November 13, 1962 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, November 13, 1962, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bryan Mr. Deming Mr. Ellis Mr. Fulton Mr. King Mr. Mills Mr. Mitchell Mr. Robertson Bopp, Scanlon, Clay, and Irons, Alternate Messrs. the Federal Open Market Committee Members of and Swan, Presidents of the Messrs. Wayne, Shuford, Banks of Richmond, St. Louis, Federal Reserve and San Francisco, respectively Mr. Young, Secretary Assistant Secretary Mr. Sherman, Hackley, General Counsel Mr. Mr. Noyes, Economist Brill, Furth, Garvy, Hickman, Messrs. Brandt, and Koch, Associate Economists Holland, System Open Market Account Mr. Stone, Manager, System Open Market Mr. Coombs, Special Manager, Account to the Board of Governors Mr. Molony, Assistant of Research and Adviser, Division Mr. Williams, Statistics, Board of Governors Board of Governors Legislative Counsel, Mr. Cardon, Chief, Government Finance Section, Mr. Yager, Board of Research and Statistics, Division of Governors Office of the Spencer, General Assistant, Mr. Board of Governors Secretary,
Messrs. Eastburn, Ratchford, Baughman, Jones, Tow, and Green, Vice Presidents of the Federal Reserve Banks of Philadelphia, Richmond, Chicago, St. Louis, Kansas City, and Dallas, respectively Messrs. Litterer and Lynn, Assistant Vice Presidents of the Federal Reserve Banks of Minneapolis and San Francisco, respectively Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston Mr. Cooper, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on October 23, 1962, were approved. Before this meeting there had been distributed to the members of the Committee a report on open market operations in United States Government securities covering the period October 23 through November 9, 1962. A copy of this report has been placed in the files of the Com mittee. At the request of the Chairman, Mr. Stone commented in supple mentation of the written report substantially as follows: The period since the last meeting has been highlighted by developments in Treasury financing. On October 25, two days after the last meeting, and in the midst of the period of maxi following the President's speech on Cuba, the Treasury mum tension the terms of its refunding operation. By the chose and announced opened on October 29, tensions had time the subscription books bond prices had risen, and the rates that the eased perceptibly, Treasury had placed on its new issues, particularly the 3-1/2 per and the 4 per cent, 9-1/4 year bond, looked very cent, 3-year note indeed to the market. The results of the refunding were attractive highly successful from the point of view of debt extension, but perhaps too successful from the standpoint of the short-rate problem, public exchange into the 3-1/8 per cent certificate amounted for the billion. There has been some market comment only to a little over $1 that the Treasury might usefully reopen the issue for some of its year; and in this connection I should remaining cash financing this say that we plan to sell some of our holdings when opportunity arises, particularly in January.
Meanwhile, the bill rate had moved down to below 2.70 in the auction of October 29, and although it edged a basis point or two higher over the next two or three days, the rise was far short of offsetting a rise in British bill rates and a narrowing of the discount on forward sterling. In consequence, the covered spread between U.S. and U.K. bills widened to 5/8 to 3/4 of a percentage point, and money started to move toward London. This situation led the Treasury to offer a strip of $1 billion bills for auction on November 7, thus adding a third auction to the two already scheduled for last week. (The auction that would have been held yesterday was held last Friday because of the Monday holiday in a number of districts.) Bill rates moved sharply higher the day following the Treasury announcement, and many in the market regarded the three forthcoming auctions as a major burden which they viewed with a good deal of apprehension. On Monday, however, the higher rate levels that had emerged brought out a good deal of investor buying, and a consensus began to develop that the rise in rates had gone as far as it was going to go, and indeed might even have been overdone. In this atmosphere, the three auctions that had been viewed on Friday as major burdens were viewed on Monday as major opportunities to acquire bills while rates were high and prices low. In consequence, bidding was rather spirited in each of the three auctions, and the average issuing rate for three-month bills in the regular weekly auctions held on Monday and Friday were 2.84 per cent and 2.80 per cent, respectively, while the average rate in Wednesday's auction of the bill strip was 2.87 per cent. It is interesting to note that the rate on the six-month bill has narrowed to only 4 or 5 basis points over the three-month issue, and indeed the one-year bill is only about 10 basis points above the three-month bill. These comparisons emphasize the point, which is worth repeating once more, that the demand for short-term secu rities, particularly by the corporate sector, continues strong. This strong demand presses on a supply of short-term securities that has been substantially reduced by the refunding. This funda mental fact was temporarily masked by the Treasury's announcement of its bill strip, but it began to be reasserted very quickly last week and accounted in large measure for the ease with which the market handled those three auctions. I should say a word about the bond market. Prices of Treasury bonds moved higher nearly every day of the period just past, and by last week yields had nearly reached the 1962 low recorded last May. In the corporate market, yields have reached the May lows. We now have in syndicate a relatively small ($14 million) Aa-rated utility issue, which was reoffered at a yield of 4.22 per cent. Investors have shown resistance to this yield thus far, and it remains to be seen how the contest between them and the underwriters comes out. In the municipal sector, yields are at the lowest levels since 1958. New borrowing in that sector
remains light, although a good volume of capital projects was author ized in the election and before too long we may begin to see some borrowing on the basis of those authorizations. Mr. Mills referred to transactions undertaken to acquire securities from foreign accounts since the October 23 meeting, and also to repurchase agreements entered into in that period. He judged that the acquisition of bills from foreign accounts was undertaken to keep those bills out of the market, but he inquired whether the transactions for the System might create a statistical illusion, at least when the report Account of reserves became available at the end of the week. In other words, would indicate higher holdings of securities and the weekly report injection of reserves into the market than actually had taken place, was no reason to believe that the proceeds of the bills since there purchased from foreign accounts necessarily would move immediately into reserves. if the securities that had been acquired Mr. Stone noted that holders had instead been sold into the market, by the System from foreign have been to withdraw reserves from the market. the initial effect would purchased these bills because it needed to supply The Federal Reserve had from foreign account represented a reserves to the market; the purchases while at the same time supplying the needed reserves means indirectly of short-term rate that might other the downward impact on the minimizing purchases in the market. As to repurchase wise have occurred from System funds provided by this means were placed in the market agreements, the sources. Moreover, while the became available from other until reserves
dealers themselves were aware that these provided the market with only temporary funds, Mr. Stone felt sure that once the funds moved beyond the dealers into the market they were not identified beyond being available as reserves. Mr. Hayes stated that, with respect to the acquisition of bills from foreign accounts, such accounts do not normally keep a large cash it seemed to him that the acquisition by the working balance. Therefore, resulted in as permanent an addition System of securities from those holders as would result from System purchases of securities of reserves to the market from other holders. from Mr. Mitchell, Mr. Stone stated that In response to questions institutions had increased, none while time deposits of official foreign for foreign accounts had been the bill sales that the Desk had undertaken of of raising funds to put into time deposits. for the purpose upon motion duly made Thereupon, seconded, and by unanimous vote, the and market transactions in Government open the period October 23 securities during November 9, 1962, were approved, through ratified, and confirmed. a report from the Special to the Committee There was distributed foreign exchange market con Open Market Account on Manager of the System and Treasury operations in foreign and on Open Market Account ditions 7, 1962, together October 23 through November currencies for the period November 8 and 9, 1962. Copies report for the period with a supplementary files of the Committee. been placed in the these reports have of
Chairman Martin turned to Mr. Coombs, who presented a review of foreign exchange market developments substantially as follows: The gold stock will probably remain unchanged this week for the second week in a row. We should be able to stave off further losses for several weeks to come and possibly through the yearend. We now have $50 million in the Stabilization Fund, with $40 million more available from the Swiss and possible sizeable receipts from the London gold pool. On the London gold market, the price has fallen off to roughly $35.09 as compared with a peak of $35.19-1/2 reached during the Cuban crisis. So far there has been no sign of private dishoarding in any volume, but an apparent shortage of foreign exchange is forcing the Russians to sell sizeable amounts of gold. Partly owing to such Russian sales, the October gold loss by the Pool was limited to no more than $35 million and since the beginning of November the Pool has actually taken in $50 million on balance. A Bank of England man who has recently visited Moscow reports that the Russians now seem to be persuaded that the Gold Pool is capable of holding the price and that they may continue to sell in some volume for another month or so. Most of the central bankers represented in the meeting of the Bank for International Settlements last weekend expressed considerable gratification over the way the Gold Pool has operated, more particularly in restraining the potentially dangerous pressures which developed during the Cuban crisis. As for exchanges, most of the European central banks also seemed to feel that coordinated operations by the central banks exerted a strongly stabilizing effect during the Cuban crisis. They expressed a great deal of worry, however, about reports that the U. S. balance of payments had deteriorated during the third quarter. As Mr. Furth will probably report, the deficit has increased to a truly alarming degree during October. As reflected in the exchange markets and central bank reserve positions, much of the outflow seems to have gone to France which continues to run a surplus in excess of $1 billion annually and, more particularly, to Canada which has been pulling in very sizeable amounts of both short- and long-term funds. Sterling, which should have seasonal deficit during the autumn months, has also moved into a been firm while our hope that the Swiss franc would weaken, after the heavy speculative inflows of recent months, has been disappointed. The sensitivity of money flows to short-term rate differentials has been well illustrated during the past week or so by a flow of arbitrage funds from New York to London as the differential covered in favor of London increased to 3/4 of 1 per cent. As you know, pulled down to almost 1/2 per cent the differential was quickly
by the rise in our bill rate. Meanwhile, I telephoned Bank of England officials to suggest that the situation called for a three way squeezing out of the differential, involving not only a rise in our bill rate but also an increase in the forward premium on the dollar and possibly some decline in the British bill rate which had moved up during the Cuban crisis. Last Friday, the Bank of England brought about a decline in their bill rate from 3.78 to 3.72, but their efforts to increase the forward premium on the dollar have been frustrated by a concurrent outflow of forward arbitrage money from London to the Euro-dollar market. Ninety day rates on the Euro-dollar market have moved up strongly, partly because of the Cuban crisis and a repatriation of funds by German and Swiss banks. The main reason, however, seems to have been a revision of the Italian exchange regulations which has permitted the Italian banks to borrow Euro-dollars in heavy volume. Since November 1, such Italian borrowings of Euro-dollars have amounted to at least $140 million and in the process have been pulling funds out of London. I had numerous conversations on the telephone and again this past weekend in Basle with Italian officials who promised to do everything possible to restrain the pressures commercial banks have been generating in the Euro-dollar their market. As of the moment, the situation has moved into better balance with the Euro-dollar rate declining towards the end of last week, while the New York-London differential has also become reduced to about 1/2 per cent. about the possible future development of our In thinking operations, I have been troubled by the problem of exchange effectively converting our holdings of one foreign currency into we wished to switch from marks into Swiss another. Assuming that in order to absorb an excessive flow of dollars to Switzer francs course, be no technical obstacle to our land, there would, of marks into Swiss francs through the market or through converting with the central banks involved. But the net direct transactions result of switching, say, $25 million of marks into Swiss francs, or through direct central bank arrange either through the market place an additional 25 million dollars ments, would simply be to Bank, thus frustrating the whole in the hands of the Swiss National solution to this The most effective purpose of the operation. one European currency to another, of problem of switching from course, would be to negotiate with each of the countries concerned, our foreign currency holdings arrangements whereby we might convert parity, thus enabling us to use marks, into gold at their official could in turn be used to buy Swiss for example, to buy gold which to the dollar holdings of the Swiss National francs without adding we have been able to negotiate As of the moment, however, Bank. such gold purchase arrangements with only one country, namely, particularly helpful in view of and this has not been Switzerland,
the difficulties we have encountered in acquiring Swiss francs. And even if we should be able to acquire Swiss francs in consider able volume, our willingness to do so might be limited by the virtual nonexistence of investment facilities in Switzerland. Pending some effective solution to this basic problem, I have tried to find ways and means of temporarily switching from one currency to another in order to deal with temporary situations. As you know, during the Cuban crisis the Swiss National Bank took in $50 million and sug gested that we might mop up the entire amount by drawings upon our swaps with the Bank for International Settlements and the Swiss National Bank. In order to conserve our resources, I limited our drawing upon the BIS swap to no more than $20 million and dealt with the remaining $30 million by securing U. S. Treasury agreement to one month Swiss franc forward operations in an equivalent amount. These forward contracts will mature during December, when the Swiss banks will be engaging in the usual yearend window dressing and will probably be unwilling to roll over or extend such forward contracts. Against this background, I have negotiated a four-cornered deal involving the U. S. Treasury, the Bundesbank, the Bank for International Settlements and the Swiss National Bank, which will enable the U. S. Treasury to utilize $30 million of its mark holdings to acquire Swiss francs against a forward commit ment to repurchase marks with Swiss francs at the same rate. The net cost of this operation to the Treasury will amount to no more than the loss of interest on its holdings of German Treasury bills. This forward operation will be executed during December and mature in February, at which time the Swiss franc should be somewhat less strong than at present. As certain members of the Committee may know, the U. S. Treasury has been engaged in discussions with the Spanish during the past month or so with respect to finan Government cial assistance to that country. In view of those discussions, I think it would be useful to have research memoranda prepared evaluating the Spanish situation and the problems that might arise in connection with a possible swap arrangement. I referred earlier to the sizeable inflow of dollars into a result of borrowing by Italian com the Bank of Italy as mercial banks on the Euro-dollar market, and to the promises that they would do from Italian officials I had received everything possible to restrain such borrowing. Meanwhile, however, the Bank of Italy faces the problem of showing this least $140 million, in its end of sizeable increase, of at Governor Carli suggested to November statement. At Basle, Treasury might wish to engage in further me that the U. S. of lire, but I expressed some doubt, in view of the borrowing announced a had only recently that the U. S. Treasury fact
$150 million lire borrowing operation and a second opera tion following so quickly might well tend to stir up the exchange market. Since the Italian balance of payments has, for at least the time being, moved into more or less of an equilibrium position, I suggested that the influx of exchange resulting from Italian commercial bank borrowing on the Euro-dollar market might well be construed as a temporary affair which might suitably be dealt with by drawing upon a Federal Reserve or Treasury swap arrangement with the Bank of Italy. I noted, however, that the amount involved considerably exceeded our present Federal Reserve Bank of Italy standby swap facility of $50 million and that, accordingly, we might usefully consider the desirability of in creasing the Federal Reserve swap facility from $50 million to, say, $150 million. Governor Carli found no difficulty in such an enlargement of the swap facility but indicated that he would like to discuss with his associates back in Rome other possible alterna tives. At this present stage of my discussions with the Bank of Italy officials, therefore, I am not in a position to recommend Committee action to increase our lire standby swap facility to $150 million, but just wanted to bring the Committee up to date on negotiations so far. Finally, I should like to ask Committee approval of a renewal for another three months of our $50 million standby swap arrange ment with the Bank of England which matures on November 30. At the conclusion of Mr. Coombs' comments, there was a general during which a number of questions arising out of his comments discussion were reviewed. upon motion duly made and Thereupon, and by unanimous vote, the System seconded, open market operations in foreign currencies during the period October 23 through November 9, 1962, were approved, ratified, and confirmed. from the Chairman, Mr. Coombs indicated In response to a question at this time was that the Committee that his only specific recommendation authorize a three-month renewal of the $50 million standby swap arrangement, August 30, 1962, with the Bank of England. dated Without objection, renewal of the standby with the Bank of England, as swap arrangement was authorized. by Mr. Coombs, recommended
The Chairman then referred to a memorandum from Mr. Sherman, distributed under date of November 8, 1962, which noted that at the meeting of the Committee on October 2, 1962, question was raised as to whether the Guidelines for System Foreign Currency Operations (approved and reaffirmed on March 6, 1962) were formulated in a on February 13 way to provide for a transaction such as the swap with the Austrian National Bank. A staff review of the Guidelines had indicated that the point was well taken. The review also indicated that the Guidelines did not provide for swap arrangements wholly or in part on a standby basis. Guidelines therefore were suggested, the pro Certain amendments to the posed changes being shown in the memorandum. suggested amendment of Sec a change in the In discussion, was agreed upon. tion 2 of the Guidelines Thereupon, upon motion duly made and vote, Section 2 seconded, and by unanimous of the Guidelines was amended to read as (deletions shown by canceled type; follows additions by capital letters): 2. Exchange Transactions [strikeout]mainly[/strikeout] be geared to transactions shall System exchange cushion or moderate dis payments flows so as to pressures of [strikeout]volatile[/strikeout] funds and their destabiliz equilibrating movements of reserves and on S. and foreign official ing effectS[strikeout]ed[/strikeout] on U. exchange markets. TRANSACTIONS SHALL BE GEARED TO PRESSURES IN GENERAL, THESE THAT ARE EXPECTED TO BE REVERSED IN THE CONNECTED WITH MOVEMENTS AUTHORIZED BY THE FEDERAL FUTURE; WHEN EXPRESSLY FORESEEABLE MARKET C0MMITTEE, THEY MAY ALSO BE GEARED ON A SHORT-TERM OPEN BASIS TO PRESSURES CONNECTED WITH OTHER MOVEMENTS.
SUBJECT TO EXPRESS AUTHORIZATION OF THE COMMITTEE, THE FEDERAL RESERVE BANK OF NEW YORK MAY ENTER INTO RECIPROCAL ARRANGEMENTS WITH FOREIGN CENTRAL BANKS ON EXCHANGE TRANSACTIONS ("SWAP" ARRANGEMENTS), WHICH ARRANGEMENTS MAY BE WHOLLY OR IN PART ON A STANDBY BASIS. The New York Bank shall, as a usual practice, purchase and sell authorized currencies at prevailing market rates without trying to establish rates that appear to be out of line with underlying market forces. If market offers to sell or buy intensify as System hold ings increase or decline, this shall be regarded as a clear signal for a review of the System's evaluation of international payments flows. This review might suggest a temporary change in System holdings of a particular convertible currency and possibly direct exchange transactions with the foreign central bank in volved to be able to accommodate a larger demand or supply. Starting operations at a time when the United States is not experiencing a net inflow of any eligible foreign currency may require that initial System holdings (apart from sums that might be acquired from the Stabilization Fund) be purchased directly from foreign central banks. It shall be the practice to arrange with foreign central banks for the coordination of foreign currency transactions in order that System transactions do not conflict with those being undertaken by foreign monetary authorities. The November 8 memorandum also suggested that, if the foregoing changes in the Guidelines were adopted, a minor change, as described, be (1) of Section III of the Authorization Regarding Open made in paragraph Market Transactions in Foreign Currencies, approved on February 13 and reaffirmed on March 6, 1962. duly made and seconded, and Upon motion by unanimous vote, Section III of the Authori zation was amended to read as follows (de by canceled type; additions by letions shown capital letters):
III. Specific Aims of Operations Within the basic purposes set forth in Section II, the transactions shall be conducted with a view to the following specific aims: (1) To offset or compensate, when appropriate, the effects on U. S. gold reserves or dollar lia bilities of [strikeout]these[/strikeout] DISEQUILIBRATING fluctuations in the international flow of payments to or from the United States, AND ESPECIALLY THOSE that are deemed to reflect temporary [strikeout]disequilibrating[/striektou] forces or transitional market unsettlement; (2) To temper and smooth out abrupt changes in spot exchange rates and moderate forward premiums and discounts judged to be disequilibrating; (3) To supplement international exchange arrangements such as those made through the International Monetary Fund; and (4) In the long run, to provide a means whereby re ciprocal holdings of foreign currencies may contribute to meeting needs for international liquidity as required in terms of an expanding world economy. At the Chairman's suggestion, Mr. Young commented informally on his recent trip to Europe, reference being made particularly to a meeting of Working Party 3 of the Economy Policy Committee of the and Development and a meeting of Organization for Economic Cooperation the Economic Policy Committee that followed. Mr. Hayes commented briefly on a private meeting of central bank governors that he had attended recently while in Basle for a meeting of the Bank for International Settlements. The Committee then turned to a review of the economic and financial situation, and the Chairman called first upon Mr. Noyes, who presented the following statement on economic developments:
11/13/2 -13- Looking back over the last three weeks, it is hard not to allow one's thoughts to be dominated by a sense of relief, and to regard the problems that remain as trivial compared to those that might so easily have been. This is all the more true because the information that has become available on the performance of the domestic economy has tended to be either favorable or less unfavorable than was widely anticipated. The very strong performance of auto sales in October--and especially in the last ten days of the month--has been so widely publicized that it needs no elaboration here. The relatively weak showing in other retail markets has received less attention, but it was associated in the trade press with unseasonable shopping weather. Aside from the surge of auto buying, which may have been completely unrelated, there was very little evidence of "scare" buying in the week following the Cuban crisis. The reaction in financial markets was also mixed and no clear trend attributable developed. Stocks have generally moved higher, but to the crisis this has been related by most observers to other factors than the crisis. the economy seem to have responded in any notable Nor does of the election. They are generally interpreted way to the results hand in Congress somewhat, but to have strengthened the President's not enough to change substantially the pattern of legislative reaction to economic issues prevailing in the last session. international crisis of the Thus, two major developments--an election--seem to have left the gravest proportions and a national unchanged. If there are basic economic situation substantially for increases in defense expenditures beyond the levels plans Cuban crisis, we are unaware of them. contemplated prior to the been able to ascertain, work is proceeding So far as I have fiscal 1964 in a routine manner. The on the budget estimates for 1963 has not yet been officially re-estimated deficit for fiscal actually enacted and economic develop in the light of legislation message. There will, of course, be a deficitments since the budget calculations suggest that a sizeable one--but our preliminary and that were made at as big as some of the estimates it will not be was under discussion in July. The seasonally the time a tax cut moved from balance to a cash expenditures and receipts adjusted will probably move a little in the third quarter and small deficit in the same direction in the current quarter. The shift further and product account basis is even smaller. in the budget on an income brevity, I shall pass over many develop In the interests of been reported to you in the some importance which have ments of two surveys that became available staff memorandum, but I think
to us at the end of last week deserve special mention. Both were in the fire just before the Cuban crisis and, of course, also before the election. The McGraw-Hill capital expenditure survey indicates that plans for such expenditures in 1963 exceed 1962 by around 3 per cent. If these plans are realized, it would mean about a continuation of the fourth quarter level of plant and equipment spending for next year as a whole. Consumer buying plans as reported by the Bureau of the Census show a somewhat more favorable picture--with intentions to buy new autos up sharply, some further recovery in interest in household durables, and house purchase plans down only slightly, perhaps no more than seasonally. Consumers were also a little more optimistic about their future income prospects than they had been in July. Taken together, recent developments seem to suggest that pro phecies of a significant downturn in the second half of this year were as premature as the forecasts of a $570 billion GNP for the year as a whole. that it would be unrealistic not to assign some It seems to me small role to monetary policy in this moderately favorable state of affairs. The fact that credit has continued to be readily available and liquidity has been ample has helped the economy maintain its modest forward momentum. A continuation and even some increase in this relative ease would undoubtedly contribute further to this end in the period ahead--and the favorable balance is certainly so delicate that it could easily be upset by restrictive action from any quarter. While the focus of my remarks has been, and will remain, on domestic economic conditions, I should add that I have noted with concern the apparent deterioration in the balance of payments situation in recent weeks. We can only hope that last week's reversal in this trend portends some real improvement, for it is about as clear as in the uncertain business of economic analysis that anything can be an appreciable short-run effect monetary action drastic enough to have on capital outflows would have unfortunate consequences for the domestic economy. the following statement on financial Mr. Holland presented developments: The past few days have been eventful ones for the financial as Mr. Stone indicated earlier. Yet, rather paradoxically, system, these same movements have served also to bring somewhat some of longer run relationships into focus; this, together with the avail ability of more dependable figures now for the third quarter and for October, provides some improved perspective for decision making.
Looking back, we can now see fairly clearly the pattern of moderately firmer money conditions that developed through June, July, and in some respects August, followed by a gradual suffusion of a more expansionary tone through much of the financial system that continued up until early November. This pattern is stamped upon the reserve situation, the interest rate structure, and the general market atmosphere although the precise timing of upturns and downturns in the different series inevitably varies. In retrospect, I think this change in reserve availability is best demonstrated by the course of total member bank borrowing from the Federal Reserve. Bank borrowing averaged $70 million in the first five months of the year, then climbed to an average $120 million between mid-June and mid-August, and thereafter has dropped back to the $70 million level characteristic of early 1962. These bare statistics describe a significant difference in bank experience: the lower figure is characteristic of a minimal level of borrowing, with a few banks meeting known seasonal or other needs and scattered others occasionally finding need for temporary assistance; the $120 million figure is high enough to involve a sizeable number of banks finding less reserves in the banking system than they expected, week after week, and being crowded into borrowing as reserve account ing periods draw to a close. In such contrasting circumstances, it would seem reasonable to expect that the resulting change in atmosphere would be disproportionate to the size of the borrowing figures involved, and that in fact appears to have been the case. Bank deposit expansion clearly slowed in the summer, then picked up in the fall, and by significantly more than seasonal dimensions. We have spoken at times in the past of the compli cations to interpretation created by changes in Government deposits and in time deposits. When the final figures are examined in broad perspective, however, it can be seen that whatever the week-to-week erraticisms contributed by Government and (to a lesser extent) time alter the basic characterization of the deposit changes, they do not summer as a period of slackened monetary growth and the fall as one of renewed expansion. Banks, in accomplishing this renewed deposit expansion, did much of an upswell of private loan demand. Most not seem to meet increases of more than seasonal dimensions seemed to bank loan borrower categories for which banks concentrate in nonfinancial aggressive competitors with other lending insti were being more the capital markets. Beyond this, banks after tutions or with unevenly to their combined holdings of secu July managed to add rities and financial loans, with sizeable fluctuations in holdings occurring around major financing dates.
Capital market flotations, meanwhile, have not as yet shown much recovery after their summer fall-off from the high first-half volume. This is particularly true in the corporate market, albeit new issues may be held down by interim borrowing on favorable terms from banks, particularly by utilities. Statistics from other financial institutions give some indications of the increased effectiveness of bank competition, both for savings funds and for earning assets. On balance, however, consumers seem to be channeling a striking proportion of their savings into financial intermediaries of all types. Corporations, at the same time, are continuing to experience large cash inflows, and the statistics suggest a pause, if not a halt, in the long postwar down trend in corporate liquidity. These influences, along with fall uptrends in reserve availability and bank credit, have helped to create a gently stimulative atmosphere in most sections of the domestic financial structure. The events of the past few weeks, however, have drawn increased attention to developments in the international financial sphere. With interest rate incentives to international flows enhanced, several counteracting official actions were undertaken at least partly in order to bring about a in domestic markets, dampening of this incentive. The Treasury brought its strip of market, and the resulting market reaction was reinforced bills to by open market sales of bills from System Account. The Account was good portion of the reserve needs of succeeding also able to meet a days with open market purchases outside the bill area. Finally, the reserve requirements on time deposits--partic Board action cutting the reduction at country banks--served to diffuse some reserves ularly banking system without easing the central money market. through the of the latter influence is the $160 million The best single indication increase in excess reserves which developed this past week, while time the Federal funds rate pushed up to the 3 per cent at the same This means the free reserve figure for level in the central markets. bias, and the free reserve figures of the this week had an upward also be subject to this upward bias, next few weeks will probably although in decreasing dimension. Coombs indicated, this particular flurry At the moment, as Mr. into foreign liquid assets appears to be subsiding of movement of respite, however, needs to be conditioned somewhat. Any feeling regarding domestic interest rates. by an awareness of market prospects Committee three weeks ago made As Mr. Brill's presentation to this and corporate financial saving clear, the current rates of individual funds bode further natural downward relative to demands for interest rates. In addition, before pressures upon domestic entered the period of the year December is over we shall have rate pressures will be substantial, parwhen seasonal downward
ticularly on the short rate. If, therefore, the circumstances that have made British and Canadian rates attractive relative to ours do not prove temporary, a more troublesome period for policy may be ahead. With such an eventuality possible, the domestic monetary and financial record of the last six months should be helpful. This record makes clearer than usual the benefits that a moderately stimulative monetary policy can bring, and also the consequences that can accompany even a moderately tighter policy, in something like the prevailing economic environment. This underlines the premium to be placed on maintaining tolerable international rate relationships in the months ahead, by means which will not restrict domestic credit availability unduly. Of various policy measures that could be impressed into service, one of proven effectiveness is concentration of Treasury financing in short-term issues, although this would be a substantial cost in terms of foregone opportunities to lengthen the debt and to tailor it more prudently. Other alter natives that could be considered include further reductions in bank reserve requirements, operations in forward exchange markets to increase the cost of covering money market investments abroad, increased concentration upon System purchases of securities other than bills, and even a raising of the interest rate ceiling applicable to 3-month time deposits, in order to allow banks to utilize this instrument to compete more directly for investible funds that might otherwise be bidding for 3-month bills. Each of these possible alternatives cited has its own drawbacks, and their probable effects on interest rate differentials vary. A careful comparison of the likely benefits and costs of each alternative action, however, might lead to a more efficiently integrated assault upon our domestic and international financial problems--an assault in which general monetary policy would need to play an important part, but in which it could be employed as something less than the ultimate weapon. the following statement on the U. S. balance Mr. Furth presented of payments and related matters: According to preliminary data, transfers to foreigners of gold, foreign currencies, and dollars amounted in October to a record sum of $900 million, more than twice the monthly average for the third quarter. The amount would be $75 million greater if it were not for a statistical adjustment by which, contrary to previous practice, certain newly issued government obligations that will not be redeemed within 12 months are no longer counted
as liquid liabilities. While the data are fragmentary and ten tative, they probably give a reliable indication of the order of magnitude involved. The October transfers will bring the total for the first ten months of the year to $2-1/4 billion, according to the official computation. If both the statistical adjustments and the receipts from extraordinary debt prepayments are disregarded, the sum rises to $3-1/4 billion--as much as the deficit for the entire year 1961. But the increase in the October deficit over the average for the third quarter was probably due to non-recurrent factors. More than half of the deficit reflected transfers to Canada and included a few large capital transactions as well as considerable attracted by the unusually wide (un amounts of volatile funds, covered) interest-rate differential maintained by the Bank of Canada. transactions were a large royalty payment Other extraordinary of the U. S. subscription to the to Venezuela and the final payment Inter-American Development Bank. Some short-term money went to in response to the re-emergence of a substantial covered London differential in favor of British money-market paper. And I am convinced, although without statistical evidence, that the Cuban to flight movements of U. S. funds to countries regarded crisis led the threat of a longshoreman strike may as safe havens. Finally, the trade surplus for the month. have reduced first week of November show transfers Preliminary data for the mainly on private account, of from foreigners to U. S. residents, Last Friday, for (excluding statistical adjustments). $150 million there seems to have been a reflux of funds the first time in months, the view that the size of Canada. Both developments support from the October deficit was due to unusual circumstances. Europe, there was less talk of an approaching In continental of a need for restrictive rather than end of the boom, and more talk payments balance, contractive For the U. S. expansionary policies. they involved a rise in Europe, especially if monetary policies in as bad as an end of the boom. rate levels, might be nearly interest modest expansionary actions, and Japan recently took some But Britain Japan by easing credit restrictions. reducing some taxes, and Britain by the beginning of October have Gold sales to foreigners since considering the size of the million, a small sum been less than $100 crisis. But in contrast the impact of the Cuban October deficit and reported by Mr. Coombs, we must to the favorable short-run prospects larger sales in the long run. expect far has not converted any Bank of Canada, which so First, the probably at the very least into gold, will of its dollar accretions of gold it sold to the U. S. Treasury last repurchase the $190 million remainder of the assistance it spring, as soon as it unwinds the
received in June from the United States, Britain, and the Inter national Monetary Fund; and it could do so any moment as it has by now gained more reserves than it lost during the first half of the year. Second, many European countries are likely to convert further dollar receipts into gold at a more rapid pace than hitherto. Until recently, some of these countries could use their dollar receipts for debt prepayments to the United States and repurchasing drawings from the Monetary Fund. But now, only Britain and France still owe large debts to the United States; and Monetary Fund holdings of dollars have nearly reached 75 per cent of the U. S. quota, the limit beyond which repurchases can no longer be made in dollars. Furthermore, the forward operations of the Treasury and, to a much smaller extent, the System swap arrangements have enabled some countries to convert straight dollar holdings into holdings protected by an exchange value guarantee. During the first nine months of this year, more than $600 million were thus converted by continental European countries. While the eight major continental European countries statistically increased their dollar holdings by $150 million, they actually reduced their uncovered holdings by $450 million. Only Austria, France, and Sweden accumulated any significant amounts of uncovered dollars; and Austria has converted its entire accrual into gold or guaranteed meanwhile continually converts dollars into gold and dollars, while France presumably intends to use the rest of its accruals for further debt prepayments. Only Sweden among all European countries apparently to the policy of keeping the bulk of its very modest still adheres reserves in straight dollars. the decline in uncovered dollar holdings The greater part of account. Thus, the decline apparently was not so was on official to hold straight dollars much the result of lessened willingness but rather a reflection of the policies on the part of the public, of the European monetary authorities. to the volume of guarantees the There are obvious limits can give in order to prevent surplus Treasury and the System from converting their dollars into gold. Unless these countries countries become more willing to accumulate uncovered dollars, the proportion of our deficit reflected we must therefore expect that will rise sharply, and with it the in a decline in our gold stock psychological impact of our deficit on the international standing of the dollar. of his views on the presented the following statement Mr. Hayes situation and monetary policy: economic
The performance of the domestic economy appears to have been slightly better, on the basis of the data coming to light in the past three weeks. Particularly encouraging is the very strong behavior of auto sales in October, although this may reflect a bunching of sales as new models have become widely available. The prospects are for a good auto production level in November. The McGraw-Hill survey of business plans for plant and equipment spending in 1963 may be regarded as only mildly encouraging, after allowance is made for past inaccuracies in this forecast--but this evidence pointing to continued, though mild, advance finds some support in the NICB's latest appropriation figures. Last month's decline in unemployment would have had more significance if it had not been due primarily to a drop in the labor force. On balance, a relatively sluggish advance seems about the best to expect in the fourth quarter. I am somewhat reluctant to point with alarm at the increasingly discouraging balance of payments situation, as I realize that this can be regarded as "playing an old record". Yet I feel strongly that, as the central bankers of this country, we must give this factor very close continuing attention; and sometimes I have an uneasy feeling that this Committee is inclined either to overlook the seriousness of the risk of real loss of confidence to assume that other than monetary remedies for the in the dollar or are so controlling that the Federal Reserve balance of payments it to others to grapple with this danger System can simply leave while we keep our eyes focussed mainly on the domestic economy. would seem to me quite unacceptable. Of course This philosophy close watch on the domestic economy--but at a time we must keep a when most business indices are at historical highs, when the latest ground for expecting any imminent decline, and figures give little of the economy and the availability of credit when the liquidity me wholly logical to shift the weight remain ample, it would seem to international as against domestic of our emphasis a little towards factors. need only look at the preliminary October To back this view we an over-all payments deficit suggest for that month alone data, which the recently published official of around $900 million, following billion (seasonally adjusted annual third quarter deficit of $2.9 of several non-recurring items the rate). Even after deduction $700 million, the largest monthly October figure is still about of this reflects movements of capital into deficit on record. Much long-term. Part represents Canadian Canada, both short-term and the acquisition of Canadian time deposits bank window dressing; part taking advantage of high rates; part long by U. S. corporations U. S. In addition, the recent temporary term bond flotations in the between U. S. and U. K. short-term widening of the covered spread London in significant, though not market rates has drawn funds to some transfers by and this has included very large, amounts,
American banks for their own accounts. Mr. Young's comments on short-term rate expectations in Europe suggest that this type of problem is likely to be a persistently recurring one. Against this we can find satisfaction in the continued steady performance of the dollar in foreign exchange markets and the recent calm atmosphere in the London gold market. To a very considerable extent this probably reflects the increasingly close cooperation among leading central banks and recognition by financial markets of the strength of this cooperation. Yet we cannot afford to forget that the major cornerstone of this co operation is faith in the individual countries' ability and willingness to guide their own economic affairs in a way that will make for better international equilibrium. No member of this cooperative group is free to go its own way, concentrating on its domestic affairs and neglecting its international respon sibilities. We have seen many examples of other countries' willingness to take at times, strong measures for the sake of better international equilibrium that tended to be contrary to purely domestic considerations. Specifically, the large European holders of dollars have been led to believe that the U. S. is taking effective steps to eliminate its payments deficit within a reasonable period, and the September Bank-Fund meetings were marked by expressions of confidence on all sides that we were making steady progress towards this goal. In this atmosphere a sudden realization that we are not making progress, but are now retrogressing, could have very serious consequences, especially of enlarged drafts on our gold stock. in the form for a moment at the current credit Now let us look situation, which must necessarily provide the basic framework Bank credit apparently continued to grow for our own operations. of weekly reporting member at a strong pace in October. Investments and municipals were up sharply. Business banks in both governments with seasonal expectations, after the loans were about in line and August--probably in part because stronger showing of September for new corporate bond issues. Banks of greater use of the market the money supply rose enough in have remained relatively liquid, decline that had occurred since April, October to wipe out the net deposit increase was the and the combined money supply-plus-time adjusted required month this year. Seasonally largest for any close to or above the deposits have been reserves against private since late October, and current Board's 3 per cent guideline continue to exceed the guide projections suggest that they will line through at least early December. is well aware, an ample flow of savings As the Committee have been placing important down and high corporate liquidity on interest rates throughout the maturity range. ward pressure Treasury and the Desk in temporary success of the Despite the
reversing the downward trend of bill rates last week, the under lying forces seem to be asserting themselves again, and we shall have our hands full trying to maintain a firm rate structure, unless we face frankly the probability that a firm rate structure calls for a somewhat less easy monetary policy. With the inter national problem as pressing as it is, and with the Nation's liquidity as ample as it is, I can see no excuse for pursuing a policy which is reflected in free reserves in a range only $100 million or so lower than the range we were aiming at at the bottom of the recession nearly two years ago. I believe we should make a moderate but definite move toward lesser ease, encouraging the 90-day bill rate to remain close to or even above 3 per cent. If free reserves in the neighborhood of $200 million should prove to be necessary to achieve this, I would have no objection to such a development. It might be argued that an immediate increase in the discount rate would provide a useful signal of our willingness and determination to use monetary policy to do our part in defending the dollar. At this point, however, I am not prepared to press this view and would be content to see a moderate tightening through open market operations as a first step. Obviously the to the time when a substantial tax reduction will closer we come become a reality, the less will be the risk that our own actions harmful effects on the domestic economy and the broader may have will be our scope for constructive monetary policy. If the Committee is willing to make a modest policy change I am advocating, I think the directive should be of the kind modified accordingly. In any case the reference to an imminent Treasury financing should be eliminated, together with the specific quarantine on armament imports into Cuba; and at reference to a I believe we should place greater emphasis on the same time outflows and less on the desirability of international capital in bank credit and the money supply. encouraging further increases The policy directive suggested by Mr. Hayes was as fol lows: the margin of underutilized resources in the In view of economy and the absence of inflationary pressures, it is the policy of the Federal Open Market Committee to permit current in bank credit and the money supply moderate further increase that this is compatible with the maintenance of to the extent that are not likely to stimulate money market conditions country. This policy takes into capital outflows from this account the difficult balance of payments situation and the of capital movements in the balance of payments. important role
It is also the Committee's policy to cushion such unsettlement in money markets as may stem from international political and military developments. To implement this policy, operations for the System Open Market Account during the next few weeks shall be conducted with a view to meeting seasonal needs for reserve expansion in the banking system while encouraging a somewhat firmer tone in money markets. Mr. Shuford, commenting on the Eighth District, noted that condi tions had changed little since May. The economy seemed to be on a plateau, with employment remaining near the level reached in May. With respect to unemployment, there had been a slight decline reflecting a decline in the labor force. The use of electric power was about the same as the May rate, and department store sales showed no significant change since spring. Bank loans rose little from September to October. Total deposits did con tinue to rise, as in the previous month, but the level of demand deposits remained essentially the same. The increase was almost entirely in the time deposit area. Mr. Shuford said that he appreciated Mr. Hayes' observations with respect to the international situation and that he recognized the problem. It was a matter not to lose sight of, and he was certain that the Com mittee would not. The domestic situation, however, was particularly dis turbing at this time in view of the relatively long, high-level plateau Without losing sight of the international problem, it that had existed. well, he thought, for the Committee to take advantage of any would be production by monetary means. This would not opportunity to stimulate in basic policy; he would think in terms of aiming at call for any change
free reserves in the neighborhood of $400 million. Of course, the Com mittee did have the bill rate to consider, but he felt that the level of free reserves he had in mind was compatible with a bill rate in the neighborhood of 2-3/4 per cent. Mr. Bryan, reporting on economic conditions in the Sixth District, commented that some series were up and some were down. In general, the District series seemed to be following close to the national pattern. There had been some interest at the Reserve Bank in formulating plans to deal with resulted from the Cuban situation; however, no problems that might have the crisis could be detected. There had been a appreciable effects of and a run on automobiles in one area. However, the run on canned water, unusual currency demands other than in the Bank could not detect any for about two days during the crisis there was a Florida area, where There had also been some demand than usual demand for large bills. greater armed forces in connection with the movement of for currency from the but that was all. troops, Mr. Bryan said he found national economic picture, Turning to the it disappointing. One month was encouraging, the next was disappointing, would make up its mind what it he found himself wishing the economy and did offer a little encouragement, going to do. The latest figures was however. Mr. Bryan commented that he be With respect to monetary policy, should be made. On the matter of the lieved as little change as possible he would recommend no change. As policy directive, Mr. Bryan said that
to Mr. Hayes' statement on the balance of payments, he agreed that this was a dangerous situation. However, the Committee must analyze the mechanics of influencing this situation through the use of monetary policy. He believed that if one analyzed that mechanism closely, it would come down to discouraging domestic economic expansion, and he had great doubt whether the Committee would want to take such a step. Mr. Bopp commented on developments in the Third District, noting that there was no evidence of buoyant activity. With respect to monetary policy, Mr. Bopp said that the last few weeks had been exceptionally difficult ones for him and others at the Reserve Bank. He found a great diversity and switching of individual views about current conditions and prospects--more so than ever before. At this time he would favor slightly greater ease, with emphasis on opera in the intermediate and longer term markets. tions the international situation, Mr. Bopp said it With respect to the Committee felt it must adjust monetary policy would seem to him that if results, the Committee would have to tighten so to obtain substantial as to injure the domestic economy. significantly economy continued to that the Fourth District Mr. Fulton reported of either an upswing or with no pronounced indication move sideways, showing in October, improved future. After a poor downturn in the immediate had carried the index back to sales for the past two weeks department store a record Christmas business was anticipated. the high September average, and to new high ground, with a sales in major cities had advanced Auto
substantial number of undelivered orders on dealers' books. However, it was reported in some quarters that new orders had slackened, portending a possible cutback in production in late December. If sales were to decline, then a year-end inventory of 975,000 units would appear to be a reasonable estimate. Used car inventories were becoming heavy, with a softening in price. Construction contracts in the third quarter remained under the second quarter average despite the fact that heavy engineering contracts had been favorable, bolstered by public works expenditures. The increase in unemployment had been slightly more than expected on a seasonal basis. Those areas dependent on basic steel and heavy industry continued to have the highest totals. This was probably the result of the modernization of increased use of labor-saving processes as well as the the mills and the low operating ratio of the mills. The paper and container industry reported a good and increasing volume of output, but a highly competitive situation with soft prices. Large capital investments made over the past two years had increased capacity greatly, and the industry was waiting for orders to grow up to capacity and to increased prices and profits at that time. Mr. Fulton said there was some indication that the As to steel, were beginning to reach the bottom of their inventory automobile companies stockpile and were ordering increased tonnages to maintain current high production. However, other users of steel had not increased takings; in mills reported a reduction of orders, There was no indica fact, some tion of inventory building. Orders were on a hand-to-mouth basis, with
the mills still carrying inventories for immediate delivery. The estimate of production for 1962 was 97.5 to 98 million tons; for 1963, about the same. The steel companies were more and more concerned about the import of foreign steel at prices under those obtained abroad. A recent meeting of industrial economists indicated that new orders of many firms were below current sales, with a consequent decline Others stated that new orders had not increased as expected in backlogs. these economists felt that the economy had already seasonally. Some of others felt that a softening would occur after the turn of peaked out; the year. was inclined to the premise that the stability Mr. Fulton said he only a pause and that the economy might break out in the indexes was than into a recession. If a downturn occurred, he on the up side rather and short-lived. He would like to see fewer believed it would be minor banking system and a firmer tone in the short reserves supplied to the in the long end. The large increase term market, with no further decline stability. Until the strip of time money posed a threat to future in had declined progressively, as was sold last week, short-term rates bills and corporates. These movements had long-term Governments, municipals, a covered basis. Mr. Fulton felt encouraged the outflow of funds on had the economy with reserves and policy had all but surfeited that monetary of funds. He would sug time had arrived to slow the injection that the free reserves of $300 million. gest maximum
Mr. Mitchell presented the following statement: Formulating policy in the current economic atmosphere is exceptionally difficult. Fears of another postwar-type re cession seem less pervasive than earlier, but hopes for a sustainable significant upthrust also seem to be rapidly fading into the oblivion of "no change." The economy continues to absorb jolts--both economic and political, internal and inter national--but it does it at per capita zero, i. e., with deflated GNP per capita showing no significant change, as it did between the second and third quarters and probably will between the third and fourth. An economy in which GNP is not rising faster than the growth in population is not the image we have of ourselves nor one that we want others to have of us. It conforms neither to our needs nor our aspirations and it is not an equilibrium situation for long. Something will happen which will stir the economy from per capita zero. It may roll off the roof with everyone, including the foreigners, watching helplessly. It may get up and go, following a substantial reduction in taxes or a substantial increase in defense spending. It would more surely be in a go if monetary policy gave the increasingly serious position domestic needs a higher priority than it gives the intractable problem of trying to maintain an artificial rate structure for balance of payments purposes. The problem is approaching a crisis stage because the sort of economy we have is generating a large and increasing amount of savings, which in the free play of markets would be put to work by depressing the interest rate structure. In the corporate area, a high level of profits and a growing volume of charges is being maintained while inventory spend depreciation and capital spending is leveling off. The result ing is reduced points toward a glut of business funds available for investment in capital financing needs. In the consumer area, and a decline grow, at least those that can be flows of savings continue to Debt repayments are beginning categorized as "nondiscretionary." debt extensions, and the volume of savings to catch up with new and insurance companies grows with flowing to pension funds we seem to be getting a shift in regularity. At the same time, saving, with the decline in the stock the structure of consumer of corporate and municipal market and the diminished availability forcing a diversion of savings into thrift institu flotations tions. this background of rising private savings and de Against clining private credit needs, the Federal Government doesn't appear to be much of a contracyclical force, at least through cash budget was in balance in the second fiscal action. The
quarter, on a seasonally adjusted basis, and in only very small deficit in the third quarter. For the calendar year as a whole, the cash deficit is likely to be only $5 to $5-1/2 billion, down from close to $7 billion last year. (Even on the national income and product basis, the deficit would be rather small, perhaps on the order of $2 billion compared with almost $4 billion last year and over $9 billion in 1958.) Neither can we regard debt management as having been contracyclical since (a) the Treasury has borrowed more than it needed in terms of expenditures and receipts, and locked up the excess in its cash balance,1/ (b) has--at least in recent months--been reducing the supply of short-term liquidity instruments through extensive refunding actions. How long can the rate structure withstand such Federal fiscal and debt management policy, growing private liquidity, and a re serve policy which keeps free reserves in at least the $300-$400 million range? This is not a tenable combination of policies and facts, and we ought to recognize it. I urge that we practice what we preach about free markets, and let the rate structure obey the laws of savings supply and investment demand. But if the Committee remains persuaded that the foreign situation should continue to dominate its posture, it makes a difference as to how that objective is realized. We could, of course, try to maintain the desired short-rate level by snugging up on reserves. This might have some expectational effect for a while, but I doubt whether, once it started, we could maintain this effect without successive reductions in reserve availability. How far it would have to go I don't know, but in a sluggish economy generating so much liquidity I suspect it would ultimately have to go far. I would venture that there are few at this table who would be willing to live with net borrowed reserves while unemployment remained close to 6 per cent. Can we start on a course in this direction without being prepared for such a consequence? I doubt it. There is another possible line of action, one we haven't the fullest. This would be providing a reserve explored to climate favorable to renewed domestic expansion by injecting re serves primarily outside the short end of the investment spectrum. Despite all the talk about having freed ourselves we still behave as though this from the bills-only restriction, the prevailing rule. I know that some will argue that were still not be deflationary so long as monetary action 1/ Which need expansion to continue over and above permits bank reserve needed to support Treasury balances. reserves
it can't be done in the magnitude needed for reserve operations, and that some will argue that we will wind up dominating and distorting the rate structure. I think the burden is on them to prove that it can't be done, especially since this would be a move in the same direction that market forces are now working. As for compromising our allegiance to free market forces, it seems ridiculous to talk about maintaining a "free" long-term market so long as we are putting a floor under the whole rate structure by pegging the short rate. I, too, would be in favor of letting the markets run free, but if we won't, we may be able to do an effective job of controlling both level and structure. Finally, I recognize that this policy runs the risk of accelerating long-term capital outflows, perhaps in sub stantial magnitude. Here again, the burden must rest on those who advance this argument, and I would welcome any evidence that would enable us to quantify the risk. We have about run out of devices to bolster the rate structure in its present form while facing the increasing need, reasons, to stimulate in both for domestic and international System is willing to utilize its vestment demand. Unless the arrow--pushing reserves out through aggressive intermediate last purchases--we may well have to face a slippage in and long-term tightening of credit availability in rates along the line or a indicators calling for a face of a host of domestic economic the contrary policy. this operation is to be used. The Timing is important if investment has put rates in capital and flow of funds seeking considerable pressure. More pressure mortgage markets under by seasonal factors at year end. If we act will be supplied now, for a few months we will have market overtly and aggressively us; we might also have the bene trends and seasonal forces with influence. On the short side, the bill fit of some expectational There is every reason to be held up a while longer. rate could believe that this policy would be significantly stimulative; it as market forces. It should fore moves in the same direction and thus avert the over-all business activity stall a decline in development on business psychology. damaging effect of that economy moving ahead again. executed, it could get the Properly of policy we face been achieved, the dilemma When that goal has will have been dissolved. encouraged about the domestic Mr. King said that he was slightly breakthrough at this time, he did not foresee any strong economy. While so sluggish. He did not base believe the economy was quite he did not
this judgment of the situation on economic reports and statistics, but on his own "straws in the wind." With respect to the balance of payments, Mr. King commented that there was nothing in the record at present about which to be encouraged. Looking back at the domestic economy, he felt the Committee's contribution had been large and real. He was reassured to a large extent by the forma tion of time and savings deposits. He did not believe it would be wise to predicate any change in policy on a tax cut. While some might be hopeful with respect to a tax cut, he was less hopeful; the possibility of achieving it was far from clear. Mr. King noted that his attitude regarding the balance of payments had followed a course varying from slightly more concern to slightly less concern. In the past year or so he had attached a little less significance to it because of doubtful forces in the domestic economy. However, as he had said, he was presently somewhat encouraged, particularly because of the economy's demonstrated ability to absorb the shocks it had absorbed, while his concern about the international situation was slightly greater than it despite his view that the international situation had been. Nevertheless, warranted concern, he would not favor a change in System policy at this time. Mr. King believed that System policy had been constructive. He also the Committee's responsibility required it to stay on line. believed that presented the following statement: Mr. Robertson around this table, after I returned to the deliberations meetings, to find the general business missing two consecutive disappointing. Auto sales have been spectacular situation still
for a few weeks, after the new model introductions, but this is not yet a reliable basis on which to judge prospects for the full model year, and moreover the auto industry is not likely to be able, by itself, to reinvigorate a slack economy. I would judge, from what I have heard this morning, that the most favor able general statement that can be made about the economy is that at least the recession that had been forecast by some gloomy prophets has failed to materialize. The harsh fact remains that we still face an economy with a substantial amount of un utilized resources and with a current rate of growth so slow that, unless it is stimulated, it offers no hope for putting these re sources back to work. other hand, I am heartened by what monetary policy On the appears to have accomplished this fall. I note that the slightly easier bank reserve position has been accompanied by a general downward drift of interest rates and a fairly substantial pace of monetary expansion. This seems to me the kind of stimulative credit atmosphere which I hoped for when I voiced my views at the late September meeting of the Committee. I regard this as an attribute of policy with longer-range significance, and a policy appropriate, indeed essential, for the alleviation of our longer-range problem of economic growth. With respect to our coordinate problem of achieving a viable of payments position, I judge that our sit international balance better nor much worse, taking the uation has become neither much year as a whole. In terms of the sales of goods and services across international boundaries, perhaps the most that can be said have experienced not quite as much worsening of trade is that we The fundamental fact in surplus as would be expected cyclically. that our trends of prices and area, however, continues to be this for our leading industrial com costs are less inflationary than petitors, and hence our basic competitive position is improved. to disturb that relationship. This I Even "Cuba" has not seemed regard as the most fundamental fact about our international implications are favorable. situation, and its long-run recent days with an upsurge of news We have been beset in and potential net capital flows from this suggesting actual chiefly Canada. Comments make country to other major nations, that these flows have occurred for a variety of reasons, it clear which do not seem to be associated with interest rate most of on money market assets. So far as I know, those differentials few flows that might be moving into foreign money market assets for purely interest rate reasons are themselves responding to rate differentials which have no certainty of persisting. Certainly the policies of Canada are not rooted in circumstances which should compel a long continuing maintenance of their short term interest rates at levels so far above our own.
More basically, however, I think we should be careful not to place too much' weight in our policy formulations upon these short term capital flows which may exist for transitory reasons. One need only take a look at the international financial problems of the United States, and other major industrialized countries, through the eyes of the less developed countries -- as I have been privileged to do recently -- to realize the overwhelming strength of our position and the unnecessary anguish involved in overemphasiz ing disturbances such as we have been witnessing these past few weeks. The industrial nations of the free world do not experience precisely the same pattern of economic developments, and they cannot always be expected to follow policies which mesh neatly the financial conditions in their money, credit, and capital markets. When changed economic circumstances are developing and new policies need to be evolved to deal with them, some less than perfect interest rate relationships must be expected internation ally, with corresponding flows of capital developing. Indeed, in a dynamic world, in which change is continual, pressures of unexpectedly large capital flows,' first in one direction and then in another, ought to be expected to occur. It is important for us to remember that, for all our gold losses of recent years, we are still probably in a better position to withstand the pressures of capital flows during periods of economic transition than is any other country. It behooves us to handle our domestic economic policies accordingly. To be specific, I think this means we should alter monetary policy with every shift in the breeze of inter not national capital flows, but aim our policy in so far as we can to press in the direction of our longer-range objectives. It seems to be clear, as I have indicated earlier, that our fundamental position domestically, with substantial underutiliza tion of resources, is unfavorable; while our fundamental position with our improving competitive cost-price re internationally, is favorable. As a result, it seems to me the policy lationships, prescription is obvious: continue to promote a monetary environment with ample availability of bank credit and liquidity in order to in stimulating higher rates of employment and economic assist me, is putting first things first. I would ex growth. This, to objective to be served by a free reserve level ranging pect such an least around $450 million, with stable to buoyant conditions at prevailing throughout the credit and capital markets. was not intended to said the statement he would make Mr. Mills minimize the seriousness of the balance of payments situation, but tied into his previously expressed belief that a strong United States economy was the to long-run worldwide economic growth and foreign exchange best guarantee stability.
Therefore, he believed that domestic considerations must take precedence over international balance of payments considerations. If, however, the balance of payments situation worsened critically, stern and strong measures should be taken and temporizing experiments abandoned. By strong measures, he referred to such as those the United Kingdom and Canada had effectively taken during the last year and which contained confidence restorative qualities. Mr. Mills then presented the following statement: As the year 1962 comes toward its close, a backward rather than a forward look offers the best vantage point from which to develop an appropriate Federal Reserve System monetary and credit into the year 1963. A portentous appraisal of past policy reaching economic events must include the years of 1961 and 1962 and leads that throughout both years the national economy to the conclusion but little more. Coincidentally, the leveling-out in held its own, that has occurred in 1962 was accompanied by a the money supply flattening-out in general economic activity. Furthermore, over this period obsolescence has run down excess plant capacity at the same time that a rapid growth in population has increased human wants and needs--all of which, in line with some slight seasonal strength, indicates that the economy may now be poised for a new upsurge in growth entailing a vigorous revival of enlarged capital investment programs, in the process of which new industries and their outlets for capital expenditure may be uncovered. monetary and credit policy less re A Federal Reserve System than that now in evidence can be straining and more expansionist stimulating economic activity and, in par an important influence for expansion of commercial bank credit with ticular, for encouraging the to growth in the money supply, which latter is an consequent support essential ingredient for any advance into new ground. However, it Reserve System policy to revert to the will be necessary for Federal that are largely identified with a kind of free market principles sought after are to be realized. "bills only policy" if the objectives A flexible monetary and credit policy freed from the pegging re now handicapped would also be consistent with straints by which it is a monetary attack on the nation's balance of payments problems, be securities would be constrained to cause dealers in U. S. Government their positions and in adding to the market supply of securities reduce would be exerted on interest rates in this manner, an upward pressure
that could be backed up through open market policy actions--and all within the context of providing adequate credit availability and an incentive for credit expansion. In other words, a firm interest rate structure as a balance of payments defense, and opportunities for credit expansion, can be made to be consistent with a flexible monetary and credit policy. I see no need for an increase in the discount rate at this moment, nor a change in the directive whose framework carries ample authority for conducting the kind of monetary and credit policy proposed--but which authority has not been used to my satisfaction in the interval since the Open Market Committee's last meeting. Mr. Wayne reported that Fifth District business conditions had ap parently remained quite stable during the past few weeks. According to the Reserve Bank's latest survey, the downtrend in textiles had moderated significantly, with orders and shipments steady but employment and hours still tending to decline. In other manufacturing industries, shipments continued to rise, but new orders, employment and hours had had reportedly remained about the same. Construction activity continued at a high level awards had been declining. Retail trade appeared to even though contract at near-record levels, and the be exhibiting normal seasonal strength for coal was somewhat stronger again. demand economy seemed to him particularly Two aspects of the national first was that in the nation, as of attention; Mr. Wayne said. The worthy had remained quite stable at a high in the Fifth District, business activity automobile production and support from record level, gaining considerable in the face of the economy's remarkable stability sales. The second was the steel difficulties, the stock market Cuban crisis. This, on top of the crisis, suggested that the economy was decline, and the Canadian monetary by anything short of a major not likely to be upset in a stable equilibrium
disturbance. Increased military activities would certainly raise defense spending and the budgetary deficit to some degree, but unless there was a further acceleration of the military buildup, it was not likely to cause any strong upsurge in business. It seemed more probable that the increased spending would simply be an additional force tending to sustain activity at about its present high level. In the policy field, Mr. Wayne said he did not see any valid argu ments for more ease. He would recommend that the Committee aim at a level of free reserves of $400 million or less, and that special attention be given to keeping the three-month bill rate above 2.75 per cent and preferably 2.80 per cent. He believed the Committee should make it clear--by above actions not words--that it had not changed policy in either direction. The reference to Treasury financing should be eliminated from the directive. that recent events had underscored the dilemma of Mr. Clay noted with which the Federal Open Market Committee had been monetary policy years. This dilemma had resulted from unfavor wrestling for more than two balance of payments at the same time able developments in the international showing little basis for encouragement. It that the domestic economy was of October brought little change in the level was apparent that the month the national economy. While new auto of seasonally adjusted activity in sales were outstanding, the aggregate performance of the economy in mobile and sales added up to little more than terms of production, employment, of the very favorable beginning of seasonal increases. The full meaning was not yet apparent; it would be necessary the new automobile sales year able to gauge the basic in order to be further sales developments to await
strength of that market and its impact on the economy. Looking ahead, the McGraw-Hill survey of business capital spending plans for 1963 did not foreshadow an expansionary impact from that important of the economy. Rather, the report projected a pace of activity sector best was sluggish. All in all, except for the spurt in automobile that at the moment produced little evidence of ex sales, economic indicators at pansionary forces in the private sectors of the economy leading to sig nificant strides toward fuller employment of manpower and other resources. Mr. Clay said, the goal of public policy Under the circumstances, be one ,of endeavoring to stimulate economic for domestic purposes should that meant to him a program of monetary ease activity. For monetary policy, of member bank reserves and the expansion of bank leading to the provision proportions and to a further downward movement credit in excess of seasonal declining rates and Recent evidence of level of interest rates. in the residential mortgage market were one credit availability in the improving policies over past months. aspect of the response to these in the international flow Clay noted that recent developments Mr. and Committee open market operations funds had led to Treasury financing of felt that this deterrent to down Treasury bill yields. He fostering higher be permitted to inhibit the rates should not ward movement in short-term of seasonal proportions and a member bank reserves in excess provision of The Committee should seek the attain further easing of longer term yields. securities and by con purchasing longer term of these objectives by ment far as necessary to attain its goals. purchases and sales so ducting offsetting
In Mr. Clay's opinion, the Reserve Bank discount rate should be left unchanged. As to the directive, in the present directive's reference to the recent Treasury financing operation and the emergency aspects of the Cuban crisis, it apparently would have to be rewritten. Mr. Scanlon reported that in the Seventh District concern about the business outlook appeared to have taken a favorable turn in recent weeks. The views expressed by the Reserve Bank's directors at their meeting last Thursday tended to reinforce this view. One important factor had been the extremely high level of auto sales. Also, manufacturers of some other con reported a strong rise in sales to dealers. Another factor sumer durables had was the expectation that military spending would be increased more than was planned earlier and that the kinds of items produced in Midwest plants would spending rise. While the impact of these developments could be share in the of short duration, they had tended, in the meantime, to bolster waning busi ness confidence to some extent. As Mr. Noyes had indicated, developments in the auto industry hardly Sales in October were phenomenal--well above expectationsrequired comment, and orders for future delivery were said to be large in comparison to the experience of recent years. Sales of domestically produced cars in October were the highest for any month in history and were exceeded only by May 1955 rate basis. Instead of increasing as expected, dealer inventories on a daily declined during October. Production schedules had been increased, and called for more than 2 million assemblies in the fourth quarter. If realized, this would exceed the record for the period, established in 1955.
As to policy, while the balance of international payments data clearly indicated that no solution to problems in that area was imminent, Mr. Scanlon suggested that the combination of domestic and international con ditions appeared to call for continuation of the policy objectives stated in the current directive. The directive should be changed to remove the ref erence to imminent Treasury financing and eliminate specific reference to the potential financial effects of the quarantine on military imports to Cuba. He would not change the discount rate at this time. Mr. Deming said the latest available evidence continued to indicate that the Ninth District economy was pushing ahead at a moderate pace, sparked by the excellent farm situation. September personal income was up from August and was 8-1/2 per cent ahead of a year earlier. October bank debits were 8 per cent larger than in October 1961. Nonagricultural employment in seasonal adjustment, rose slightly from the Minnesota in October, after unemployment was well (40 per cent) below year-ago September level. Insured October. In a survey of business opinion taken totals in both September and of the respondents reported retail sales up early in November, two-thirds of the respondents reported man auto sales up considerably. The bulk and employment holding even to up slightly and ufacturing and nonmanufacturing For the weeks ahead, two-thirds saw unemployment even to down slightly. in business as probable or certain, and most of the remainder improvement stable, about the same pattern as had held since saw business continuing early July.
The District banking picture remained about the same, with deposits growing and loan demand fairly strong. In October city bank loans behaved about in normal fashion, but this followed a very strong September expansion. Country bank loans grew at a record level in October, and they also were strong in September. Both types of banks remained in a fairly liquid position. Borrowings from the Reserve Bank were nominal, and those banks in the Federal funds market had been mainly on the selling side. With respect to monetary policy, Mr. Deming commted that although the economy was not doing as well as the Committee might like, he did not see any significant basis for easing. With respect to the balance of pay ments, Mr. Deming said he agreed with Mr. Hayes that the central bank should do everything within reason, particularly in the area of short-term rates. Perhaps, under certain circumstances, the Committee should do more than it had been doing. On the other hand, he would not like at this time to see the short-term rate the major guide for policy; in his opinion, the Commit tee should key its policy primarily to the domestic economy. He thought what Mr. Mitchell had said at this meeting had a great deal of merit: the seek alternative means for dealing with the balance of Committee should payments problem. Mr. Deming said, with respect to the directive, that he was a little puzzled about suggestions to remove reference to the Cuban situation. The imminent Treasury financing should be removed. The Cuban reference to situation remained a factor, however, even though the situation perhaps was Therefore, from deletion of the Treasury financing phrase, not as tense.
he would feel that the directive could be renewed. Mr. Swan reported that the Twelfth District was exhibiting somewhat mixed trends, but that there was a reasonably good level of activity. The data for October were still fragmentary. Going back to September, there was a 4 per cent increase in nonagriculture employment in the District from a year earlier, with an increase in defense-related employment of 10 per cent. In October, department store sales were apparently about unchanged from September. Steel production was down in October, and petroleum refin ing was down slightly. With respect to the financial picture, Mr. Swan said that in the past few weeks the reserve position of major District banks had tightened, and they had switched from being suppliers of Federal funds to net buyers. of November 7th there was a substantial increase in borrowing In the week from the Reserve Bank. Turning to monetary policy, Mr. Swan said the situation stood in The Committee was still faced with a domestic situation delicate balance. expansion. He could not see a basis for a that showed no significant switch toward a tighter policy despite problems in early significant side. He would think that during the next November on the international should supply reserves beyond seasonal requirements, few weeks the Committee reserve position of $400-$450 million. which would imply a free the directive, Mr. Swan said he would remove the With respect to to Treasury refinancing and the Cuban crisis. references
Mr. Irons said that there had been no very significant changes in the Eleventh District economy, but that the level of activity had been favorable. Comparing the current level of economic activity with the fore cast made in late 1961, the economy in that District was not accomplishing what had been predicted. However, comparing the current levels with those of a year ago, the District was up in construction, department store trade, and agriculture, and conditions in the oil industry were not too bad. Turning to the financial picture in the Eleventh District, Mr. Irons reported that demand deposits were down and that there had been little bor rowing from the Reserve Bank. There was little concern on the part of the Reserve Bank's directors with respect to the domestic economy, but growing concern with respect to the international situation. he was pretty much in agreement with Mr. Hayes' state Mr. Irons said ment. The Committee had to try to walk a tightrope as between domestic and international problems, but he was inclined to think it should avoid giving any less attention, from the standpoint of the rate structure, to the inter national situation. There was a risk in every approach, but he felt that less risk was involved in the domestic economy than on the international side. He would favor, for the next three-week period, continuing to follow current policy, but he felt the banking system was liquid and he would lean toward being a little less easy, though meeting essential needs for reserves. As to free reserves, he would say under $400 million; $300-$350 million would be all right. For the Treasury bill rate, he would say 2.75-2.85 per cent, with the Federal funds rate rather consistently at 3 per cent. He would not change the discount rate.
With respect to the policy directive, Mr. Irons said he would take out the words relating to Treasury financing. With respect to phrases on the Cuban problem, he would prefer the passage of more time before making any changes. Mr. Ellis described business in New England as unsettled at a relatively high level. Department store sales were lagging behind last year, but automobile sales were strong. Personal income reached a peak in June and was leveling out. Employment had declined slightly in excess of seasonal expectations. In the banking field, demand deposits of weekly reporting member banks, on seasonally adjusted basis, had declined, but loan demand was up. Mr. Ellis said it seemed to him the Committee should be satisfied with the position of monetary policy. He found it difficult to recommend changing the present policy materially, even though recognizing the importance of Mr. Hayes' comments with relation to the international policy aspects. He would prefer to wait a while longer. With respect to the directive, he would strike out the phrases regarding the Treasury financing and the Cuban crisis. If that was done, the sense of the directive would come very close to no change in the position of policy. Mr. Balderston said he was of the view that the Committee should consider probing in the direction suggested by Mr. Hayes and Mr, Fulton. The goal of a balance in international payments seemed as far from attainment as it was a year ago. There was some continuing tendency for wage rates and
Governmental costs to increase, and it was just not good enough to depend on European competitors being improvident and impractical. He was disturbed by the behavior of the stock market in recent days, which behavior appeared to be a matter of reacting to fright, and also that the Government would now spend more because of political and military uncertainties. As he pondered those matters, he came back to the question of liquidity, and he felt the amount of liquidity in the banks and economy at large was very great. There fore, as he looked at required reserves held against private deposits, which had increased since June by 3-1/2 per cent, he concluded that the time may have come to probe in the direction of a lower level of free reserves. Chairman Martin said that he had been impressed by the amount of thought reflected in the comments that had been made at this meeting. The discussion pointed up the difficulties of the period which, although perhaps no more difficult than many other periods, was nevertheless an extremely difficult one. Nothing said in the comments this morning had changed at which he had arrived before coming into the essentially the position present was not a good time for an overt change meeting--a position that the in monetary policy. Public psychology had shown several reversals during these shifts, the Chairman said, it seemed to the past month. Observing Federal Reserve System had gained by having maintained a policy him that the of stability in a period when the public had shifted from one extreme to another in a short period of time. Chairman Martin said that he sympathized with the views expressed by Mr. Hayes and would lean in the direction advocated by the latter if it
were not for the pyschological repercussions that he thought he sensed. The views expressed by the members of the Committee seemed more evenly divided than had been the case for a considerable period of time. He doubted that anyone in the room would perceive the right answer to the problems; he did not pretend to do so, but his feeling at this particular time was that monetary policy, if anything, was too easy and may have been so for some little time. He was just as anxious as anyone to see further growth in the economy and to see an expansion in activity that would get rid of un utilized capacity. He was convinced, however, that easier money would not desired goals. The Chairman then cited a personal expe bring about these the past week end that illustrated that banks were not only rience over but were soliciting loans when there was the slight willing to extend credit One result of this, he noted, was a lower est sign of a potential borrower. business. This may not have gone ing of standards of credit in the lending but in his opinion some concern was to the point of justifying concern, warranted. that the problem of growth in the Chairman Martin also commented balance of payments problem of economy and the solution to the domestic of assigning priority to one over country should not be put on a basis this were one; the Committee was wrestling the other. The two problems essentially of both of them at the same time. He thought that the money with the solution a sense, the Committee was caught between the "bills market sensed this. In group. He doubted that and the "buy long-term securities" only" pressures mark certain interest rates that might be used would effectively any devices
up and others down to deal with the contrasting objectives of domestic growth and the solution to the balance of payments problem. There had been a resurgence of business sentiment and activity within the last week or ten days, the Chairman noted, but no one could tell how long that would last. To base a change in monetary policy on a shift of the sort observed recently would not be desirable, he felt, and if he were to arrive at a policy deci sion entirely on his own, he would make no change at this point in monetary policy. To base a change in monetary policy on a shift of the sort observed recently would not be desirable, he felt, and if he were to arrive at a policy decision entirely on his own, he would make no change at this point in monetary policy, although if he were forced to choose between change in one direction or the other, he would have to come out on the side of slightly rather than on the side of slightly more ease than at the present less ease that the Federal Reserve should maintain the same time. While concluding policy at this point, Chairman Martin remarked that he did not believe that continuance of that policy indefinitely was going to provide the solution to problem. The time might come when the System would the balance of payments rate in order to deal with the balance of payments have to raise the discount problem. Turning to the Committee's discussion, there was a close division morning, with a wider gap in the judgment in the views expressed this of views than he had observed for a long period of time. Several of the members were advocating a shift in policy to provide for greater ease, while several others were advocating a shift to provide for less ease and some wanted no change at all. No one was advocating a change at this the discount rate. time in
With respect to the discount rate and the balance of payments problem, the Chairman said he believed interest rates to be the controlling force in the movements of funds. This might not appear to be so at any given time, but it was his belief that in the longer run the rates were a controlling force. This morning the Committee was between the "easy money" view and the "easier money" view. He saw no way of resolving the weight of these views other than to call for a vote on the general question. He then suggested that a vote be taken Ln which the members of the Committee whether they would vote for or against a change in the degree would indicate of ease called for by existing policy. On this question a total of five members of the Committee indicated that they would vote for no change (Messrs. Martin, Bryan, Deming, Ellis, and King), while six indicated that they would prefer to some change in the present policy (Messrs. Balderston, Fulton, make Hayes, Mills, Mitchell, and Robertson). Chairman Martin then suggested that to approach a closer under of the views he would present the question whether the Committee's standing this meeting to provide for a lesser degree policy should be changed at of ease. members voted "aye", while seven voted On this question four a change to a policy of less ease. (Messrs. Martin, Balderston, against Bryan, Deming, Ellis, King, Hayes voted "yes", while Messrs. Fulton, and a change to a policy of less and Robertson voted against Mills, Mitchell, ease.)
Chairman Martin next put the question of a change in policy to provide for a greater degree of ease, and on this question seven members voted against such a policy, with three in favor and one abstaining. Those voting against a change to a greater degree of ease were Messrs. Martin, Hayes, Balderston, Deming, Ellis, Fulton, and King; those voting for a greater degree of ease were Messrs. Mills, Mitchell, and Robertson; and Mr. Bryan did not vote. In the discussion that followed, Mr. Robertson stated that, while his basic inclination was toward a policy of somewhat greater ease, he would he strongly in favor of holding policy unchanged if the only practicable alternatives were a policy of no change or a policy of less ease. Accordingly, he was prepared to change his vote on the first question put to the Committee from a vote against no change to a vote in favor of no change in the present policy. Chairman Martin then called for any further comments with respect to the indications of views. In the absence of comment, he declared should record the Committee's policy vote on the that the Secretary be a change in the present degree question of whether there should six members voting for no change (Messrs. Martin, of ease as showing and Robertson), and five voting for a Bryan, Deming, Ellis, King, change (Messrs. Balderston, Fulton, Hayes, Mills, and Mitchell). Of these five, Messrs. Balderston, Hayes, and Fulton would favor a lesser Mills and Mitchell would favor a greater degree of ease, while Messrs. degree of ease.
With respect to his own position, the Chairman stated that, as he had indicated at the outset, he favored no change in the degree of ease. However, if it had been necessary to vote for a change to greater or lesser ease, he would have favored slightly less ease than at present. The Chairman then took up the question of the current economic policy directive to be issued to the Federal Reserve Bank of New York, noting that some suggestions had been made that reference to the Treasury and to Cuba should be deleted from the directive issued at the financing meeting on October 23. The Chairman stated that he felt the present directive, with a deletion of the reference to the Treasury financing, could be used. Mr. Hayes had suggested a change which would move in the less ease but, in view of the vote of the Committee against direction of such a change, such wording would not be appropriate. the ensuing discussion several suggestions of wording During were presented. Thereupon, upon motion duly made and seconded, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, transactions in the System Open to execute in accordance with the follow Market Account current economic policy directive: ing of the recent stability of economic activity, with In view resources and an absence of inflationary a margin of underutilized policy of the Federal Open Market pressures, it is the current to encourage moderate further increase in bank credit Committee supply, while avoiding money market conditions unduly and the money It is also the to capital outflows internationally. favorable such unsettlement in money markets Committee's policy to cushion developments of an emergency or as may stem from international near emergency character.
To implement this policy, operations for the System Open Market Account during the next three weeks shall be conducted with a view to providing moderate reserve expansion in the banking system and to fostering a steady tone in money markets. Votes for this action: Messrs. Martin, Balderston, Bryan, Deming, Ellis, Fulton, King, Mills, Mitchell, and Robertson. Vote against this action: Mr. Hayes. Mr. Hayes stated that his vote against the wording of the directive in the foregoing form was based on his feeling that the wording gave too little attention to the difficult international balance of payments situation and that it placed its main emphasis on the domestic situation. Chairman Martin noted that the next meeting of the Committee had been tentatively scheduled for December 4, 1962. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions