the Desk the discretion it now had under the current authorization. He leaned toward the position that it was not necessary under present conditions that the bill rate be maintained at present levels at all costs. He saw no reason why the bill rate could not fall to 2-3/8 or even 2-1/4 per cent, if need be, provided the Account could obtain bills without seriously upsetting the market. However, he saw no reason at this point for the Committee to get itself back in the box, in which it had been for so long, of being inflexible to the extent of taking a position that it would not deal across the board even though the deals, when available across the board, were in reasonable relation to the market. Everyone, he noted, could take the currently available data and read it differently. Mr. Robertson, for example, had interpreted the information in the memoranda from the New York Bank a little differently than he would have interpreted it, but he (Chairman Martin) may not have read the memorandum correctly. In any event, he felt that everyone should study and evaluate data of this kind very carefully. to a number of people in the market, and there were He had been talking evidently some difficulties in the special operation, but he had not he would want to make a judgment. Instead, he reached the point where keep an open mind. He felt, certainly, that the would prefer to Committee ought to renew the special authorization at the present time
and continue the discretion placed in the Manager of the Account. At the same time, the Manager should understand that the intent was not just to engage in operations in longer-term securities for the sake of holding the bill rate up to any preconceived level. That, he thought, was essentially where the majority of the Committee stood this morning. In response to a question from the Chairman, Mr. King clarified that his position, as stated earlier during , e meeting, had not been to terminate the special authorization, but rather to disengage from operations under it for the time being. Chairman Martin then inquired whether it was agreed that the Committee would renew the special authorization, with Messrs. Allen and Robertson dissenting. and there were no comments to the contrary. Accordingly, the Committee authorized the Federal Reserve Bank of New York, between this date and the next meeting of the Committee, within the terms and limitations of the directive issued at this meeting, to 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. Martin, Balderston, Irons, King, Mills, Swan, Wayne, Votes against this action: and Treiber. Messrs. Allen and Robertson. It was agreed that the next meeting of the Committee would be held on Tuesday, September 12, 1961.
Chairman Martin commented that he would be leaving shortly after the date of the next meeting to attend the Fund and Bank meetings in Vienna, and in those circumstances, particularly, he thought it might be useful to put on the agenda for general discussion at the September 12 meeting the subject of Federal Reserve holdings of foreign currencies. He noted that there had been distributed to the members of the Committee and the Presidents not currently serving on the Committee copies of a memorandum from Mr. Young dated June 16, 1961 (as corrected June 26), along with a memorandum dated June 16 from Mr. Furth of the Board's staff, and that there would also be distributed a letter dated July 21, 1961, from the Federal Reserve Bank copies of of New York commenting on Mr. Young's memorandum. The meeting then adjourned. Secretary.
TOTAL RESERVES AVAILABLE TO SUPPORT PRIVATE DEPOSIT EXPANSION, SEASONALLY ADJUSTED ACTUAL VS. 5 PER CENT AND 3 PER CENT ANNUAL GROWTH RATES, MARCH I -AUGUST 16, 1961 BILLIONS OF DOLLARS 5 PER CENT _____ ANNUAL GROWTH RATE ,19. SINCE MARCH 1 ACTUAL-- "19.3 3 PER CENT --- ANNUAL GROWTH RATE----- ------------ 90. is 9 JUNE JULY AUG. SEPT. MAR. APR. MAY
Also: Record of Policy Actions