October 24, 1961

October 24, 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, October 24, 1961, at 10:00 a.m. PRESENT: Mr. Hayes, Vice Chairman, presiding Mr. Allen Mr. Balderston Mr. Irons Mr. King Mr. Mills Mr. itchell Mr. Robertson Mr. Shepardson Mr. Swan Mr. Ellis, Alternate for Mr. Wayne Messrs. Fulton, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Clay, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Baughman, Coldwell, Einzig, Noyes, and Hatchford, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Messrs. Holland and Koch, Advisers, Division of and Statistics, Board of Governors Research Mr. Furth, Adviser, Division of International Finance, Board of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors Government Finance Section, Mr. Yager, Economist, and Statistics, Board of Division of Research Governors Mr. Heflin, First Vice President, Federal Reserve Bank of Richmond

Mr. Hickman, Senior Vice President, Federal Reserve Bank of Cleveland Messrs. Eastburn, Lewis, Strothman, and Tow, Vice Presidents of the Federal Reserve Banks of Philadelphia, St. Louis, Minneapolis, and Kansas City, respectively Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston Mr. Link, Assistant Vice President, Federal Reserve Bank of New York Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Assistant Cashier, Federal Reserve Bank of Atlanta There had been distributed to the Committee preliminary and revised drafts of minutes of the meeting of the Committee held on October 3, 1961. Upon inquiry by Vice Chairman Hayes as to whether there were or suggestions regarding the minutes, Mr. Robertson any comments to which his attention had been called stated that in light of a point connection with his comments would like to request, in by Mr. King, he that the next-to-last* sen on page 13 of the revised draft, appearing tence be changed as follows: SUGGEST that the Committee He would agree-with-Mr.-King its policy by the level of the should not continue to guide had been put on the bill rate. bill rate--too much emphasis was indicated, and it to Mr. Robertson's request No objection that the change would be made. was understood upon motion duly made and Thereupon, and by unanimous vote, the minutes seconded, * Last sentence beginning on page 13 of typed copy.

of the meeting of the Federal Open Market Committee held on October 3, 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 October 3 through October 18, 1961, and a supplemental report covering the period October 19 through October 23, 1961. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Rouse made the following comments: The conduct of open market operations during the period since the last meeting has been complicated by unforeseen adjustments in reserve statistics. Not only has the reserve outlook ahead been highly uncertain, but in addition there have been some large downward adjustments of free reserves statement weeks that had already passed. The resulting for lower level of free reserves, however, was not reflected in any significant firming of money market conditions. Federal funds generally traded around the 2-1/4 per cent level and rates on three-month Treasury bills continued to move in the general 2.25 - 2.35 per cent range in which they have fluctuated since late August. Although dealers held over $1.8 billion of bills in trading accounts as of Friday night, more than half were bills due in over 90 days and on average able to carry the bills at a profit. With they have been bill rates tending to follow movements in the Federal funds rate, there would appear to be little likelihood of any increase long as the Committee continues to maintain the in bill rates as present degree of ease--particularly in view of the purchases meet the large-scale need for reserves over the next required to firming of the Federal funds rate two weeks. However, temporary 2-3/4 - 3 per cent level would probably help shake bills to the portfolios and minimize the effect of our loose from dealers' on bill rates. purchases Treasury plans to announce the terms of its November The refinancing next week. A major question is whether the $7 nearly all of which are pub billion of maturing securities, licly owned, will be refinanced on a cash basis or whether the

Treasury will give holders pre-emptive rights to exchange into one or more new issues, It seems likely that the Treasury will try to achieve some debt extension whichever method is employed, particularly since it appears that banks have recently tended to move out the maturity scale slightly in quest of higher earnings. Also, there has been some small buying interest in Treasury bonds on swaps out of corporates as the narrowed rate spread between Treasury and corporate issues has made the former relatively more attractive. A difficulty with the cash method is that the Treasury must specify the size of each issue it will offer, and with the market's appetite for maturities beyond the short-term area uncertain as to amount, this is not an easy problem. On the other hand, if the Treasury chooses to give "rights" to holders of the maturing issue, it will have to face the problem of attrition. If attrition should be normal, the Treasury in all likelihood would have to come to market with a special cash operation. I should mention that the System does not hold any of the maturing issue. Thereupon, upon motion duly made and seconded, the open market trans actions during the period October through October 23, 1961, were approved, ratified, and confirmed. Mr. Noyes presented the following statement with respect to economic developments; A careful analysis of the whole range of economic intelligence available at this juncture seems to yield something of a dichotomy. hith very few exceptions businessmen and business economists report disappointment with the behavior of the economy in the third quarter, and skepticism about the strength of the expansion ahead. least on the surface, there is considerable statisti At seems to support this less optimistic cal evidence that appraisal of the situation, Even before the work stoppage at General Motors and Hurricane Carla last month, the pro duction index was showing a curtailed rate of increase. just how much of the weakness It is difficult to estimate in September should be attributed to in industrial output

these transitory factors and the anticipation of the tie-up at Ford which materialized in October. A few components of the index continued their vigorous expansion, but most seemed to reflect a falling off in the rapid rate of increase which had characterized the advance in spring and early summer. Unemployment was not significantly reduced--remaining just under the 7 per cent rate in September, for the tenth consecu tive month. The statistics on retail trade are perhaps the least satis factory of all the current measures of economic activity. But even after allowing for a considerable bias on the downside, retail sales can hardly be described as buoyant. At department stores we find that, while activity has picked up a little in recent weeks, it is still at about the July level, on a season ally adjusted basis. The increase in personal income also moderated considerably in August and September. Actually, income declined from July to August, but after deducting the National Service Life Insur ance dividend in July, the increase, at seasonally adjusted annual rates, was $800 million in each of the last two months. This was considerably less than the month-to-month increases earlier in the year, and even less, for example, than the September to October advance a year ago. Perhaps most important of all, wholesale prices of indus trial products--that is, the prices that manufacturers receive for their products--have shown no significant upward movement during the entire recovery period and are now still more than 1/2 of 1 per cent below the March level. If we stopped at this point, the less optimistic appraisal which seems to have become so prevalent in the of the outlook would seem to be justified-and one might business community well ask why there is any reason to question it. There are, it seems to me, two kinds of reasons. First, if we look at the third quarter as a whole, in terms of the we find that the economy was operating at levels GNP accounts, which few believed we could achieve six months ago. The $10 in the $526 billion third quarter billion increase involved jump from the first while less than the $15 billion estimate, any other standard. More the second, is large by quarter to in the face of a smaller this increase was accomplished over, and services than purchases of goods increase in Government was expected and a substantial cut in net exports. Thus, actually increased more in personal consumption expenditures second, contrary to general quarter than the the third expectations.

The second set of reasons for questioning the somewhat pessimistic view which has developed is admittedly more tenu ous and prospective. It stems from such facts as the scattered evidence of some improvement in the production index in October (despite the Ford strike), the rise in the seasonally adjusted rate of housing starts (despite a big drop in FHA financed activity), and the moderate, but continuing rise in manufacturers' new orders for durable goods. It is supported by the knowledge that the less than expected rise in Government spending in the third quarter probably means more for the current quarter and those ahead. It is further buttressed by the observation of those who seem best qualified thread to their way through the maze created by early model changeovers, strikes, and introduced and unintroduced middle lines, that sales of 1962 model automo biles are going pretty well. There is also probably some truth in the oft-repeated observations that unseasonably warm weather and the unsettled situation in the auto industry have retarded soft goods sales this fall, and that cool weather and the re sumption of full-time employment at auto plants will shortly give a lift to retail activity in many areas. The recent be havior of bank credit and the money supply seem to me to support a more optimistic appraisal of the outlook. This leads to the conclusion that if we set aside the troublesome developments, of which Mr. Furth will remind us in a moment, with respect to the balance of payments, one might describe the present situation as one beset with no more un certainty than is necessary if we are to avoid over-rapid expan sion and an upward spiral of costs and prices. It does not seem to me that the signs of weakness that have appeared thus far are sufficient to suggest any easing in monetary policy, even if we were free of the constraints imposed by international factors. other hand, the widespread uncertainty among busi On the to the outlook, the stability of wholesale nessmen with respect and the hesitation in the advance in prices at reduced levels, output at factories and mines all suggest that overt tightening Treasury refunding operation ill-timed, even if a major would be were not just ahead. evidence of diverse trends in the economy, I In citing In fact, domes seemed uncertain or indecisive. hope I have not give a much clearer guide to policy tic economic conditions today an actual and in favor of case. The balance is often the than to me to be posture seems of the present apparent continuation overwhelming.

Mr. Thomas presented the following statement with respect to credit developments: In recent weeks, it has appeared that the System was having more success than previously in its double, often conflicting, aims of fostering monetary expansion essential for economic recovery and at the same time avoiding a de cline in short-term interest rates. Total bank credit expanded more in September and also in the third quarter than in corresponding periods of any previous year (at least in the last 12). The money supply showed the first substan tial increase in several months, while time deposits continued to increase. These developments have been aided by substan tial new cash offerings of Treasury securities, which have in large part by the banks. Federal Reserve been acquired operations have made reserves available for this credit and monetary expansion. Treasury bill rates have been relatively firm, with yields in very short-term issues a little above the low level and those in longer bills close to the high levels of this year's relatively narrow range. Yields on medium term Government securities have tended to decline, while those on longer-term issues have held fairly steady, Treasury advance refunding exchange into that despite a of both corporate and municipal securities area. New issues in moderate volume, with the combined total have continued of the past two years. Yields on outstand close to levels Yields at which new ing issues have edged downward. have been offered have been relatively low. corporate issues between yields on corporate and on U. S. bonds The spread strength to Treasury issues. has narrowed, imparting record bank credit expansion in September reflected The a large extent increases in bank holdings of Government to in loans to dealers in Government securities. securities and only underwritten new Treasury Banks and dealers have not also tended to increase their portfolios. issues, but have have been maintained at particularly Dealers' holdings of bills other securities also increased levels. Bank holdings of high Loans to business amount in September. by an unusually large showed the usual tax period and to sales finance companies comparable with or in excess of other years, increase by amounts banks about the disappointing some grumbling among despite by banks have shown an demand. Real estate loans loan

accelerated rise in recent months, though still quite small relative to the continued substantial mortgage lending by savings and loan associations and relative to the increase in savings deposits at banks. Partial data for banks in leading cities as of October 18 indicate a continuation of credit expansion at a moderate rate during the three weeks since the last report date in September. Banks reduced their holdings of Treasury bills, after acquiring substantial holdings of tax bills in the last week of September, but they added to their holdings of notes, reflecting Treasury financing. Loans to dealers in Government securities increased further. Business loans in creased moderately, while loans to finance sales companies declined, as seems to be customary in October. Demand deposits and currency increased much more than seasonally in September. Further increases occurred at city banks in the first three weeks of October, though daily average figures for the first half of the month, for which final data are not yet available, may show a small seasonally adjusted decline in the money supply. That decline and some of the September increase may be due to faulty seasonal adjustments; the net result is still a substantial increase. The money supply is now about 2 per cent larger than a year ago, but is still little if any above the peak reached in the summer of Turnover of demand deposits at banks outside financial centers has also increased nearly 2 per cent in the past year, while in financial centers, where deposit growth has been smaller, increases in the rate of turnover have been much larger. The combined increase in transactions--turnover and volume of deposits--outside financial centers corresponds closely to the growth of 4 per cent in GNP during the past year. deposits at banks, which increased sub U. S. Government stantially in September, have been drawn down in October. large, but Treasury cash needs are also They are still fairly new cash borrowing may be needed in November, in heavy. Some addition to the large refunding operation. at commercial banks have continued to in Time deposits crease at a rate of about 1 per cent or more a month. The total growth in the past year has been over a sixth. This in crease has occurred in savings deposits and at small banks, as negotiable time certificates of well as in the much publicized deposit. Apparently inflows of funds to nonbank savings insti rate, though not as much as have continued at a heavy tutions bank time deposits. Savings thus continue large. commercial

Nonbank holdings of short-term Governments have not increased in the past year, although the amount of such securities outstanding has been considerably enlarged. Banks have absorbed more than the total addition. The public has been satisfied to hold its liquid assets in deposit form. Total liquid assets held by nonbank owners--business and consumers, and including currency, demand deposits, time de posits, savings deposits and shares, and short-term Government securities--have continued to expand. In the third quarter of the year the total of such holdings was 6 per cent larger than a year ago, compared with the GNP increase of 4 per cent. first quarter of this year, however, GNP has increased Since the than 4 per cent. The and liquid asset holdings less 5 per cent ratio of liquid assets to GNP is still somewhat lower than it The ratio of money supply to GNP is at the lowest was in 1958. level reached since the 1920's. This situation indicates the need for continued growth in supply and in general liquidity at a rate closely commen money economic activity and income. Al surate with expansion in rapid increase in time deposits may have largely though the slower rise in the money supply, the com compensated for the increase could hardly be called any more than adequate bined for a period of economic recovery. in the staff memorandum already submitted As brought out reserves against pri Committee, member bank required to the past three months at an have increased in the vate deposits an expansion of time of 4 per cent, covering annual rate and of demand deposits at a deposits at an 11 per cent rate increase since February cent annual rate. The combined 2 per has been close to 4-1/2 per cent. week, total reserves available In the latest statement to provide excess reserves private deposits were adequate for to preliminary estimates. over $600 million, according of however, were obtained million of these reserves, About $140 which have already been reduced by member bank borrowings, Free reserves were to a minimal figure. by about $100 million for the past three week, and have been $500 million last below statement week, nearly $500 weeks or so. During the current by a return flow of are being supplied million reserves additions have rise. These the mid-month float currency and in member bank borrow by the reduction been partly absorbed Redemptions and holdings of securities. ings and in System a reduction in resulted in earlier would have sales made

available reserves, but large purchases yesterday will wipe out some of that effect. During the next two weeks, market factors will absorb about $900 million of reserves, while lower required reserves, resulting from the drawing down of Treasury deposits at member banks, may release only a small amount. In this period, System purchases of securities may need to aggregate close to or over $600 million in order to maintain an adequate volume of reserves for seasonal needs. A part of these needs will be temporary, and there could be some sales or runoffs of repurchase contracts around the middle of November, but in late November and early December further large purchases will be needed. During the remainder of this year and into January, the net increase over present holdings, allowing roughly for this week's operations, which are not included in the staff memorandum, will range from around $200 million in mid-November to perhaps as much as $1,250 million for a brief period in early January. Such operations would maintain total reserves at around the amounts projected in the staff memorandum (table 3, column 3). If credit and monetary demands continue at levels that would be consistent with economic recovery of the magnitude generally desired and expected, the maintenance of reserves at the level indicated should not have the effect of reducing short-term interest rates. At some stage in the future, as the economy approaches fuller utilization of available resources and credit demands increase, it will be appropriate to adjust the amount of reserves supplied through open market operations and make it necessary for banks to borrow some of the reserves they want. The economic expansion projected as necessary before this stage is reached is in the order of ten per cent or more and the time period is at least a year, or maybe two. A commensurate expan sion in bank deposits might require close to $2 billion additional reserves. Over the next year, at least $1 billion of these, pro viding a five per cent expansion in reserves, might appropriately be supplied by open market operations. Any additional amounts needed or desired could be obtained through member bank borrow ing. Mr. Furth presented the following statement with respect to the United States balance of payments:

In the third quarter, transfers to foreigners of gold, convertible foreign currencies, and dollars amounted to $900 million. This corresponds to a seasonally adjusted annual rate of more than $3 billion, as compared to less than $2 billion for the second quarter (after eliminating the influence of special debt repayments). Within the third quarter, September seems to have been the worst month, and whatever October figures are available suggest little if any improvement. The third-quarter transfers reflected a deficit in the so-called basic balance of U. S. payments (current balance, Government expenditures, and long-term capital movements). In the second quarter, basic U. S. payments were approximately in balance. The main reasons for this deterioration are primarily that U. S. imports increased last summer faster than expected and that the net capital outflow apparently has failed to show the expected improvement. As to the current quarter, our export prospects are not good in Latin America, Japan, and the United Kingdom. In all these countries domestic inflationary pressures have either already led to restrictive policies or are likely to make them necessary in the near future. Prospects are only moderately good in Continental Europe, where the boom may be petering out, especially in Germany, and in Canada, where the effects of the upswing on imports are modified by those of the recent devaluation of the Canadian dollar. It is true that exports of some categories, such as agri cultural commodities and machinery, are expected to rise; but a considerable part of them will be financed by grants or long-term loans under aid and agricultural disposal programs, and will therefore be of little immediate benefit to our balance of payments. Imports may not rise much more, as the slowing-down of our recovery in recent months may be followed by a similar behavior of imports. There is no reason to assume, however, that they will actually decline. Similarly, there is no indication of a slowing-down of to Japan, which accounted for our capital outflow. Lending a very large part of the outflow in the first half of the year, may be further reduced or possibly even reversed. Similarly, massive capital movements to Germany and Switzerland may not However, any improvement due to these changes be resumed. could be offset if the outflow of funds to the United Kingdom to gain momentum, as the fragmentary October data suggest. were

This outflow presents U. S. monetary policy with some what of a dilemma. A gradual increase in U. S. interest rates, together with the expected gradual decline of U. K. rates, would reduce incentives for investment in U. K. short-term assets, unless offset by a reduction in the forward discount of sterling, There is evidence, however, that a sizable part of the outflow is going into U. K. long-term securities. For this kind of investment, expectations of rising U. S. interest rates, together with expectations of a further decline in U. K. rates, might activate the outflow of funds, with some investors seeking capital gains, While these movements would come to an end once a new equilibrium level of interest rates was reached, they would in the meantime aggravate U. S. balance-of-payments problems. In any case, we must expect the pressure on the dollar and the drain on the U. S. gold stock to continue. These pressures may be lessened later this year, as December usually shows a seasonal improvement in the U. S. balance of payments. This improvement will give us a welcome respite but should not detract attention from the basic problems. At this point Mr. Haves related certain personal observations growing out of his recent trip to Europe, during which he attended the annual meetings of the International Monetary Fund and the International Bank for Reconstruction and Development in Vienna, Austria. In general, it seemed to him that the meetings were fruit and resulted in a considerable net gain to cooperative international ful because of the general agreement expressed with efforts, particularly regard to the plan to shore up the resources of the Fund to provide to cover exceptional needs. In the press, standby credit arrangements interpreting certair speeches he noted, there had been some articles of other countries as attacks on the United States. by representatives within the United States delegation regarded them as However, no one feeling existed among the representatives such, and actually a harmonious

of the principal nations. Rather than attacks on the United States, the speeches to which the press referred appeared to constitute attacks on loose fiscal monetary, and economic policies in general. They seemed to be aimed at any country, whether underdeveloped or industrialized, that did not display enough self-discipline when such discipline was needed. Some countries, notably France, expressed rather specific reservations with regard to the circumstances under which they would like to see the standby credit arrangements utilized, and it was generally understood that the credits were not to be used for normal IMF purposes but only in case of major disequilibria among key currencies. Mr. Hayes went on to say that at the meetings there appeared to be a rather high degree of confidence in the dollar, a view he had also noted in visits to London, Paris, and Frankfurt. However, statistics for the first half of 1961, and these views reflected balance-of-payments deficit would early estimates that this year's to a feeling that the United $1 billion, which had led be under way toward curing its balance-of-payments States might be on the sensed some underlying nervousness Even so, moreover, he problem. continue to display the degree as to whether the United States would necessary to meet the and determination considered of self-discipline period the country would whether over a longer situation; that is, and monetary policies. The appropriate budgetary, wage, follow rapidly if there could worsen to the dollar attitude with respect slipping into a United States was feeling that the should develop a payments, and measures in its balance of of chronic deficit condition

going beyond those already taken were needed on several fronts to make clear this country's determination not to let the situation drift. The country had shown a tendency toward a serious balance of-payments problem in time of recession. The fact that the recession involved lower interest rates was one of the reasons, but the country was now in danger of showing little ret improvement in its balance of payments despite the improvement in domestic economic conditions. This was a problem, then, with which he felt that everyone must be deeply concerned. Mr. Hayes then presented the following statement of his views on the business outlook and credit policy: The most striking development since the last meeting has been the sharp deterioration in the United States balance of-payments position in September. As a result, the third quarter payments deficit's provisionally estimated at 3.2 billion (seasonally adjusted annual rate) as against 1.9 in the second quarter and $1.4 in the first. This figure will soon become known publicly, well before the official release, and may easily be construed, both here and more particularly abroad, as a serious reversal of the encouraging tendency of the first half year, which did so much to help restore confidence in the dollar. Already there are increasing signs of nervousness abroad as to the possibility of heavier U. S. deficits over the next year or so, with a consequent growing threat to dollar stability. Higher imports have been the major cause of the third-quarter It is noteworthy, however, that the net short-term deterioration. capital outflow has been substantial through most of 1961, and extent this flow reflects a multiplicity of foreign to a large because interest rates here borrowing operations in this market borrowing countries. Of course the are far below those in the including establishment of a 7 per British austerity program, funds to London, and the cent Bank rate, has drawn short-term cent apparently has had relatively recent cut to 6-1/2 per on the strength of London's attraction for little effect international funds.

In contrast with this critical international outlook, the domestic business situation appears calm and substantially unchanged in the past three weeks. The slower rate of expan sion in September may be attributed in good part to such special factors as strikes and weather conditions; the most evidence still points to a strong, but not overly exuberant recovery. It is true that the last couple of months suggest a somewhat more cautious attitude on the part of both business the and consumer than had been expected earlier. On balance this strikes me as healthy, as the absence of speculative pressures has per mitted much more stable price conditions, on the average, than might have been looked for at this stage of an upward business movement. There is certainly nothing in the credit picture to sug gest that our policies have been restrictive. On the contrary, September witnessed a very sharp rise in total bank credit and the first significant rise in the money supply in many months. Much of this may be attributed to Treasury financing; and after a brief reversal early in October, bank credit seems to have risen again in reflection of the October Treasury program. In contrast, business loans have shown no great strength and have moved about with seasonal expectations. The banks' liquidity position in line continues to look relatively easy in terms of liquid asset holdings, especially in New York. Despite loan-deposit ratios well above those prevailing during most of the post-war period, the banks have ample liquid resources to meet probable loan demands. For the moment at least, the danger of a sharp rise in the Federal Government's deficit due to higher defense spending seems Secretary Dillon's latest estimate of the 1962 to have receded. fiscal year deficit is about in line with our own estimates of the last few weeks and substantially below some of the figures which were recently mentioned in financial circles and the press as a real possibility. It is also encouraging that he reiterated the Administration's firm intention of reaching a balance in fiscal of the fiscal position will develop with 1963. A clearer picture of the post-Congress budget review expected shortly. the release to announce the terms of the November With the Treasury expected ten days, we shall soon be confronted with the refunding within conditions in the money and capital markets need to promote stable to assist this financing operation. considerations, the domestic business As for general policy justify our adhering to the same degree of situation would last few months. On the other monetary ease prevailing in the

hand, the balance-of-payments position is sufficiently dangerous to warrant a careful review of our policy to see whether there is anything helpful we can do in the monetary sphere without damag ing the domestic economy. It seems to me that the level of short term market interest rates--and particularly the 90-day bill rateclearly offers the most fruitful possibilities. A higher bill rate might have some influence on capital flows and might also be of psychological value as an indication that we are not unaware of the payments problem. I would not go so far, at this time, as to suggest a rise in the discount rate, although it may well be that we shall have to come to this within the near future if the payments trend is not reversed. But for the time being I believe we should avoid the general tightening effects throughout the domestic economy that would undoubtedly accompany any such overt move. that the Manager might be instructed to seek I would think a higher level of bill rates, say between 2-1/2 per cent and 2-3/4 per cent for the three-month Treasury bills, with a Federal funds rate of perhaps 2-1/4 per cent to 2-3/4 per cent, while still pre serving a general atmosphere of ease. I am not sure this can be accomplished, but it is well worth trying. It seems to me that free reserves could be allowed to average a little lower than they have been, say around the $400 million level, without any damage business, especially in view of the sharp rise in bank liquidity to since earlier in the year, and the sizable growth in bank credit in recent weeks. The special authorization should, in my judgment, be continued and should be used to the extent possible to help twin objectives of higher short-term rates and con attain the tinued monetary ease. I should think that offerings of intermediate and long maturities should be accepted whenever available at a fair price, with little regard for reserve figures, so as to enable the Desk sales of short-term securities if consistent to make offsetting with the reserve figures. During the next few weeks, however, there may be little or no opportunity to make such offsetting of the sizable net release of reserves called for sales, because that period; but I do think the Committee should encourage during the Desk to do more swapping of this kind if and when circum stances provide a suitable occasion. The present wording of the directive might appropriately be retained. Mr. Ellis said that in the First District it was hard to define However, there seemed to be pronounced trend in economic conditions. any

general satisfaction with nonmanufacturing activities; the service and trade occupations showed high and growing levels of employment. Con struction activity seemed to be picking up slightly, and the banking situation was strong without exhibiting rapid growth. Therefore, the problem area was in manufacturing, The New England production index exceeded the year-ago level by 1 per cent in August, according to the revised figures, and it was as yet too soon to have any firm indication of September trends. There was some indication that employment may have declined, while electric power consumption probably expanded. The shoe industry was disappointed in third-quarter results, for it had expected an upturn that failed to materialize. Textile producers scored some further recovery, but employment was 7 per cent behind year-ago levels. Continuing, Mr. Ellis said that the general sentiment of in the District appeared to be one of optimism regarding businessmen the outlook. This was reflected in the Reserve Bank's fall survey in manufacturers were requested to review their invest which New England respondents, employing about 20 per ment plans of last spring. The England, reported that they employees in New cent of the manufacturing by about 5 per cent since their 1961 investment intentions had boosted were executed, outlays this survey; if present intentions the spring 4 per cent. Durable and those of 1960 by about year should exceed apparently were going to participate nondurable goods manufacturers

about equally in this increase, and a shift toward outlays for expan sion was indicated, in contrast with the recent emphasis on modernization. The condition of District banks had changed only moderately in the past few weeks. Business loans were down slightly, but were still up 4-1/2 per cent from the first part of the year. Other loans also were up, about twice as much as the gain nationally. Demand deposit growth matched that of the country, but other deposits lagged a little. District banks had been net sellers of Federal funds. As to policy, Mr. Ellis said he still thought it appropriate to say that there was a vigorous lull in economic activity. He was inclined to feel that the economy was going to break out on the upside; meanwhile the conomy was arking time for a move in some irection and the m d present degree of ease was, of course, intended to stimulate a movement in the proper direction. He would be a little reluctant to follow the suggestion of lowering the free reserve target, for he would not like to see anything done that might be interpreted as a move on the part of the System toward restriction at this stage of the business cycle. Insteaa, he would prefer to continue the present degree of ease and its stimulative effect. He would, however, go along with resolving doubts on the side of less ease. indicated that he would not favor a change in either Mr. Ellis rate or in the directive at this time. He would be glad the discount

to see the Desk seek somewhat higher levels of short-term interest rates. This inferred use of the special authorization to operate in longer-term securities, and he would favor the use of this device in providing reserves during the next few weeks. Mr. Irons reported that conditions in the Eleventh District had not changed significantly, and that the over-all picture included some favorable and some unfavorable movements. Employment and department store sales had shown a little improvement, especially in the first half of October, and the agricultural situation was very good. Unfavorable factors included a continuation of the eight-day allowable crude oil situation, which might be expected to persist, although there had been some pickup in drilling. Construction was off a little, and production was down somewhat more in September than had been anticipated, largely due to hurricane Carla and the effect of auto strikes. On balance, District conditions were reasonably satisfactory. Mr. Irons said that in talking with businessmen he found that the general sentiment seemed to be one of optimism, tinged with some of inflation. Knowledgeable businessmen concern as to the inevitability appeared to be more disturbed about the continuing and rising Federal deficit and the implications of the balance-of-payments deficit than about the question of economic recovery in the District or the country. In the latter respect they were not pessimistic.

District banking conditions were reasonably liquid. Borrow ing from the Reserve Bank had been running under $1 million, with no borrowing on the part of city banks. As to bank credit, the increase in loans had been moderate and the increase in investments had been substantial, largely in reflection of Treasury financing. Demand and time deposits were both up, and on the whole the banking situation was favorable. Bankers tended to talk about loan demand being less than expected, or no better than seasonal, but they all felt in a position to meet whatever demands might appear. There had been little change in the pattern of trading in Federal funds, with Dallas banks buying and most other reporting banks selling. The totals were about two to one on the buying side. Turning to policy, Mr. Irons said there seemed to be a three way proposition that the Committee must try to average out. In terms of the domestic economic situation, one might say that it would seem reasonable to continue about the same degree of ease that had existed during the past three weeks. However, the international situation presented a problem possibly calling for a somewhat different con Treasury refunding, which was another factor clusion. The forthcoming suggested maintaining the status quo. Balancing these to consider, Committee might do well, he thought, to give more direct out, the rates and less direct attention to the level attention to the matter of He did not believe that under such an approach free of free reserves.

reserves would decline enough to cause any damage from the standpoint of the domestic economy. That would enable the System to give more attention to firming short-term rates in order to provide relief on the international side without creating instability or undue restric tion in the domestic market. He would envisage a Federal funds rate of 2-1/2 per cent, a bill rate in the area of 2-3/8 - 2-5/8 per cent, and little borrowing from the Reserve Banks. In that kind of pattern, free reserves might run around $400-$450 million, which he thought would still provide sufficient ease to avoid any restrictive or restraining influence on the economy, when consideration was given to the liquidity position of the banks. The System, of course, should provide reserves to reet seasonal requirements. He would hope, however, that any deviations from the kind of objectives the Committee had been seeking might be on the side of less ease. He would not change the rate or the directive at this time, and he would continue the discount special authorization. that in the Twelfth District the picture was about Mr. Swan said nationally. In the past month or so, however, the District the same as perhaps had picked up a little faster. For example, nonfarm employment Coast States rose a little more in September than the in the Pacific fairly general in nature, was supported national average. The increase, employment in Southern California, which b a surprising gain in aircraft expectations of a continuing decline for several was contrary to earlier

months. The lumber industry continued in the doldrums, with further price weakness in both lumber and plywood. Residential construction continued to be devoted increasingly to multiple-unit structures, even though vacancy rates were not particularly encouraging, District steel production fell in September but picked up again in the first two weeks of October, apparently in response to demands for construc tion steel. District banks were still encountering only a moderate loan demand, with the possible exception of some continuing increase in real estate loans. In the past month or so they had been net sellers of Federal funds; however, in view of substantially increased holdings of Government securities, their net sales of Federal funds were on a much smaller scale than in the first part of September. There had been a couple of indications that some of the banks here getting a little to keep their maturities short in prospect of restive about continuing a stronger loan demand. They were worried about the income they had and apparently were considering some lengthening of been foregoing maturities. Mr. Swan commented that the Committee's latitude As to policy, was considerably limited by the November refunding of the for action he could see nothing in the business situation that Treasury. Further, significant change in policy in either would call for any particularly direction. He had been impressed, however, by the fact that for the

past four weeks--if one included the current statement week--free reserves had been running below $500 million with remarkably little pressure on the bill rate, the Federal funds rate, or even, except in one week, on member bank borrowing. While he felt that the System still needed to encourage credit expansion in light of the domestic business situation and that it certainly must meet seasonal reserve needs, he thought it would add up to a satisfactory situation at the present time if the bill rate were around 2.3 to 2.5 per cent, the Federal funds rate was at 2 or 2-1/2 per cent, a low level of member bank borrowing prevailed, and free reserves could be kept around $450 million. Although he would not argue for becoming appreciably tighter than in the past three weeks, he noted that perhaps the situation actually reflected slightly less ease than had been suggested at the October 3 meeting. He would not change the discount rte or the directive at this time, and he would con tinue the special authorization to operate in longer-term securities same reasons that Mr. Haves had suggested. Presumably for much the doubts would be resolved on the side of less ease, although this depend somewhat on the Committee's free reserve target. would District continued to be more Mr. Deming said that the Ninth of the nation in its economic and financial atypical than typical total personal income, for example, its developments. In terms of greater than the nation's for the last half of 1960, less gains were

than for the nation in the first half of 1961, and very recently had again been running ahead. Had it not been for adverse developments in agriculture, District personal income gains would be significantly better than those for the United States--and this despite depressed conditions on the Iron Range. Measured against a year ago, net farm income in September was running 8 per cent smaller, in contrast to a U. S. gain of almost 5 per cent. District nonfarm personal income, however, was registering better than national average gains. the District also presented a picture in sharp In banking, the nation. District member bank loans declined in contrast to by more than in any other September, save one, since the September War II. For the entire third quarter the decline in end of World District member banks was very large, whereas loans usually loans at this period. In fact, only in the increase significantly in recession year 1954 was there another third-quarter loan decline and that was only 1/15 as much as since the end of World War II, the decline was general--in both this year's drop. Furthermore, and in all District States--and preliminary city and country banks of these movements. Deposits October data indicated a continuation in bank liquidity had been continued to grow, and the improvement had ratio at country banks was In September the loan-deposit marked. in June 1961. At a high of 51 per cent in contrast to 47 per cent was 51 per cent (it was now 49 per city banks the ratio in September

cent) as against 56 per cent in June and 61 per cent at the peak in May 1960. Mr. Deming said that if he were reasoning solely from District experience his policy prescription probably would have to be to absorb some of the growing liquidity that could serve as the base for too much credit expansion in the future. The national picture, however, caused him to advocate no more than a continuation of about the degree of ease that had prevailed over the past three weeks, which he interpreted to be one of resolving doubts on the side of less ease. In terms of guides, he would suggest free reserves of about $450 million, a low level of discounting (and no change in the discount rate), around 2-1/2 per cent, and a bill rate ranging upward Federal funds from 2-3/8 per cent for three-month bills. He saw no reason to change the directive and favored continuing the special authorization. Mr. Allen said that in the Seventh District consumers appeared up their purchases of both hard and soft goods. In to be stepping September, producers of television, furniture, and most August and over the year-ago months. In the appliances reported large gains store sales were 4 per cent four weeks ended October 14, department in the nation and the Seventh than a year earlier, both higher the question as to when consumers District, If this trend continued, spending would have been answered. would begin to increase

The work stoppages in the automobile and farm equipment industries, which prolonged the pause in the upward pace of busi ness activity, now seemed to be out of the way. A strike at Chrysler remained a possibility, but unless lengthy its effect would be relatively slight because Chrysler dealers were well supplied with new model cars. Thus, fourth-quarter production of 1,800,000 auto mobiles was still expected, despite less then anticipated output in October. And production of approximately the same number was presently scheduled for the first quarter of 1962. The sharp advance in automobile sales in early October was explained by the fact that virtually all companies introduced new models at about the same time and earlier than in previous years. However, there was optimism in Detroit, with many estimating around Inventories were in good shape and 7 million 1962 car deliveries. to total 640,000 on October 31, of which 490,000 would were expected and 150,000 leftovers, or "dogs" to use the Detroit be new models vernacular. The Seventh District employment situation continued to improve, Mr. Allen said. In September three District centers--Peoria, Rockford, Gary-Hammond--were upgraded from substantial to moderate unemploy and as having substantial un areas. All centers still classified ment influenced by the automobile industry where employment were in areas improvement was under way. reserve deficit position of the large The substantial basic within the past ten days had resulted Chicago banks which developed

chiefly from payments for three Treasury issues, which increased required reserves or absorbed reserves, Government security holdings of weekly reporting Chicago banks rose $250 million in the three weeks ended October 18, and loans increased $100 million during the same period. Although business demand for credit seemed to be gaining strength, it was not yet clear that the increase was anything more than seasonal. As to monetary policy, Mr. Allen said he felt that the Com mittee should endeavor to continue the degree of ease that had been maintained for some time. There were indications, as he had suggested, upward pace of business activity was continuing, which offered that the reason to avoid easing the situation any further. On the other hand, yet find any persuasive argument for moving to a lesser he did not of ease. He would not favor continuance of the authorization degree nine months ago and yet was still which was conceived approximately as he saw it, the special authorization. termed, euphemistically said that while it was apparent that economic Mr. Clay of this development was had leveled off, the significance activity were clouded by the impact of not clear. Analysis and interpretation industry, related industries, and the automobile strikes upon that had the automobile strikes affected the economy as a whole. Not only output, but the resulting limited availability the volume of industrial the test of consumer buying of durable of new automobiles had delayed

goods--a test which was tremendously important in gauging the future pattern of economic activity. This situation had been further com plicated by the unexpected leveling off in Federal Government outlays for goods and services. The nature of the hesitation in the upswing of economic activity, and the probable course of future developments, could not be accurately judged until the automobile industry hit its full stride and more information was available as to the amount and timing of Federal Government outlays. Under these circumstances, Mr. Clay continued, the domestic economy at this time appeared to require no lessening of the effort to use monetary policy to encourage the expansion of economic activity. This view was supported not only by the nonfinancial developments in the economy. It was further underscored by the lack of increased of the type typically associated with cyclical expansion. credit demands Accordingly, domestic considerations indicated the need for open market operations designed to encourage further credit expansion and level and pattern of interest rates essentially the maintenance of a in line with those presently existing. that the Committee had had evidence that Mr. Clay noted outflows again presented a problem. Under the short-term capital of the System Open Market Account he suggested, the Manager circumstances, need to conduct open market operations with a view to keeping would bill rate from going too low relative to rates abroad. the Treasury

That would appear to call for a bill rate no lower than in recent weeks, and perhaps somewhat above recent levels. Offsetting opera tions in longer maturities should in his opinion be undertaken to the extent necessary to maintain the Treasury bill rate at such a level, as it was important that approximately the present ease in bank reserve positions be maintained. Quite apart from other considerations, he added, the Committee would be faced with Treasury financing again for much of the period immediately ahead. Accordingly, it would want to avoid any change in policy during that period; but no change would appear to be appropriate in any case. In Mr. Clay's view, no change was needed in either the Com mittee's directive or the Reserve Banks' discount rate. He felt that the special authorization with respect to operations in longer maturities should be renewed. said that Fifth District business activity had Mr. Heflin the generally favorable tone reported three weeks ago. High retained levels of employment continued to prevail in virtually all sectors of the District economy. Insured unemployment declined more than in every month from March through August, and the latest seasonally suggested a resumption of this favorable trend follow weekly figures reports early in September. Rates of insured ing less favorable national rate in every State in September were below the unemployment

in the District except West Virginia. In manufacturing, uncertain markets had retarded recovery in textiles and lumber. Textile companies, however, were encouraged by the recent Internal Revenue decision allowing them to depreciate machinery for tax purposes on the basis of a 12- to 15-year useful life instead of the 25-year schedule currently in effect. This would give them substantial help in over coming the effects of a higher support price for cotton and a higher minimum wage and should enable them to compete more effectively with imports. The furniture business, also slow to join the trend toward recovery, had improved substantially in recent weeks. Retail sales of furniture in the District were up sharply in September, and manu facturers were quite optimistic as they prepared for the fall Southern Furniture Market now in progress. Farm income continued to improve. Through October 13, tobacco farmers in the District had sold more than one billion pounds of tobacco for about $650 million, an income increase of about 7 per cent over the corresponding period in 1960, and average prices for probably be the highest on record. Cotton pro the season would per cent, and prices were well above those duction was up about 8 price. Broilers provided the last year due to a higher support of picture. Production was at only gloomy portion of the agricultural but prices were about the lowest in history and an all-time high, well below costs of production.

With respect to policy, Mr. Heflin commented that the Com mittee was faced with a situation that had not changed significantly for several weeks. Business activity was still rising, but the movement has lost some of its vigor. Prices continued to move side wise and there were no indications of any build-up of speculative or inflationary forces, Thus, the state of the domestic economy seemed to call clearly for continued ease. On the other hand, the delicate and uneasy international position of the dollar suggested that it would be unwise to move toward additional ease. In addi tion, the large Treasury refunding operation that was imnediately ahead would require stable market conditions for its success. Hence, it seemed to him that the only reasonable course was to maintain the present open market policy, which would mean no change in the directive. Also, he would favor no change in the discount rate and a renewal of the special authorization. Mr. Mills said that because he believed the Committee's was faced with critical problems that were crying for policymaking remarks today would be couched in unaccustomed blunt solution, his ness. He would argue for more positive action to tighten reserves, dalliance with existing conditions. In his opinion and against to adopt a "troika" policy: a policy whereby it would not be possible interest rates would be kept low while at the same time they would be

raised, and under which a strong attitude would be taken toward the protection of the dollar. The two critical danger points that he thought deserved the Committee's attention were a perilously exposed Government securities market and the weakness of the dollar on the international exchanges. In elaboration of those points, he presented the following statement: A similarity in the economic developments of the years 1958 and 1961 has been urged as a reason for formulating comparable Federal Reserve System monetary and credit policies. However, the most apt comparisons between these two periods have not entered into policy-making discussions and are of a financial nature: In the early months of 1958 an ill-advised policy of forc ing reserves into the commercial banking system in order to stimulate credit expansion led not only to excessive credit ease but also abetted a disastrous speculation in United States Government securities. Now again in 1961, and flying in the face of the previous unhappy experience, a similarly undesirable policy has been em barked upon for the self-same purpose of encouraging a vast expansion of commercial bank credit. But this year a scatter gun aim has been taken at increasing the money supply regardless of the fact that in doing so damaging hits have been registered on banking, industrial, and commercial liquidity which is approach ing toward an inflationary status, and on the very fabric of the money market. In this latter regard, the continuous injections of new reserves into the commercial banking system, in leaving no room for the free play of natural market factors that from time to time tighten the supply of reserves, have had the effect of drugging market participants into insensibility to the "real facts of life" by giving them an implied assurance that the Federal Reserve System has allied its policies to credit ease for an indefinitely extended period of time. * The dangerously top-heavy positions of United States Govern ment securities dealers are a prime expression of the investment climate that Federal Reserve System policy actions have created. The dealers are now carrying positions that are beyond their

function of making markets and instead represent a growing float ing and undigested supply of securities that has been mistakenly taken into account for profit motives that have been nourished by the Federal Reserve System's policies. In consequence of the market overhang of United States Government securities carried by the dealers, they are vulnerable to any shift in System policy toward restraint which would immediately be reflected in falling prices and higher interest rates. Such developments could lead to a disorderly market for United States Government securities if bank lenders felt compelled to call their loans or require additional collateral. If Federal Reserve System intervention in the market should then become necessary, an extremely confused market picture could unroll which might end in the commercial banking system holding a larger supply of reserves than that which it had been sought to diminish. Altogether the present money market situation is fraught with danger. Even so realities must be faced and a start made toward implementing a moderately restraining monetary and credit policy; otherwise delay and temporizing with the present situation will only raise more difficult future problems. The sceptical attitude to Federal Reserve System policies that has been taken by domestic and foreign monetary experts, and which is a factor in the weakness of the dollar on the international exchanges and in renewed gold losses, is perhaps the strongest reason that urges a revision of policy thinking. Mr. Mills said he would not recommend a change in the Committee's this time. However, he would recommend moving, as policy directive at he had indicated, toward a reduction in the supply of reserves. Feeling would be concern about such a policy in terms of its certain that there he would suggest that the attitude of the Account market consequences, developments of that character might fall into Manager and the System to outlined in the following statement: the kind of posture for, and adoption of, a mildly restric The imperative need Reserve System monetary and credit policy could tive Federal money market effects the consequences foreseeably produce drastic against by appropriate policy actions. of which must be guarded for correcting a disorderly mar The conventional treatment ket should of course be followed.

Upward pressures on interest rates should be reflected as soon as practicable in a 3-1/2 per cent Federal Reserve Bank discount rate. The timing for an increase in the discount rate would be the juncture at which the Federal funds rate rose to and then tended to move above the present 3 per cent discount rate of the Federal Reserve Banks. In the process of these developments, it is conceivable that member banks would temporarily be in a position to finance United States Government securities dealers by borrowing at their Federal Reserve Banks at a less cost than the interest rate which they would charge on such loans, which would serve the purpose of lifting off the pressure for their reduction except only as the burden of higher carrying costs voluntarily induced dealers to reduce their credits. Although accident rather than design has brought the level of free reserves down below $500 million, the absence of abrupt money market tightening in response to this change in the volume of free reserves outstanding suggests that their further re duction can be accomplished and the money market conditioned for a higher Federal Reserve Bank discount rate with a minimum of market disturbance. Leaving aside the possibility of disorderly market conditions, however, a tighter money market can in any event be expected to produce higher interest yields on Treasury bills and other types of short-term United States Government securities. If this kind of development tended to draw corporate investors out of investment in commercial bank time certificates of deposits and into higher yielding U. S. Treasury bills, con sideration could then be given to raising the maximum rate of interest permissible for payment under Regulation Q. All in all, advance policy preparation to forestall any con ceivably adverse effects of a shift in Federal Reserve System monetary and credit policy toward restraint is the best assurance that the change can be successfully and beneficially accomplished. In further comments, Mr. Mills said that he would favor renewing the special authorization covering operations in longer-term Government securities. However, in the outside possibility that a disorderly market might develop, he assumed that the Account Manager would return to the Committee for instructions and that the special authorization would not

be construed as authority to move in a disorderly market situation. Mr. Robertson said that as of today he could not see any basis for too much concern about adhering to the degree of ease that had existed over the past several weeks. There were no infla tionary tendencies apparent at the moment and the economy still needed to be stimulated. In his view, then, the Committee should continue to pursue the policy it had followed of stimulating the economy. The volume of free reserves had fallen somewhat below the level that he understood to have oeen contemplated at the October 3 Committee meet ing, which was to a large extent justifiable because of the numerous variations in operational factors that had occurred. However, in order that monetary policy might maintain what he considered the proper posture, he would favor moving back up to a free reserve target in the neighborhood of $500-$525-$550 million in the hope that this would per mit the Committee to continue to carry out the spirit of its directive, in terms of encouraging credit expansion to promote fuller which was utilization of resources. definite feeling, Mr. Robertson said, that the Com He had the mittee was overemphasizing the importance of the international picture; that it was permitting the foreign tail to wag the domestic dog. He would let that factor deter it was apprehensive that the Committee from doing what it could in the way of stimulating the domestic economy.

Under no circumstances would he approve the suggestion that the swapping device be used for the purpose of stimulating the bill rate. As to the outflow of short-term capital and gold, he noted that it served as a thermometer. By tinkering with the thermometer, he felt that the System would only be fooling itself. What was needed was an effort to deal with the basic underlying difficulties, and monkeying with the thermometer only tended to put off the time for making such an effort, for the thermometer called attention to what ought to be done. As he had said on previous occasions, he felt that too much reliance was being placed on short-term rates as a guide to System policy. Mr. Robertson also said that he would not change the directive, which he thought was appropriate as it stood, and that he would not move on the discount rate at this time because he saw no reason for a change. In his opinion, the present posture of policy was appropriate as of now, and probably would continue to be appropriate for the next three three-week periods. Therefore, he would one, two, or maybe even continue it. He would not approve renewal of the special authorization covering operations in longer-term securities. Mr. Shepardson said that he thought the thermometer referred to by r. Robertson did indicate the existence of a problem. In his was a need to get at the basic problem, and one way opinion, there in the direction of a tendency toward less ease. The was to move

international situation deserved serious consideration, both in terms of actual balance-of-payments prospects and their psychological effect. There had been a failure, it seemed to him, to get at the basic problem to which Mr. Robertson had referred. Mention had been made of the fact that prices had been relatively stable, and this was true. However, if the country was going to enjoy the desired economic growth and expansion of business, and if the basic balance-of-payments prob lem was going to be met, it was necessary to recognize the movement from a seller's market to a buyer's market and the need for some downward revision of prices. The buying power of consumers, measured of their income, was now high, and consumers were not spending in terms basically because they were being more selective. more, it seemed to him, Productivity gains, he noted, were now being reflected in lower prices and their continuation would tend to offset in by some industries, in other sectors that were not making comparable gains. creased costs had not raised prices on the new model While automobile manufacturers to absorb the increased wage costs re cars and apparently intended there were rumors that other from the recent labor contracts, sulting the economy were going to have to raise prices because of sectors of Thus, the current step-up in spending for consumer increased costs. prospect of increased prices around durable goods might be due to the the addition of more funds to validate the turn of the year. Certainly,

price increases was not going to get at the root of the problem, and for that reason he would agree with the view that the System should trend toward a little less ease. While he would not be prepared to go quite as far as Mr. Mills at this time, nevertheless everyone should be aware of the problem that was building up and monetary policy should not be providing tinder for inflation. Rather, it should lend such support as it could to bringing about not only a leveling off but a correction of prices in those areas making real productivity gains to offset the inevitable crawl in some other areas. Mr. Shepardson concluded by saying that he would not change the directive or the discount rate at this time. However, he would lower the free reserve target somewhat and give some attention to bringing the rate up to a level more in the order of 2-1/2 per cent or thereabouts. bill said that he had been satisfied with the recent opera Mr. King of the Desk, which provided the type of ease that he understood tions the Committee to have requested at the October 3 meeting. He would have of free reserves fluctuated somewhat, but he no objection if the level the degree of ease that had prevailed and was interested in maintaining in not changing policy by talking about the resolving of doubts on the he would suggest being careful to avoid side of restraint. Further, did not understand the limitations of monetary policy giving those who resolve basic long-run problems; these the impression that it could

must be faced up to in other ways if they were going to be solved. If the System should try to solve, through monetary policy, problems that could not be solved in that manner, this might only tend to encourage others not to face up to those problems as promptly as they should. After repeating that he would not alter the present degree of ease, Mr. King went on to say that at this stage he saw no need to talk about a higher discount rate because of the lack of any significant amount of borrowing by member banks from the Federal Reserve Banks. Only if the banks began to borrow more substantially would he feel that it was necessary to consider a change in the rate. In summary, he that a continuation of existing monetary policy would produce believed results than if the System were to start out to try more satisfactory policy problems that must really be met to solve through monetary in some other manner. suggested that there might be a tendency to forget Mr. Mitchell economy there is an automatic technique for that in a free enterprise namely, a reversal from inventory bringing the economy out of recession, inventory accumulation, which provides a substantial decumulation to stimulus appeared to be about At present, however, this stimulus. exhausted; if it was not transferred to the sector of final takings, to available evidence that be in trouble. Turning the economy would was taking place, he noted indicate whether such a transferral might

that in September retail sales amounted to $18.2 billion on a seasonally adjusted basis, a figure that had not changed substantially for four or five months. It was below the $18.3 billion average for the year 1960 and only slightly above the $18.0 billion average for 1959, when there were six million less consumers, so the September figure was not reassuring. Department store sales had shown some signs of life in the past three or four weeks, but the sample was unscientific, to say the least, and difficult to interpret. Automobile sales were hope fully higher, but it was too soon to know, while consumer credit extensions were barely exceeding repayments. Data on savings inflow and outflow were not adequate for analysis on a national basis, but where good data existed, as in the Seventh District, they indicated that consumers were showing only a moderate tendency toward more liber ality in their spending. Consumer psychology appeared to be adversely affected by the cold war, by continued high levels of unemployment, and by an uncertain stock market. The situation, Mr. Mitchell said, had been approximately at this same point for the past two or three meetings, and the time was getting closer when something would have to give. Either there would in the industrial production index that could not be be a downturn strikes or by weather abnormalities, or activity would explained by upward. Until it was known what direction the movement start moving

would take, he felt that monetary policy should be as stimulative as the System could make it without betraying a concern that would serve only to add to the anxieties of consumers. If the recovery were to falter obviously, he pointed out, it would take a substantial deliberate effort on the part of Government to turn the starter over again. In such circumstances, he felt that the System must be careful to do its part to encourage the economy to move ahead. While he was concerned, of course, about the international situation, the current dilemma reflected a worsening of the balance of trade, and that was not going to be cured by the expedient of adding a few basis points to tte yields on short-term Government securities. In summary, he would be inclined to "stay just about where we are" in terms of monetary policy and not to make any change that could be detected on the outside. Mr. Fulton reported that a recent succession of happenings, including the steel strike, the early automobile model changeover, and the auto strikes, had left the economy of the Fourth District without the steel industry the doldrum in operations had much bounce. In continued, with operations down for the second week in a row. Orders here on a hand-to-mouth basis; the users of steel were not ordering for inventory purposes. Inventories were estimated at about 9.6 million was almost a minimum for working purposes, and orders for tons, which October and November delivery were no better than for September. However,

some rebuilding of inventories, possibly in the area of three to six million tons, might take place later against the possibility of a steel strike and also against the possibility of a price increase. The industry expected production of about 107-110 million tons next year, but for this year it now appeared that production would probably be in the neighborhood of only 96-98 million tons. Industry spokesmen were saying that a price adjustment was necessary if the industry was to replace outmoded equipment. However, foreign companies had increased their capacities, prices of foreign steel were softening, and shorter delivery schedules were being offered. Also, the price decline in aluminum had put a damper on the aspirations of the steel companies. In the rubber industry, customers seemed reluctant to increase inventories and were depending on controls to keep inventories at a not seem apprehensive about the possibility of price minimum. They did Industry spokesmen expressed the opinion that automobile increases. for next year might be about 6.3 million units, as contrasted production figure of 7 million projected by the automobile makers them with the be some help for the heavy industries if military selves. There might for conventional weapons should begin to appear, but expenditures there had been few contracts as yet. situation had improved from a statistica The District unemployment only a slight improvement, considerably standpoint, but analysis indicated suggest. The exhaustion of benefits was less than the statistics would of the work week was another. Auto sales one factor and the shortening in the Cleveland area in the past had shown a good seasonal increase

three weeks, but there had been a substantial decline in Pittsburgh; Cincinnati showed no trend. Department store sales had improved slightly from the poor September record; for the year to date they were still 1 per cent below last year. Savings deposits at District banks continued to increase. Loans showed only a small increase, hardly any movement at all, and no unusual demand for bank credit was anticipated. Mr. Fulton expressed concern about the international situation and said he would like to see the bill rate around 2-1/2 per cent. However, the domestic situation was such that a close eye should be kept on it, and he would feel that a degree of ease similar to that of the past three weeks should be maintained. He would not like to see a substantially greater degree of ease; instead, about what had prevailed recently. He would not favor a change in the discount rate or in the directive, and he would renew the special authorization. reported that business was good in the Third District. Mr. Bopp Unemployment claims had declined to the levels of 1959, and the steady decrease in claims was now apparent in total unemployment statistics, areas recently had been reclassified upward. Five major labor market strong recently and carloadings were increasing Production had been Department store sales had improved so far in October. steadily. This picture had been disturbed somewhat by the findings of survey of capital spending. These indicated the Reserve Bank's latest

that manufacturers in the Philadelphia area to planned spend 10 per cent less in 1962 than in 1961. On the face of it, this was somewhat discouraging. However, since the Reserve Bank's survey was taken as of September, it might not reflect final plans, and the Bank intended to check up in January. Moreover, this survey as well as others had tended to underestimate expenditures at this phase of the cycle, and there was reason to hope that the 10 per cent figure would turn out to be erroneous. In the banking area, no evidence was seen as yet that loan demand was picking up. In fact, loans had declined in recent weeks. Bank reserve positions had been relatively easy most of the time. Since this was one of the few brief breathing spells in Treasury financing, it seemed important, Mr. Bopp said, to consider especially carefully whether this might be the time to move away from the Committee's position of prolonged ease. However, nothing com pelling was seen in the economic picture that would dictate such a step. As long as the business expansion, and especially prices, gave of hand, he believed there was every advantage no threat of getting out position of ease. The only argument to the in maintaining the same contrary that carried much weight was the possibility that economic developments might call for less ease in the near future. This, still only a possibility. If it became more than this, however, was the Committee might have to act more drastically than if it had been

moving away from ease gradually, But at present this seemed to him to be a risk worth taking. Therefore, he would maintain the same degree of ease and make no change in the directive or discount rate. He would continue the special authorization. Mr. Bryan stated that as far as statistics were concerned, the Sixth District seemed to be going along without displaying any notable differences from the nation as a whole. There had been some signs of hesitation in the recent past and, although he considered it probable that the economy was going to break out on the up side, neither the nation nor the District was in the middle of an exuberant boom. There were at least substantial possibilities, in fact, that the economy might not move up, and instead would move on the down side. In the light of that uncertainty, and speaking only in terms of the very short run, he believed there should be no fundamental change in the posture of System policy. In terms of a figure, he would assume that a free reserve target in the range of $500-$550 million would be compatible with an expansion in total reserves appropriate to the present situation. If the country did move into an exuberant boom, the System would have to ease to a more restrain from a posture of as adroitly as possible move had not yet arrived. However, that point ing attitude. he was just as concerned as anyone Mr. Bryan went on to say that Aside from the balance of payments. in respect to the about the problem he believed that and the military situation, unemployment situation confronting the the most dangerous situation perhaps this was potentially

country. However, as he had said on previous occasions, he did not believe that the situation was going to be corrected by the change of a few basis points in the bill rate. Nothing of a fundamental nature had been done to correct the situation and to improve the attitude of other countries. Certainly there was nothing in the fiscal position that would inspire confidence in the dollar, almost nothing had been done in the area of foreign aid programs, either military or otherwise, and the country was still following a policy that encouraged wage rates to increase. In these circumstances, for the System to try to correct the balance-of-payments situation by monetary manipulation struck him as not only absurd but dangerous. Mr. Johns said that if one looked at the internal economic situation it seemed reasonable to conclude that monetary policy should continue to be stimulative. He hastened to add, however, that he was any dramatic stimulation. Rather, he would think that not referring to be to attempt to achieve the total reserves an appropriate course would 3 of table 3 of the staff memorandum of October 20 projected in column bank reserves, and he would like to see the on the outlook for member Committee's instruction to the Desk expressed in such terms. Of course, believe that one could look at the internal economic situation he did not time. As a matter of fact, the Committee's directive alone at the present of international factors, and he assumed the required consideration to such factors whether or not they were Committee would give attention

mentioned specifically in the directive. Certainly, he would not want to under-emphasize the importance of those factors or the dangers they involved. The dilemma of which Mr. Furth had spoken was a real and a difficult one. It would be nice, Mr. Johns commented, if the Committee had a crystal ball that would show the future with such clarity as to insure where the economy was going. He did not disagree with the view that it could be helpful to the balance-of-payments situation, at least in the short run, if there could be such short-term rates in this country, led by the 90-day bill rate, as to reduce the incentive for so-called hot money to flee the country. If one could look and see with assurance economy was going to expand and grow, with healthy and sus whether the tainable strength, then he supposed it would be reasonable to assume as a matter of course, at least based on experience, that there would be a movement of short-term rates that might be of considerable short-range the balance-of-payments situation. Conversely, if the economy benefit to should move in the other direction, an unwholesome situation could result, short-term rates are generally associated with slackened because lower This was another way of expressing the dilemma of economic activity. had spoken. He did not believe that monetary policy had which others the sole, or perhaps any major, responsibility for providing a solution the balance-of-payments problem. Nevertheless, when he appraised to might have deleterious effects upon the the risk that monetary policy

balance of payments, at least in the short run, he came to the conclu sion that the System should not gamble with tightening monetary policy that might inhibit the expansion of the economy at this particular point in time. Mr. Balderston said he had approached the question of what open market policy would be appropriate for today by using the device of asking himself a series of questions, to most of which he found that the answers must be tentative in the absence of confirming data. His first question was whether the recovery had been in a period of hesitation recently, to which his answer was: possibly but not certainly, despite the general comment to that effect and a slight decline in the Board's index of industrial production. His second question was whether there were indications that the money supply was now responding to the intro since February, to which the answer seemed to be in duction of reserves one could rely upon the September increase in the the affirmative, if active money supply of $1.5 billion, even though the money supply seemed by a few hundred million dollars in the first half of to have declined His third question was whether the foregoing answer indicated October. to be supplied somewhat less rapidly to provide the that reserves needed same stimulus to the money supply and to the economy, to which he had confirmation was needed. His perhaps so, although further answered: fourth question was whether the transfer abroad of gold and dollars, New York and London, was the widened rate differential between plus this question his answer was in the enough to give concern. To serious

affirmative. For this reason, he felt it would be desirable if the bill rate were to rise somewhat, even though a rise would not deter the out flow of long-term investment funds or cure the deficit in this country's basic balance of payments. Mr. Balderston went on to say that from these questions and such answers as he could provide to them he had come to the conclusion, on balance, that he would aim for free reserves of around $500 million, recognizing that the coming three weeks would have less float than the past three. It was his hope that this target might be achieved with some rise in the bill rates, since this was the period of the year when such rates were under seasonal upward pressure; he would expect the Account Management to use the special authorization to protect bill rates during the next two weeks when a large decline in float would need to be offset, even though some change in target might be considered, he was impressed by the fact that any change today should be minor in order to preserve reasonable market sta ility during the Treasury that would occur between now and the next meeting. financing the meeting, Vice Chairman Hayes commented that In summarizing exchange of views and that it might be there had been an interesting than usual to express the consensus. There somewhat more difficult difficult problems and the manner of looking at them were several around the table. A majority appeared to feel, varied considerably Committee had been following was that the general policy the however,

appropriate from the standpoint of domestic conditions. There had been comments about the continued need for stimulation of credit expansion. There had also been comments about the general stability of prices, for the moment at least, but there had been warnings on both sides of the question as to what might lie over the horizon, Some had referred to the potential danger of inflation and others had suggested that the recovery movement might not be too strongly founded. However, those were more in the nature of longer-range considerations than matters of immediate concern. As to the period immediately ahead, there was recognition that the System should meet seasonal needs for reserves and also that the System should observe the usual attitude of helpfulness toward the Treasury's refinancing program. international factors, Mr. Hayes commented that he Turning to would like to depart for a moment from his role as Chairman and say that personally he found it hard to go along with those who had because things that should be done to deal expressed the view that problem in fundamental ways were not being with the balance-of-payments to do anything. He recognized, done, the System had no responsibility the System might create an impression of course, the argument that through monetary policy than could that it thought it could do more such an impression might contribute to a actually be done, and that in considering the whole problem, letdown in other efforts. Yet, System would lose more by standing aside he though that on balance the

than by doing what it could to indicate that it saw some danger on the international horizon, even though admittedly the necessary things were not being done in areas such as cost stability or even cost reduction to improve the situation fundamentally. M Reverting to his role as Chairman, r. Hayes said he thought that at least a goodly number of those around the table had expressed some concern about the international problem and had recognized that there was perhaps something the System could do to help, in a minor way, to show that it was aware of the problem, without doing danger to the domestic economy. In terms of monetary policy, Mr. Hayes said it seemed to him there was a close balance around the table as between those who would favor a little tighter policy, or at least the resolving of doubts on the side of less ease, and those who would make no change in policy. It was very close. Of the members of the Committee, however, he thought perhaps a slight majority veered toward resolving doubts on the side of less ease as compared with "staying exactly where we are." As to the level of free reserves, Mr. Hayes noted that various figures had been mentioned. In this respect, it was again very close between "staying where we are" and "very slightly fewer." When it came to short-term interest rates, however, a clear majority had said that they would be glad to see higher rates and hope the Account Manager could do something in that that they would

direction. The expressions as to the bill rate had included "a little higher than at present" and 2-1/2 per cent, with some even suggesting a little higher than 2-1/2 per cent. In any event, the giving of some attention to short-term rates apparently was desired by a clear majority of those present. It was quite clear also, Mr. Hayes continued, that a majority of the Committee wished to renew the special authorization to operate in longer-term securities. A few had spoken of the value of that author ization in helping to meet the various objectives that the Committee was trying to mesh. Further, it was clear that the Committee did not want to make any change in the policy directive to the New York Bank at this time. There had been one or two comments on the possibility of discount rate action in the future, but a large majority would feel that no action along that line seemed appropriate at the present time. This was almost a unanimous feeling. The foregoing, Mr. Hayes said, represented his effort at stating the consensus. He then inquired whether it was felt that the consensus had been presented accurately. In the ensuing discussion Mr. Swan commented that he had been one of those who went along with the idea of resolving doubts on the side of less ease. This, however, did not mean that he would favor a change of policy in the direction of tightening at this particular time.

In reply to Mr. Swan, Mr. Hayes said he had not meant to infer that the consensus contemplated anything more than the resolving of doubts on the side of less ease. Turning to the matter of short-term rates, he said he thought a majority of the Committee members had expressed some interest in somewhat higher rates, and this point was confirmed by Mr. Sherman. Mr. Hayes then inquired whether there were further comments on whether the consensus had been properly expressed. Mr. Mills commented that the statement of the consensus was in understanding of it, but that he would like to have conformity with his recorded his dissent from the implementation of policy in the manner indicated by the consensus. Mr. Hayes replied that he had up to this point meant to inquire had been properly stated. He judged the Com only whether the consensus mittee agreed that it had. Therefore, he would now ask whether anyone, Mr. Mills, wished to go on record as disagreeing that the in addition to implementation embodied in the consensus should be followed. policy said he agreed that the consensus was as stated and Mr. Allen therefore be followed. However, his own views were that it should in the comments he had made earlier during the meeting. contained an opportunity to vote on noted that there was always Mr. Hayes should be implemented along the lines indicated by the whether policy consensus. He inquired of Mr. Allen whether he wished to vote against

the implementation of policy along the lines indicated by the consensus today, to which the latter responded that he was content to recognize that the consensus was as stated and to vote for its implementation. His own feelings would, of course, be recorded in the minutes. Mr. Robertson said he felt thatthe consensus had been stated accurately. It was a question, in such event, whether a Committee member felt strongly enough to want to register a formal dissent against the implementation of policy along the lines indicated by the consensus. On this occasion, he did not. Accordingly, it was understood that Committee policy would be implemented in the manner indicated by the consensus, as stated, and expressed in the statement he Mr. Mills dissented for the reasons that had made earlier during this meeting. that he understood the special authoriza Mr. Hayes then stated in longer-term securities would be renewed tion covering operations meeting of the Committee, with Messrs. Allen and until the next and there were no comments to the contrary. He Robertson dissenting, the unanimous desire of the members of the also understood that it was the existing policy directive to the Committee to renew without change York, and again there were no indications Federal Reserve Bank of New to the contrary. upon motion duly made and Thereupon, seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee:

(1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allow ing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to encouraging 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 in cases where it seems desirable, to issue discretion, participation to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. The Committee then authorized the Federal Reserve Bank of New York, between this date and the next meeting of the Com and within the terms of the directive mittee, issued at this meeting, to acquire inter mediate and/or longer-term Government securities of any maturity, or to change the holdings of such securities, in an amount not to exceed $500 million. Votes for this action: Messrs. Hayes, Balderston, Irons, King, Mills, Mitchell, Swan, and Ellis. Votes against Shepardson, this action: Messrs. Allen and Robertson.

In response to an inquiry from Mr. Haves, r. Rouse stated that he had no questions to raise concerning the directive to the Federal Reserve Bank of New York. With reference to a comment made earlier during the meeting by Mr. Mills, Mr. Rouse said it was his interpretation of the special authorization covering operations in longer-term securities that in the event of a disorderly market he would, despite the existence of that authorization, come back to the Open Market Committee for instructions. He assumed that the Account Manager did not have authority under the special authorization to act in that kind of a situation. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, November 14, 1961. There followed a brief discussion regarding the dates on might be tentatively scheduled in view of which succeedirg meetings No decision was reached, however, and it was the Holiday Season. be considered further at the next understood thet the schedule would meeting of the Committee. The meeting then adjourned.

Source

Also: Record of Policy Actions