October 23, 1962 FOMC Minutes

FOMC minutes

Mr. Young had merit because it went further than a mere observation with respect to the international situation that had developed. The discussion today, Chairman Martin repeated, brought out the essence of the problem faced by the Comittee with respect to its policy directives. It would be his suggestion that the Committee devote another round of discussions to the formulation of the policy directive, beginning with the next meeting, perhaps, and continuing over the remaining meetings this year in an attempt to determine whether a better form of directive could be found. After further observations along these lines, Chairman Martin invited additional comments on the several proposals regarding the directive to be issued by the Committee today, and Mr. King presented the view that a formulation such as suggested by Mr. Deming might indicate that the Open Market Committee was fashioning policy on little other than the Presidential announcement. Actually, the Committee knew a good deal about the economy. Also, if Mr. Deming's suggestion were adopted, the Committee would face the question of what to do at its next meeting, for such a directive could not be continued indefinitely. Mr. Hayes indicated that he had some sympathy with Mr. King's observation. At this juncture the Open Market Committee was just as interested as ever in the state of the economy and the balance of payments. However, there was a new element of uncertainty in the

situation. A clause could be inserted in the directive to recognize that fact even though policy was left unchanged. At the request of members of the Committee, the directives suggested by Mr. Deming and Mr. Young were then read again. Question was raised as to whether Mr. Deming's formulation implied that the bill rate should be maintained at precisely its present level, and Mr. Stone said he would not interpret the language to mean that every indicator would necessarily have to remain constant. Mr. Deming agreed. Mr. Hayes inquired whether, if policy was to remain unchanged, the second paragraph of the present directive should not be left intact. asked whether it was not correct to say that a majority When Mr. King of the Committee would not object to a slight easing of the bill rate, in view of the likelihood of increased bank demand for particularly short-term securities, Mr. Hayes referred to the Chairman's consensus, as stated earlier, which had been in terms of maintaining the status quo. After further discussion, Mr. Balderston moved the adoption of the policy directive suggested by Mr. Young, and this motion was seconded by Mr. Mills. A vote was taken and the motion was carried by unanimous vote. Accordingly, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to effect transactions for the System Open Market Account in accordance with the current economic policy directive: following

current policy of the Federal Open Market It is the to encourage moderate further increase in bank Committee credit and the money supply, while avoiding money market conditions unduly favorable to capital outflows inter nationally. It is also the Committee's policy to cushion such unsettlement in money markets as may stem from inter national developments of an emergency or near emergency This policy takes into account the potential character. financial effects of the Government's quarantine on armament imports into Cuba, the imminence of a large Treasury refinancing, and the recent stability of economic a margin of underutilized resources and an activity, with absence of inflationary pressures. this policy, operations for the System To implement during the next three weeks shall be Open Market Account a view to providing moderate reserve ex conducted with pansion in the banking system and to fostering a steady tone in money markets. Votes for this action: Messrs. Martin, Hayes, Balderston, Deming, Ellis, Fulton, King, Mills, Mitchell, Shepardson, and Irons. Votes against this action: None. In casting his vote on the directive, Mr. Mills said he sensed a growing sentiment within the Committee, with which he concurred, toward giving less attention to fluctuations in the supply of reserves resulting from natural influences and allowing the weight of such movements to fall in the direction of easier rather than tigher money In his view the steady posture that had been main market conditions. the climate of status quo did a disservice to the Federal tained within and credit policy had a general belief that monetary Reserve System's great virtue in being flexible. Instead of that, the System had moved, actions, toward a rigidity that in business and academic in words and could very possibly provoke criticism in the future. circles

Mr. Hayes voted in favor of the directive with the under standing that his reservations would be recorded in the minutes. He noted that at past meetings there had been some advocacy of changing the word "permit" to "encourage" in the directive in describing the attitude of the Committee toward further expansion of the supply of bank credit and money. That type of change, which seemed to have significance to some Committee members, provided an indication of why he voted today with reluctance. He would have preferred to leave the directive unchanged, except for the inser tion of a clause in recognition of the current international crisis. It was agreed that the next meeting of the Open Market Committee would be held on Tuesday, November 13, 1962, unless occasion arose to hold a meeting by conference telephone in the interim, and that subsequent meetings would be scheduled tentatively for December 4, 1962, December 18, 1962, and January 8, 1963. The meeting then adjourned. Secretary