March 5, 1963 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, March 5, 1963, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Clay Mr. Irons Mr. King 1/ Mr. Mills Mr. Mitchell Mr. Robertson Mr. Scanlon Mr. Shepardson Shuford, and Swan, Alternate Messrs. Fulton, Wayne, Members of the Federal Open Market Committee Ellis, Bryan, and Deming, Presidents of the Messrs. Reserve Banks of Boston, Atlanta, and Federal Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Assistant General Counsel Mr. Hexter, Mr. Noyes, Economist Baughman, Brill, Eastburn, Furth, Garvy, Messrs. Green, Holland, and Koch, Associate Economists Manager, System Open Market Account Mr. Stone, Special Manager, System Open Market Mr. Coombs, Account to the Board of Governors Mr. Molony, Assistant Mr. Farrell, Director, Division of Bank Operations, Board of Governors Division of Research and Mr. Williams, Adviser, Board of Governors Statistics, at point indicated in minutes 1/ Withdrew from meeting
Mr. Yager, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Messrs. Ratchford, Jones, and Parsons, Vice Presidents of the Federal Reserve Banks of Richmond, St. Louis, and Minneapolis, respectively Messrs. Brandt and Lynn, Assistant Vice Presidents of the Federal Reserve Banks of Atlanta and San Francisco, respectively Financial Economist, Federal Mr. Anderson, Reserve Bank of Boston Sternlight, Manager, Securities Department Mr. Reserve Bank of New York Federal Mr. Mann, Senior Economist, Federal Reserve Bank of Cleveland for this meeting, the Secretary reported that In the agenda been received of the election by the Federal Reserve Banks advice had of members and alternate members of the Federal Open Market Committee for the term of one year commencing March 1, 1963, and that it appeared such persons would be legally qualified to serve after they had executed their oaths of office. and alternates, all of whom had now executed The elected members oaths of office, were as follows: their of the Federal Reserve Bank of New Alfred Hayes, President F. Treiber, First Vice President of York, with William Reserve Bank of New York, as alternate; the Federal President of the Federal Reserve Bank of Karl R. Bopp, Philadelphia, with Edward A. Wayne, President of the Federal Reserve Bank of Richmond, as alternate; Charles J. Scanlon, President of the Federal Reserve Bank of Chicago, with Wilbur D. Fulton, President of the Federal Reserve Bank of Cleveland, as alternate;
George H. Clay, President of the Federal Reserve Bank of Kansas City, with Eliot J. Swan, President of the Federal Reserve Bank of San Francisco, as alternate; Watrous H. Irons, President of the Federal Reserve Bank of Dallas, with Harry A. Shuford, President of the Federal Reserve Bank of St. Louis, as alternate. Upon motion duly made and seconded, and by unanimous vote, the following offi cers of the Federal Open Market Committee were elected to serve until the election of their successors at the first meeting of the Committee after February 29, 1964, with the understanding that in the event of the dis continuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Wm. McC Martin, Jr. Chairman Alfred Hayes Vice Chairman A. Young Secretary Ralph Merritt Sherman Assistant Secretary A. Kenyon Assistant Secretary Kenneth General Counsel Howard H. Hackley David B. Hexter Assistant General Counsel Economist Guy E. Noyes Associate Economists Ernest T. Baughman, Daniel H. Brill, David P. Eastburn, J. Herbert Furth, George Garvy, Ralph T. Green, Robert C. Holland, Albert R. Koch, and Clarence W. Tow Upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was selected to execute for the System Open Market transactions until the adjournment of the first Account meeting of the Federal Open Market Committee after February 29, 1964. Upon motion duly made and seconded, and by unanimous vote, Robert W. Stone
and Charles A. Coombs were selected to serve at the pleasure of the Federal Open Market Committee as Manager of the System Open Market Account and as Special Manager for foreign currency operations for such Account, respectively, it being understood that their selection was subject to their being satisfactory to the Board of Directors of the Federal Reserve Bank of New York. Secretary's Note: Advice was sub sequently received that Messrs. Stone and Coombs were satisfactory to the Board of Directors of the New York Reserve Bank for service in the respective capacities indicated. In connection with the foregoing action, Mr. Hayes recalled that at the meeting of the Federal Open Market Committee on April 17, 1962, he and Mr. Reed, Chairman of'the Federal Reserve Bank of New York, had presented arguments against the proposal, then under consideration, Manager and Special Manager of the change the procedure whereby the to were selected by the Federal Reserve Bank System Open Market Account execute transactions for the System Account, that was selected to the Open Market Committee. As a possible subject to approval by Mr. Hayes noted, he had suggested a process of joint compromise, and Special Manager by the Open Market appointment of the Manager sympathy had been and the Reserve Bank. Considerable Committee in the end the Committee had voted with that suggestion, but expressed its By-Laws to provide for selection (with Mr. Hayes dissenting) to amend by the Committee of a Manager and a Special Manager, both of whom were
to be satisfactory to the Reserve Bank selected to execute transactions for the System Account. That decision having been made, Mr. Hayes said, he saw no purpose in pursuing the matter further. He merely would like to make the comment for the record that although he would go along with the current procedure, he did so with some reluctance. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on January 29 and February 12, 1963, were approved. Consideration then was given to the continuing authorizations of the Committee, according to the customary practice of reviewing such matters at the first meeting in March of each year, and the actions set forth hereinafter were taken. Upon motion duly made and seconded, it was voted, with Mr. Robertson abstaining, to authorize and direct the Federal Reserve Bank of New York, until otherwise directed by the Committee, to execute transactions in the System Open Market Account in accord ance with the following continuing authority directive relating to transactions in U. S. Government securities and bankers' acceptances: 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the current economic policy directive adopted at the most recent meeting of the Committee: sell United States Government securities in (a) To buy or the open market, from or to Government securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market
prices and, for such Account, to exchange maturing United States Government securities with the Treasury or allow them to mature without replacement; provided that the aggregate amount of such securities held in such Account (including forward commitments, but not including such special short-term certificates of indebtedness as may be purchased from the Treasury under paragraph 2 hereof) shall not be increased or decreased by more than $1 billion during any period between meetings of the Committee; (b) To buy or sell prime bankers' acceptances of the kinds designated in the Regulation of the Federal Open Market Committee in the open market, from or to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market discount rates; provided that the aggregate amount of bankers' acceptances held at any one time shall not exceed $75 million or 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent accept ance survey conducted by the Federal Reserve Bank of New York; (c) To buy United States Government securities with maturities of 24 months or less at the time of purchase, and prime bankers' acceptances with maturities of 6 months or less at the time of purchase, from non-bank dealers for the account of the Federal Reserve Bank of New York under agree ments for repurchase of such securities or acceptances in 15 calendar days or less, at rates not less than (a) the discount rate of the Federal Reserve Bank of New York at the time such agreement is entered into, or (b) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower; provided that in the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers' acceptances covered by any such agreement are not repurchased by the seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. 2. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York to purchase directly from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommoda tion of the Treasury; provided that the rate charged on such
certificates shall be a rate 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchases; and provided further that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $500 million. In discussion that preceded the foregoing action, which continued in effect the directive adopted by the Committee on March 6, 1962, Mr. Mills commented that he would accept the directive because its construction was susceptible of the kind of policy that he thought it was appropriate for the Committee to pursue, namely, a reversion to the practice that called for transactions in the System Account to be limited to supplying and withdrawing reserves with, except in unusual circumstances, the understanding that such transactions would be carried out through the purchase and sale of Treasury bills rather than by operations in other areas of the Government securities market. This was a reiteration, he noted, of views he had expressed on previous occasions. Mr. Robertson said it continued to be his view that the contin uing authority directive was inadequate and lacked sufficient guidance and restrictions, which view he had expressed at the meeting on March 6, 1962, and also in connection with the adoption of the continuing authority directive on December 19, 1961. In his opinion, the directive in its present form served no purpose other than as window dressing. Therefore, he would abstain from voting on the directive.
Upon motion duly made and seconded, and by unanimous vote, the Authorization Regarding Open Market Transactions in Foreign Currencies (as amended November 13, 1962) and the Guidelines for System Foreign Currency Operations (as amended November 13, 1962) were reaffirmed: AUTHORIZATION REGARDING OPEN MARKET TRANSACTIONS IN FOREIGN CURRENCIES Pursuant to Section 12A of the Federal Reserve Act and in accordance with Section 214.5 of Regulation N (as amended) of the Board of Governors of the Federal Reserve System, the Federal Open Market Committee takes the following action governing open market operations incident to the opening and maintenance by the Federal Reserve Bank of New York (hereafter sometimes referred to as the New York Bank) of accounts with foreign central banks. I. Role of Federal Reserve Bank of New York The New York Bank shall execute all transactions pursuant to this authorization (hereafter sometimes referred to as trans actions in foreign currencies) for the System Open Market Account, as defined in the Regulation of the Federal Open Market Committee. II. Basic Purposes of Operations The basic purposes of System operations in and holdings of foreign currencies are: (1) To help safeguard the value of the dollar in inter national exchange markets; (2) To aid in making the existing system of international payments more efficient and in avoiding disorderly conditions in exchange markets; cooperation with central banks of (3) To further monetary other countries maintaining convertible currencies, with the International Monetary Fund, and with other payments institutions; international (4) Together with these banks and institutions, to help moderate temporary imbalances in international pay may adversely affect monetary reserve ments that positions; and
(5) In the long run, to make possible growth in the liquid assets available to international money markets in accordance with the needs of an ex panding world economy. 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 liabilities of disequilibrating fluctuations in the international flow of payments to or from the United States, and especially those that are deemed to reflect temporary 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 reciprocal holdings of foreign currencies may contribute to meeting needs for international liquidity as required in terms of an expanding world economy. with Foreign Central Banks IV. Arrangements arrangements with foreign central banks In making operating of foreign currencies, the New York Bank shall on System holdings not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. The Bank shall instruct foreign central banks regarding the such holdings in excess of minimum working balances investment of with Section 14(e) of the Federal Reserve Act. in accordance consult with foreign central banks on The Bank shall coordination of exchange operations. Any agreements or understanding concerning the administration maintained by the New York Bank with the central of the accounts banks designated by the Board of Governors under Section 214.5 of N (as amended) are to be referred for review and approval Regulation
to the Committee, subject to the provision of Section VIII, paragraph 1, below. V. Authorized Currencies The New York Bank is authorized to conduct transactions for System Account in such currencies and within the limits that the Federal Open Market Committee may from time to time specify. VI. Methods of Acquiring and Selling Foreign Currencies The New York Bank is authorized to purchase and sell foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the Stabilization Fund of the Secretary of the Treasury established by Section 10 of the Gold Reserve Act of 1934 and with foreign monetary authorities. Unless the Bank is otherwise authorized, all transactions shall be at prevailing market rates. VII. Participation of'Federal Reserve Banks All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3 G (1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. VIII. Administrative Procedures The Federal Open Market Committee authorizes a Subcommittee consisting of the Chairman and the Vice Chairman of the Committee Chairman of the Board of Governors (or in the absence and the Vice of the Chairman or of the Vice Chairman of the Board of Governors the members of the Board designated by the Chairman as alternates, the absence of the Vice Chairman of the Committee his alternate) and in instructions to the Special Manager, within the guidelines to give the Committee, in cases in which it is necessary to reach issued by on operations before the Committee can be consulted. a decision All actions authorized under the preceding paragraph shall be promptly reported to the Committee.
The Committee authorizes the Chairman, and in his absence the Vice Chairman of the Committee, and in the absence of both, the Vice Chairman of the Board of Governors: (1) With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Secretary; (2) To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and with the Secretary on such policy matters to consult as may relate to the Secretary's responsibilities; (3) From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Problems. IX. Special Manager of System Open Market Account Manager of the Open Market Account for foreign A Special shall be selected in accordance with the currency operations established procedures of the Federal Open Market Committee for of the Manager of the System Open Market Account. the selection Manager shall direct that all transactions in The Special and the amounts of all holdings in each foreign currencies foreign currency be reported daily to designated authorized officials of the Committee, and shall regularly consult staff designated staff officials of the Committee on current with the in the flow of international payments and on current tendencies developments in foreign exchange markets. and the designated staff officials of The Special Manager shall arrange for the prompt transmittal to the the Committee and other information relating to Committee of all statistical and the amounts of holdings of foreign the transactions in for review by the Committee as to conformity with currencies its instructions. shall include in his reports to the The Special Manager a statement of bank balances and investments payable Committee in foreign currencies, a statement of net profit or loss on to date, and a summary of outstanding unmatured transactions contracts in foreign currencies.
X. Transmittal of Information to Treasury Department The staff officials of the Federal Open Market Committee shall transmit all pertinent information on System foreign currency transactions to designated officials of the Treasury Department. XI. Amendment of Authorization Open Market Committee may at any time amend The Federal or rescind this authorization. FOREIGN CURRENCY OPERATIONS GUIDELINES FOR SYSTEM 1. Holdings of Foreign Currencies the System will limit its Until otherwise authorized, to that amount necessary to holdings of foreign currencies to exert a market influence. Holdings enable its operations will be authorized only when the U. S. of larger amounts of international payments attains a sufficient surplus balance of holdings of major con to permit the ready accumulation vertible currencies. currency shall generally be kept sufficient Holdings of a that currency (exclusive of contracts to meet forward contracts in arrangements with foreign monetary authorities made under parallel to mature in the following provide their own cover) expected which three-week period. a certain minimum shall be currency holdings above Foreign in conformity with Section 14(e) invested as far as practicable of the Federal Reserve Act. 2. Exchange Transactions be geared to pressures of System exchange transactions shall so as to cushion or moderate disequilibrating payments flows and their destabilizing effects on U. S. and movements of funds foreign official reserves and on exchange markets.
In general, these transactions shall be geared to pressures connected with movements that are expected to be reversed in the foreseeable future; when expressly authorized by the Federal Open Market Committee, they may also be geared on a short-term 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 rates that appear to be out of line with trying to establish 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 This review might suggest a temporary change in payments flows. System holdings of a particular convertible currency and possibly direct exchange transactions with the foreign central bank involved to be able to accommodate a larger demand or supply. a time when the United States is not Starting operations at experiencing a net inflow of any eligible foreign currency may require that initial System holdings (apart from sums that night be acquired from the Stabilization Fund) be purchased directly from foreign central banks. the practice to arrange with foreign central It shall be coordination of foreign currency transactions in banks for the order that System transactions do not conflict with those being undertaken by foreign monetary authorities. 3. Transactions in Spot Exchange The guiding principle for transactions in spot exchange shall be that, in general, market movements in exchange rates, within the limits established in the International Monetary Fund Agreement or by central bank practices, index affirmatively the interaction of underlying economic forces and thus serve as efficient guides to current financial decisions, private and public.
Temporary or transitional fluctuations in payments flows may be cushioned or moderated whenever they occasion market anxieties, or undesirable speculat:.ve activity in foreign ex change transactions, or excessive leads and lags in international payments. Special factors making for exchange market instabilities include (i) responses to short-run increases in international political tension, (ii) differences in phasing of international economic activity that give rise to unusually large interest rate differentials between major markets, or (iii) market rumors of a character likely to stimulate speculative transactions. Whenever exchange market instability threatens to produce disorderly conditions, System transactions are appropriate if the Special Manager, in consultation with the Federal Open Market Committee, or in an emergency with the members of the Committee designated for that purpose, reaches a judgment that they may help to re-establish supply and demand balance at a level more consistent with the prevailing flow of underlying payments. Whenever supply or demand persists in influencing exchange rates in one direction, System transactions should be modified, cur tailed, or eventually discontinued pending a re-assessment by the Committee of supply and demand forces. 4. Transactions in Forward Exchange Occasion to engage in forward transactions will arise mainly when forward premiums or discounts are inconsistent with interest rate differentials and are giving rise to a dis equilibrating movement of short-term funds, or when it is deemed appropriate to supplement existing market facilities for forward cover as a means of encouraging the retention or accumulation of dollar holdings abroad. Proposals of the Special Manager to initiate forward operations shall be submitted to the Committee for advance approval. For such operations, the New York Bank may, where authorized, take over from the Stabilization Fund outstanding contracts for forward sales or purchases of authorized currencies.
5. Exchange Rates Insofar as practicable, the New York Bank shall purchase a currency through spot transactions at or below its par value, and should lower the rate at which .t is prepared to purchase a currency as its holdings of that currency approach the established maximum. The Bank shall also, where practicable, sell a currency through spot transactions at rates at or above its par value, and should raise the rate at which it is prepared to sell a currency as its holdings of that currency approach zero. Spot transactions at rates other than those set forth in the preceding paragraphs shall be specially authorized by the members of the Committee designated in Section VIII of the Authorization for Open Market Transactions in Foreign Currencies, In discussion preceding the foregoing action, Mr. Mills stated that he accepted the Authorization and the Guidelines on the theory that they envisaged continued experimentation with System foreign currency operations, an experiment that in his judgment had not proven completely successful Ln accomplishing its intended objectives. He was apprehensive about the difficulties that, according to press reports, were being encountered by U. S. authorities in financial negotiations with other countries. These reports served to heighten his feeling of apprehension with regard to the whole approach currently being followed, which he thought in a matter of time was likely to find the U. S. becoming a handmaiden of assistance to a number of its foreign allies rather than in their providing a first line of defense in time of difficulty. Mr. Robertson stated that he concurred in the views expressed by Mr. Mills. His favorable vote on reaffirmation of the Authorization
and Guidelines also was based on an understanding that the action contemplated a continuation of experimental operations; in other words, that the authorization for further foreign currency operations was regarded as merely a vehicle with which to carry on experimentation. Chairman Martin commented that he thought it was generally accepted that the program of System operations in foreign currencies was of an experimental nature. Mr. Mitchell noted that this under standing had been reflected in the minutes of the Open Market Committee when the program was instituted; he suggested that it would seem this understanding also to be reflected in the minutes desirable for connection with the current action reaffirming the Authorization in Mr. Hayes commented that he could not conceive that and Guidelines. anyone would be unwilling to make such changes in the program as might appear at any time to be appropriate. during which reference was made to There followed a discussion in the Guidelines indicatng that System foreign currency provisions be directed toward dealing with exchange market operations would that might be expected to be of a temporary nature instabilities disequilibria. In this connection, Mr. Hayes rather than fundamental that the limited use of foreign currencies under swap arrange remarked afforded an indication of the character of System operations. ments Martin called attention to a second article on Chairman Treasury and Federal Reserve foreign exchange operations that had been
prepared by the Special Manager of the Open Market Account with a view to publication in the March issues of the Federal Reserve Bulletin and the Monthly Review of the Federal Reserve Bank of New York. This article, which was of a factual nature, would bring up to date the information contained in the previous article, which had been published in September 1962. Chairman Martin commended the article to the members of the Committee for study, adding that the System program of foreign exchange operations should continue to be reviewed carefully. There had been distributed under date of February 26, 1963, a memorandum from Messrs. Stone and Farrell submitting for consideration suggested revisions in the procedures with respect to allocations of the System Open Market Account. It was noted that on January 29, 1963, had amended such procedures so that adjustments of a the Committee holdings because of a low reserve ratio would not be Reserve Bank's the Bank's reserve ratio fell below 28 per cent. It had made until at that time that informal staff groups from the Board been mentioned of Governors and New York Reserve Bank would make a further review of draft of proposed procedures submitted with the the procedures. The changes recommended by the staff February 26 memorandum incorporated Stone and Farrell concurred. which recommendations Messrs. groups,in adoption of the proposed changes would help to It was felt that the reserve ratios of individual Reserve Banks from falling prevent
to urdesirably low levels, would reduce further the frequency of interim adjustments in holdings of System Account securities, and would also reduce the need for frequent adjustments between pledged and unpledged gold certificates in order to maintain a 25 per cent reserve against Federal Reserve notes and a 25 per cent reserve against deposits. The principal proposed changes were as follows: (1) monthly reallocations in lieu of quarterly reallocations; (2) insertion of language that would make the raising of a Bank's reserve ratio all the way to the System average, in the course of a special adjustment, rather than mandatory; (3) elimination of the provision discretionary of any adjustments made in a Bank's holdings concerning reversal (4) insertion of a provision in the procedures between reallocations; participation to Banks having a relatively that would give an additional liabilities to total note and deposit liabilities; high proportion of note would permit allocating a Bank's and (5) insertion of a provision that in purchases on any one day to other Banks if it were participation the Bank could not assume its participation in such anticipated that incurring a reserve deficiency. purchases without Stone made the follow of the memorandum, Mr. In supplementation ing statement: before the Committee grew out of the work of The proposals the two informal groups that were recently constituted within and the New York Reserve Bank. I think all of us who the Board have been involved in these discussions would agree that while
the present proposals would carry us some distance further than the procedures now in effect, the useful life of the proposals would be rather limited if reserve ratios continue to decline. For this reason, the informal gcoups are continuing their work in an effort to devise procedures that would be adequate to circumstances in which reserve ratios push still closer to 25 per cent. If and when the ratios get to that point, of course, the publication of a figure below 25 per cent will be unavoid able. I think I need comment upon only one specific point in the present proposals. That concerns the suggestion that the rais ing of a Bank's reserve ratio all the way to the System average during a special adjustment be made discretionary rather than mandatory. In the exercise of such discretion by the Manager and the Bank concerned, it would be my suggestion to the Bank that we go all the way to the System average if that could be done without stripping the Bank of most or all of its unpledged securities. If that could not be done, I would suggest to the Bank that, if otherwise feasible, we raise its reserve ratio as far as possible consistent with leaving some amount of unpledged securities with the Bank and available for sale in case we had to absorb reserves over the following day or two. was raised, during a discussion of the matter, regard No question of proposed amended procedures. However, there was ing the statement of a statement in the transmittal memorandum which some discussion indicated that the fourth principal proposed change, as cited heretofore, the effect of making additional gold certificates available would have deposits. (It was subsequently clarified that the as reserve against this statement was to say that the change in procedure would intent of additional gold certificates available "to have the effect of making other Banks" as reserve against deposits.) Thereupon, upon motion duly made and seconded, and by unanimous vote, the amended procedures with respect to alloca tions of the System Open Market Account
were approved, effective immediately. The procedures read as follows: 1. Securities in the System Open Market Account shall be reallocated on the first business day of each month by means of adjustments proportionate to the adjustments that would have been required to equalize the average reserve ratios of the 12 Federal Reserve Banks over the first 23 days of the preceding month; provided, that the participation of each Bank, after such reallocation, shall not be less than 80 per cent of its outstanding Federal Reserve notes unless a smaller participation is necessary in order to prevent its reserve ratio from being less than 28 per cent. Any additional allocation required by the foregoing proviso shall be taken from the participations of the Banks having participations in excess of their outstanding notes, in proportion to such excesses. 2. If a Bank's reserve ratio should fall below 28 per cent on the next to the last business day (as observed by the Agent Bank) of a statement week or month, its holdings as of the close of business that day shall be adjusted by an amount sufficient to raise its reserve ratio to the average reserve ratio of the 12 Banks combined on the preceding day, or to such point as the Manager of the System Account and the Bank concerned consider feasible. Such securities shall be allocated to the Bank in a position to absorb the largest additional amount without reducing its reserve ratio below the ratio of the 12 Banks combined. If that Bank is unable to take the entire amount, the excess shall be allocated to the Bank which can absorb the next largest amount without reducing its reserve ratio below the average for the System. 3. If a Bank's reserve ratio should fall below 28 per cent on any other day, or if a Bank anticipates that its reserve ratio will fall below that figure, it may arrange of the System Open Market Account for an with the Manager adjustment similar to those provided for in paragraph 2 so as to increase the Bank's reserve ratio in any degree desired up to the average of the 12 Banks combined. 4. If purchases by the System Open Market Account on a particular day would, in the opinion of a Reserve Bank, be likely to reduce the ratio of that Bank's gold certificate reserves to its note and deposit liabilities, either combined or separately, below 25 per cent, the entire purchase shall
be allocated to other Banks. Such allocation, having the effect of a special adjustment increasing the participations of the other Banks above normal proportions, shall be made to those Banks having the largest amounts of excess gold certificate reserves in relation to total note and deposit liabilities. 5. The Account shall be apportioned during the ensu ing month on the basis of the ratios determined in paragraph 1, after allowing for any adjustments as provided for in paragraphs 2, 3, and 4. 6. Profits and losses on the sale of securities from the Account shall be allocated on the day of delivery of the securities sold on the basis of each Bank's current holdings at the opening of business on that day. Messrs. Hexter and Farrell withdrew from the meeting at this point. for distribution of periodic reports prepare: The authorization by the Federal Reserve Bank of New York for the Federal Open Market Committee, as amended March 6, 1962, was presented for consideration and certain suggested changes were mentioned. Thereupon, upon motion duly made and seconded, and by unanimous vote, authorization was given for the follow ing distribution: 1. The Members of the Board of Governors. 2. The Presidents of the twelve Federal Reserve Banks. 3. Officers of the Federal Open Market Committee. *4. The Secretary and the Under Secretary of the Treasury. *5. The Under Secretary of the Treasury for Monetary Affairs and the Deputy Under Secretary for Monetary Affairs. *6. The Assistant to the Secretary of the Treasury working on debt management problems. *7. The Fiscal Assistant Secretary of the Treasury. market operations only. * Weekly reports of open
8. The Director of the Division of Bank Operations of the Board of Governors. 9. The officer in charge of research at each of the Fed eral Reserve Banks not represented by its President on the Federal Open Market Committee. 10. The alternate member of the Federal Open Market Com mittee from the Federal Reserve Bank of New York; the Vice President and Senior Adviser of the Federal Reserve Bank of New York; the Assistant Vice Presidents of the Federal Reserve Bank of New York working under the Manager of the System Account; the Managers of the Securities Department of the New York Bank; the Vice President of the Foreign Function having supervisory responsibility for operations; the Senior Foreign Exchange Officer of the Foreign Function; the Managers of the Foreign Department; the officer in charge and Assistant Vice President of the Research Department of the New York Bank; the confidential files of the New York Bank as the Bank selected to execute transactions for the Federal Open Market Committee; and the Chief Federal Reserve Examiner or members of his staff. 11. With the approval of a member of the Federal Open Market Committee or any other President of a Federal Reserve Bank, with notice to the Secretary, any other employee of the Board of Governors or of a Federal Reserve Bank. The Committee reaffirmed by unanimous vote the authorization, first given on March 1, 1951, for the Chairman to appoint a Federal Reserve Bank to operate the System Open Market Account temporarily in case the Federal Reserve Bank of New York is unable to funct on. The following resolution to provide for the continued operation of the Federal Open Market Committee during an emergency was reaffirmed by unanimous vote: In the event of war or defense emergency, if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secre tary or Acting Secretary of the Board of Governors of the Federal Reserve System) certifies that as a result of the emergency the available number of regular members and regular alternates of the Federal Open Market Committee is less than
seven, all powers and functions of the said Committee shall be performed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Committee, subject to the following terms and con ditions. Such Interim Committee shall consist of seven members, comprising each regular member and regular alternate of the Federal Open Market Committee then available, together with an additional number, sufficient to make a total of seven, which shall be made up in the following order of priority from those available: (1) each alternate at large (as defined below); (2) each President of a Federal Reserve a regular member or an alternate; Bank not then either Vice President of a Federal Reserve Bank; (3) each First provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of the Federal (b) the President and the First Vice Reserve Districts, President of the same Federal Reserve Bank shall not serve time as members of the Interim Committee, and at the same a regular member or regular alternate of the (c) whenever Committee or a person having a higher Federal Open Market in clauses (1). (2), and (3) becomes priority as indicated shall become a member of the Interim Com available he mittee in the place of the person then on the Interim priority. The Interim Commit Committee having the lowest to take action by majority vote of tee is hereby authorized whenever one or more members thereof are those present that an affirmative vote for the action present, provided taken is cast by at least one regular member, regular alternate, or President of a Federal Reserve Bank. The authority and other procedures set forth delegation of be effective only during such period or periods above shall are available less than a total of seven regular as there and regular alternates of the Federal Open Market members Committee. herein the term "regular member" refers to a As used Open Market Committee duly appointed member of the Federal or elected in accordance with existing law; the term refers to an alternate of the Committee "regular alternate" with existing law and serving in duly elected in accordance of the regular member for whom he was elected; the absence term "alternate at large" refers to any other duly and the elected alternate of the Committee at a time when the member whose absence he was elected to serve is available. in
The following resolution authorizing certain actions by the Federal Reserve Banks during an emergency was reaffirmed by unanimous vote: The Federal Open Market Committee hereby authorizes each Federal Reserve Bank to take any or all of the actions set forth below during war or defense emergency when such Federal Reserve Bank finds itself unable after reasonable efforts to be in communication with the Federal Open Market Committee (or with the Interim Committee acting in lieu of the Federal Open Market Committee) or when the Federal Open Market Com mittee (or such Interim Committee) is unable to function. (1) Whenever it deems it necessary in the light of economic conditions and the general credit situation then prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obliga tions. any prospective seller of obligations of the (2) In case United States to a Federal Reserve Bsnk is unable to tender the actual securities representing such obligations because of conditions resulting from the emergency, such Federal Reserve Bank may, in its discretion and subject to such safe guards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank in substantial effect that the seller is the owner stating of the obligations which are the subject of the purchase, that ownership of such obligations is thereby transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. (3) Such Federal Reserve Bank may in its discretion purchase special certificates of indebtedness directly from the United States in such amounts as may be needed to cover overdrafts in the general account of the Treasurer of the United States on the books of such Bank or for the temporary accommodation of the Treasury, but such Bank shall take all steps practicable at the time to insure as far as possible that the amount of obligations acquired directly from the
United States and held by it, together with the amount of such obligations so acquired and held by all other Federal Reserve Banks, does not exceed $5 billion at any one time. Authority to take the actions above set forth shall be effective only until such time as the Federal Reserve Bank is able again to establish communications with the Federal Open Market Committee (or the Interim Committee), and such Committee is then functioning. By unanimous vote the Committee reaffirmed the authorization, first given at the meeting on December 16, 1958, providing for System personnel assigned to the Office of Civil and Defense Mobilization Classified Loca tion (High Point) on a rotating basis to have access to the resolutions (1) providing for continued operation of the Committee during an emergency and (2) authorizing certain actions by the Federal Reserve Banks during an emergency. There was unanimous agreement that no action should be taken to change the existing procedure, as called for by resolution adopted June 2:, 1939, re questing the Board of Governors to cause its examining force to furnish the Secretary of the Federal Cpen Market Committee a report of each examination of the System Open Market Account. to the procedure authorized at the meeting Reference was made on March 2, 1955, and most recently reaffirmed on of the Committee March 6, 1962, whereby, in addition to members and officers of the not currently members of the Committee and Reserve Bank Presidents Committee, minutes and other records could be made available to any other employee of the Board of Governors or of a Federal Reserve Bank
with the approval of a member of the Committee or another Reserve Bank President, with notice to the Secretary. It was stated that lists of currently authorized persons at the Board and at each Federal Reserve Bank (excluding secretaries and records and duplicating personnel) had recently been confirmed by the Secretary of the Committee. The current lists were reported to be in the custody of the Secretary, and it was noted that revisions could be sent to the Secretary at any time. It was agreed unanimously that no action should be taken at this time to amend the procedure author ized on March 2, 1955. This concluded the consideration cf the continuing authoriza tions of the Open Market Committee, and the Committee turned to a review of operations during the period since the meeting of the Committee on February 12, 1963. Before this meeting there had been distributed to the members of the Committee a report from the Manager of the System Open Market Account on operations in U. S. Government securities and bankers' acceptances during the period February 12 through February 27, 1963, and a supplemental report covering the period February 28 through March 4, 1963. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Stone commented as follows:
The highlight of the recent period has been the suc cessful advance refunding of eight issues maturing out to 1966 into four new or reopened issues maturing from 1967 to 1980. In this unusually large and rather complex operation--involving a potential exchange of about $29 billion of outstanding issues, with public holdings amounting to about $20 billion--the market has given a particularly good account of itself. Preliminary results, which we understand the Treasury is announcing this morning, point to an exchange of almost $8 billion of the eligible issues, including about $325 million exchanged by various Government trust fund accounts. Exchanges into each of the longer issues were more than $1 billion. The broad scope of the exchange encouraged an extra ordinarily large volume of market activity, particularly in the rights and new issues directly involved in the exchange, but also in a variety of other securities. In part, this arose as investors took advantage of the oppor tunities for switching out of rights and moving into bills or doing their own refunding in the market. In addition, there were many reports of investors in various outstand ing issues switching into the securities newly offered in the exchange. In short, the exchange was a massive catalyst opening the way to an enormous variety of port folio adjustments. Trading volume in the Government securities market, which typically averages $1-1/2 to $2 billion a day, soared to $3 - $3-1/2 billion from February 21 (the day after the Treasury's announcement) through February 28 (the day the subscription books closed for all but individual investors). On each of the three days from February 26 to 28, market trading in rights and when-issued securities alone exceeded $1.5 billion--which was far more than in any previous advance refunding. Indeed, the volume of trading in coupon-bearing issues on those days--which took place against a background of relatively narrow price movements--may well have been a record. the market atmosphere surrounding the On the whole, exchange has been favorable. It has been less enthusiastic than on some past occasions when prices actually strengthened in the face of enlarged supplies of longer term issues, but there has been an undertone of dealer and investor confidence in the market. As of March 1, the net dealer position in the four new or reopened issues was about $800 million. This was a sizable amount, but it did not appear to be too different from professional holdings at comparable dates in earlier advance refundings or regular refundings.
Subscription books for the advance refunding remain open for individual subscribers through March 8, and delivery of the new securities is to take place March 15. With that, the Treasury will have completed the second part of the three stage program it outlined last January 30. The third stage is to be an auction of long-term bonds, now tentatively scheduled for early April. In the meantime, the Treasury is also planning to announce, later this week, the auction on March 14 of another $1 to $1-1/2 billion of June tax anticipa tion bills. Near-term financing plans also include an enlargement of the weekly bill offerings by $100 million for a total of eight weeks starting March 28, and the addition of $500 million to the offering of one-year bills to be sold April 15 by replacing a $2 billion maturity with a new issue of $2.5 billion. Turning to System operations and money market develop ments, there is little to say in addition to the reports already distributed. System operations during the recent interval helped to preserve a steady money market tone in which Federal funds traded quite consistently at 3 per cent and member bank borrowing hovered around $140 million. Treas ury bill rates tended slightly lower over the period, as outright market demand was augmented to some extent by demand that stemmed from switches out of rights to the refunding. With additional market supplies of bills in prospect as a result of the Treasury financing plans noted above, and with quarterly corporate liquidity needs now drawing close, it would ordinarily be expected that bill rates would not move much lower and indeed might tend upward over the period ahead. On the other hand, these influences may be offset, in whole or in part, by downward rate pressures flowing frcm the reduction of the supply of short-term securities as a result of the refunding. What the net of these influences will be remains to be seen. Chairman Martin commented that it should be borne in mind that the advance refunding, which was highly successful, had removed roughly $6 billion of securities from the short-term area. This came at a time when the Treasury was experiencing difficulty in obtaining an extension of the present temporary debt ceiling; it now looked as
though Congressional action was likely to be deferred until after Easter. This meant that the Treasury would be running close to the debt ceiling during the period immediately ahead, and a responsibility was placed on the Federal Reserve System to try to keep market conditions as steady as possible during this period. reference to the advance refunding, the Chairman With further noted that most people had felt the results would be quite good if $4 billion of securities were refunded; actually the figure was close to twice that amount. He had not felt that the 3-7/8s of 1974 would be but they had been taken to the extent of over $1 billion. at all popular, The importance of the changes that had occurred by virtue of the advance refunding should not be underestimated. Thereupon, upon motion duly made and seconded, the transactions in U. S. Government securities and bankers' acceptances during the period February 12 through March 4, 1963, were approved, ratified, and confirmed. there had been distributed to the Committee Before this meeting Special Manager of the System Open Market Account on a report from the market conditions and on System Account and Treasury foreign exchange currencies for the period February 12 through operations in foreign February 27, 1963, together with a supplementary report covering the March 4, 1963. Copies of these reports period February 28 through have been placed in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs reviewed recent and prospective changes in the U. S. gold stock, summarized developments in the London gold market, and described the results of operations of the gold pool during the month of February. Mr. Coombs then discussed recent exchange rate developments, with particular reference to the Canadian dollar and the French franc, and noted that the enlarged Federal Reserve-Bank of France swap arrangement in the amount of $100 million became effective March 4, 1963. In that connection, he referred to certain adverse articles in the French press, apparently growing out of an erroneous interpretation along lines that the U. S. was in the process, through negotiation of the enlarged swap arrangement, of trying to borrow $100 million from the French Government. An official of the Bank of France had called yesterday to express his regrets concerning the press articles and to assure that the enlargement of the swap arrange ment was thought of as providing evidence of continuing cooperation between French and U. S. financial authorities. Mr. Coombs went on to review recent developments with respect to the pound sterling, which had been at times under substantial pressure. He continued to be hopeful that an enlarged Federal Reserve Bank of England swap arrangement, the negotiation of which had been authorized by the Open Market Committee, might be concluded at a relatively early date.
Thereupon, upon motion duly made and seconded, and by unanimous vote, the System Open Market Account transactions in foreign currencies during the period February 12 through March 4, 1963, were approved, ratified, and confirmed. Mr. Coombs pointed out that the existing $50 million swap arrangement with the Netherlands Bank would mature March 13, 1963, and that the $250 million swap arrangement with the Bank of Canada would mature March 26, 1963. He recommended renewal in each case for a period of three months on a stand-by basis. Renewal of the swap arrangements with the Netherlands Bank and the Bank of Canada, as recommended by Mr. Coombs, was authorized. Mr. Coombs then referred to a memorandum dated February 25, 1963, in which he had requested, for reasons stated, authority to forward purchases in any or all of the currencies authorized undertake a combined total of $25 million equivalent for System operations up to flexibility in covering commit for the purpose of allowing greater swap arrangements. The memorandum pointed out that the ments under Foreign Currency Operations provided Committee's Guidelines for System Manager was to submit to the Committee, for advance that the Special approval, proposals to initiate forward operations. (Mr. Coombs had mentioned this matter at the meeting of the Committee on February 12, 1963, at which time it was understood that a decision would be deferred pending the availability of a memorandum on the subject.)
supplementing the memorandum, Mr. Coombs stated In comments that in another memorandum he would hope to put forward the case for a similar authorization covering forward sales. The present request, however, extended only to forward purchases, on an experimental basis, up to a maximum of $25 million. questions, Mr. Coombs reiterated that the requestec In reply to forward purchases would be limited authorization contemplated that any to covering commitments under swap arrangements. He would not contemplate, without coming back to the Committee, buying forward to augment outright holdings of foreign currencies. The request envisaged experimental operations; if they worked well, possibly he might suggest at a later date an expansion of the authorization to provide for acquiring outright currency holdings through buying forward. At present, though, he was seeking authorization only to cover outstanding in foreign currencies by purchasing these currencies short positions forward. When the System drew on a swap, ne noted, it was short of currency and had to buy it back. This was the nature that particular of a swap deal. While the System could buy the currency back at maturity date of the swap, it could also buy the currency back earlier, be advantageous opportunities to buy forward. and on occasion there might confident that it would be possible to keep Federal Reserve He felt operations of this kind distinguished clearly from forward forward operations of the Treasury.
In reply to further questions, Mr. Coombs said that the $25 millior figure had been selected on an arbitrary basis. It was intended to be modest. He had assumed that Committee members might have some qualms about forward operations and that the Committee would like to have early opportunities for review. On certain occasions the total short position of the System under swap arrange ments had been much greater than $25 million. However, it would require a particular set of circumstances in which the foreign were at a discount to make forward operations advantageous. currencies Therefore, he did not anticipate extensive use of the requested but at the same time he felt that it would be a useful authorization, It might save money and contribute authorization to have available. to more efficient foreign currency operations. If it should develop of useful opportunities for forward purchases presented that a number over a period of time, he could envisage the possibility themselves of requesting that the $25 million limit be raised to, say, $50 million. He recognized that the important issue million or $75 the cost of foreign currency operations to the involved was not Reserve System; that was incidental and not the objective. Federal this, however, he felt that on certain occasions it might Aside from operate in the forward market than the be easier and more prudent to It seemed important, therefore, to acquire some experi spot market. ence with forward operations. If they were carried out on a small scale, be minimal, and the experience should be helpful. the risk would
stated that he regarded this as a questionable Mr. Robertson tinkering with market forces. However, in view of the very limited scope of the requested authorization, and since the authorization was requested on an experimental basis, he would approve the experimenta tion on this small scale. Limited operations over a period of time would tend to indicate whether his qualms were justified. was made to the provision of the Committee's Reference continuing authority directive for foreign currency operations limiting to $1.3 billion the holdings of foreign currencies at any one time, and question was raised as to the sufficiency of the limita Coombs stated that he would consider this limitation as tion. Mr. adequate margin for the time being, even if the requested providing for forward purchases should be granted. The limitation authorization inadequate only in the event that certain existing swap would become arrangements were enlarged or new swap arrangements were concluded. In that connection Mr. Coombs referred to certain swap possibilities that might develop. further question, Mr. Coombs commented that the In reply to a Federal Reserve System had always consulted closely with the foreign central banks concerned in undertaking any foreign currency operations. of close consultation would also be followed insofar This procedure as forward operations were concerned.
Thereupon, upon mction duly made and seconded, and by unanimous vote, the following continuing authority directive to the Federal Reserve Bank of New York with respect to foreign currency operations was approved, effective immediately: The Federal Reserve Bank of New York is authorized and directed to purchase and sell through spot transactions any or all of the following currencies in accordance with the Guidelines on System Foreign Currency Operations reaffirmed by the Federal Open Market Committee on March 5, 1963: Pounds sterling French francs German marks Italian lire Netherlands guilders Swiss francs Belgian francs Canadian dollars Austrian schillings Swedish kronor The Federal Reserve Bank of New York is also authorized and directed to purchase, in accordance with the Guidelines and for the purpose of allowing greater flexibility in cover ing commitments under reciprocal currency agreements, any or all of the foregoing currencies through forward transactions, up to a combined total of $25 million equivalent. Total foreign currencies held at any one time shall not exceed $1.3 billion. This concluded the discussion of System foreign currency opera tions and related matters. Accordingly, the Chairman called for presentation of the usual staff economic and financial reports, and Mr. Noyes presented the following statement on economic developments: We are always harassed at this time of the year by relatively large month-to-month changes in our basic data
that reflect normal seasonal swings rather than a fundamental change in the tempo of economic activity. This year there were 1.5 million fewer people actually employed in January than in December. Actual production at factories and mines declined almost 3 per cent from November to December, and then rose a little from December to January. Retail trade declined one-fourth from December to January. Yet in each of these cases we have observed that there was no significant change after allowance for seasonal factors. There is no way of "correcting" data precisely for seasonal variation. No matter how complex the methodology employed, it must be based on the assumption that the seasonal influence in the current year is an extension of the seasonal pattern observed in past years. This is not a bad assumption, but neither is it a perfect one. Many seasonal influencesthe weather being a good example--vary from year to year as to intensity and timing, so that previous behavior provides an approximation of the month-to-month seasonal at best only change. of sizable month-to-month changes that The possibilities are in fact the result of seasonal influence appearing in seasonally adjusted data are obviously greatest in those months where seasonal influences are largest and, for most series, these fall on each side of the year end, No matter and carefully the processing of the data to how skillfully adjust for seasonal influence is carried out, we shall always have to exercise special care in evaluating the significance of changes that appear in this season. But these difficulties, real as they are, certainly do not entitle us to take a four-month leave of absence each our scrutiny of economic developments. We have winter from that significant changes will not occur in this no assurance period--in fact, we know from hindsight that they sometimes have. are essentially the facts on Our underlying statistics the performance of the economy--how many people were at work, tons of steel were produced, how many houses were how many many dollars of bank credit were actually ex started, and how knowledge of these underlying facts is just as tended. Our accurate in January and February as it is in any other month. a little harder to tell whether the changes that It is simply transitory or are of longer range the facts reveal are significance. I apologize if it seems to you that I have labored this point unduly, but it is relevant to my observations as to the
present state of the economy. Despite the wide swings that have occurred in the raw data, I think it can be said with reasonable confidence that there has been no significant improvement or deterioration in over-all economic activity since November. The percentage of the labor force unemployed has crept up a little. The February figure, due to be released on Thursday, will probably show some further increase--back to the 6 per cent level. In more concrete terms, there were 300,000 more people unemployed in February this year than there were a year ago. We really have no sound basis for estimating industrial production in February as yet, but my own guess is that it will not change much, either way. We do have some basis for saying that there was probably in retail sales--the chances seem to favor not much change decline, if anything. The performance of retail sales a small January and February might be regarded as especially dis in appointing in view of the substantial addition to personal income in January brought about by the accelerated payment of VA insurance dividends. Some other figures--notably new up, and some were down. A rather sizable decline orders--were in the stock market appears to have been interrupted by a rise in the Dow-Jones industrial average yesterday. 7-point altogether, it does seem to me that a fairly But, taken of horizontal movement emerges from a careful clear picture analysis of the rather wide fluctuations in the raw data on economic activity in the last three months. Unfortunately, one of the most significant bits of forward-looking data--the Commerce-SEC survey of plant and equipment expenditure plans--will not be available for a week or so. We have, however, had a chance to look at the NICB appropriations survey, due for publication next week, capital and it suggests possible improvement in the outlook for investment as compared to the rather discouraging business picture shown by last fall's McGraw-Hill survey. This, by certainly not a sufficient basis for assuming that itself, is we will have a vigorous pick-up. It does offset to some the rather pessimistic view one might extent, however, derive from the behavior of the so-called leading indicators. I can assure you that I am as tired of saying it as you are of hearing it, but I find myself again unable to avoid the conclusion that there not only has not been much change in the economy, on balance, since the last meeting, but that signs have come to light to indicate the no very convincing direction the next move will take when it comes.
Mr. Brill presented the following statement on financial develop ments: Many economists were puzzled, last fall and early winter, by a growing disparity in the behavior of measures of produc tive activity on the one hand and measures of financial activity on the other. While the production index was clinging to a plateau, the unemployment rate was bobbling in a very narrow but high range, and the average work week in manufacturing was slipping, credit demands seemed exceptionally strong and rising. In fact, our preliminary flow-of-funds measures indicate a record for the total of borrowing by Governments, consumers, and businesses in the fourth quarter of the year. The banking system contributed substantially to this record financing volume. Bank credit rose by over $10 billion from August through December, and more than a third of the rise was in business and consumer loans. Reflecting the continued large deposits, ancther third of the increase went inflow of savings to real estate loans and municipal securities. There was a substantial rise in bank financing of security dealers, but banks' own portfolios of Governments were reduced somewhat. All in all, it was a pace and pattern of bank credit growth that in the past has been typical of vigorous economic expan sion periods and the beginning of monetary restraint, rather than of very mild growth and relative monetary ease. Since the year end, however, there seems to be less incongruity between developments in credit markets and measures of economic activity. Productive activity has remained on a plateau, and unemployment has edged up. While bank credit has continued to expand--perhaps even more sharply last month than at any time last fall--it has been responding more to Government financing demands and to savings inflows, and less to any burgeoning of private credit needs. Bank purchases of Govern ment securities and loans to dealers accounted for fully half of the bank credit expansion in January and February. Continued growth in savings inflows has been reflected in continued growth in real estate loans and municipal security holdings, but combined business and consumer lending has fallen to only a sixth of the total. The drop has been all in business loans, which hardly increased in either January or February. With the Government locking up some of the borrowing proceeds in its own cash balances, and time and savings deposits still rising, the privately held money supply showed no further growth
from January to February and required reserves against private deposits have slipped further down toward the 3 per cent guideline. Obviously, two months' data does not make a cyclical phase, particularly these two winter months. Nevertheless, the marked drop-off in business loan demands, the relatively light current and prospective business demands for longer term funds, and--up to yesterday--an apparent pause in the rise of stock prices suggest that we may now be in a period when financial developments will more closely mirror the lack luster performance in production and sales. for the interest rate structure could be Consequences troublesome. Treasury needs for new money are not expected to be large over the balance of this fiscal year, and in the absence of supplementary demands from the private sectors, and with savings flows continuing large, we may once again be ourselves to the problem of propping the rate addressing structure for international capital flow purposes, but in the context of a 6 per cent unemployment rate. of course, some possibilities of a resurgence There are, in activity that might be reflected in financial markets. As has pointed out, in a few days we will be getting Mr. Noyes a new reading on business plans for capital spending this year. The last surveys on this subject were not optimistic, turnaround in business sentiment is not unprec but a rapid Back in 1956, the March Commerce survey indicated edented. business spending plans than had been reported much stronger in the previous fall's McGraw-Hill survey, and touched off a scramble for capital market funds that resulted in a very rise in long-term interest rates. With wides:read rapid expectations of a large Federal deficit and cash borrowing cut or no--a bullish report by the Department of ahead--tax this month could touch off such a scramble again. Commerce area, General Motors' very publicly In the short-term announced intention to stockpile steel against strike possi spark an upsurge in business loan demands bilities might and there doesn't seem to be any evidence fore generally, shadowing a slackening in consumer demands for new cars or the credit to finance these car purchases. for an underpinning for the Such developments could provide current rate structure, but in their absence it is hard to demand forces in the spring months would overcome see what the depressing influence on rates of a continued very large of savings. Perhaps once again it may be necessary volume to depend on the Treasury to borrow nd build up its cash
balances in order to maintain the current level of short rates. The Treasury will first have to persuade Congress to raise the debt ceiling, however. The present ceiling leaves some margin over actual cash needs this month, but becomes very restrictive on April 1. Over the very short term, market forces will likely operate to keep rates up for a while. We may already have had the adjustment in short-term rates likely to a large share of stem from the Treasury's refunding, with "rights" switching dealers, corporations, and institutions largely completed by by the end of last week. Until about midmonth, corporate needs make tax and dividend payments and dealer needs to for cash to finance "rights" will help maintain money market pressures. After midmonth, however, these pressures should moderate. Present and still tentative Treasury financing plans would replace the $3 billion March tax bill maturing on March 22 with a June tax bill of $1-1/2 billion paid in on that date, plus an increase in the weekly bill auctions beginning March 25 and an increase in the one-year bill in mid-April. Whether the con templated amount and timing of Treasury offerings will be enough to sustain rate levels--after the switch out of about $6 billion of short-term instruments in the refunding and in of high corporate cash flows and reinvestment demands the face stemming from the fairly large municipal calendar--is a matter of fine judgment. The situation developing later in the month--around the week beginning March 20--could be one of renewed downward pressure on short rates. Moreover, this is the period in which the demand for short bills generated by the April 1 Cook County property tax reaches a maximum. Mr. Furth presented the following statement with respect to the U. S. balance of payments: Net transfers of gold, dollars, and other convertible currencies to foreigners during February are tentatively estimated at $100-$150 million, less than half the January figure. In view of the effects of the dock strike, however, and February figures should be combined; this the January gives a monthly average of perhaps $250 million--only average for 1962. The gold slightly lower than the monthly transfers, about $80 million a month, was portion of these slightly higher than the monthly average for 1962. average is consistent with recent The January-February projections of the deficit for 1963. Deducting expected
further prepayments of European debts to the U. S. Govern ment, the payments deficit for 1963 might be guessed at about $2-1/2 billion. Although this actually would be a modest improvement over 1962, the statistical adjustments made last year would give the impression of a deterioraticn, with possible repercussions in international financial markets. Even without such repercussions, the problem of cover ing such a deficit by means other than gold will be difficult to solve. If the foreign payments surpluses that must correspond to the U. S. deficit were to accrue to Canada or to less developed nations, we could count on these countries increasing their holdings of U. S. dollars. But if the surpluses were again to be concentrated in Conti nental Europe, we should be confronted with a decided unwillingness of these nations to cooperate in protecting our gold reserves, except perhaps by very temporary means such as System swaps--means that should be preserved for an emergency and not be used to finance a persistent deficit. it is intriguing to find that In this connection, virtually all Continental European nations project a decline in their payments surplus for 1963. Unfortunately, similar projections for earlier years have generally proven to be exaggerated. This year they sound slightly less unrealistic, the continuing rise in European costs and prices in view of and in view of the uncertainties about the continuation of the flow of U. S. capital to Europe created by the recent Common Market difficulties. Should these projections for once turn out to be correct, the international financial position of the United States would be greatly eased even if the total U. S. payments deficit were not affected. But it would be rash at this time to pin great hopes on such a development. Mr. Young presented the following report based on his attendance a meeting in Paris of Working Party 3 of the Economic Policy last week at of the Organization for Economic Cooperation and Development: Committee This meeting was largely directed to close scrutiny of the U. S. payments deficit and the relation thereto of U. S. monetary and debt management policy. The tone of the meeting was highly critical of U. S. financial policy.
This critical tone no doubt reflected in part the dis appointingly large size of the U. S. deficit for 1962 and the inability of the European experts to foresee any sizable reduction in our payments deficit for 1963. It no doubt reflected, too, some disillusionment on the European side as to how soon the U. S. economy would benefit from and respond to the stimulus of a tax cut, with resulting possibilities for less easy U. S. monetary conditions and some rise in U. S. interest rate levels. I earlier reported to you that they regard these developments as essential to restoring U. S. payments equilibrium. The central theme of the European attack was that the continuing large U. S. payments deficit, whatever its other contributing causes, is being aggravated and prolonged by a net capital outflow that stems in part from excessive domestic liquidity. While this high level of liquidity may have resulted more from heavy financial savings flows than from money creation by the central bank, the Europeans feel that monetary policy is shirking its appropriate role of absorbing excess liquidity. according to the Europeans, must also Debt management, take scme responsibility for continuing payments deficit. a budget deficit in order to It had been financing short support short-term interest rates. Thus, it had failed to for long-term savings, and thereby had furtherec bid directly long-term markets, including interest rate conditions in conducive to capital outflow :o foreign borrowers. levels, Since U. S. monetary and debt management policies, to this theme, were functioning in a way to permit according if not encourage, a sizable seepage or spill-over of U. S. savings funds into international markets, European central banks could hardly be expected to help the U. S. finance its of the situation was up to the payments deficit. Correction U. S. authorities. They should no longer delay. In fact, avoidance of delay in action was crucial because of waning confidence in the dollar. The attack on U. S. policy was supported in varying by all of the delegations of countries in payments degree only support for the U. S. position came from surplus. The two other countries with high unemployment and payments deficit problems--the U. K. and Canada. The delegations of these two countries gave the U. S. their support on grounds that the U. S. was making progress payments deficit problem; that it needed time in meeting its to adjust its payments position; that domestic economic
factors in the U. S. did not justify restrictive monetary and debt management action at this juncture; and that pros pective world demands for goods and services were not so buoyant that any dampening of the U. S. market via monetary restriction could be regarded with equanimity. In addition, the Canadians pointed out that Canadian borrowing in U. S. markets was essential to cover Canada's current account deficit and that Canada's own monetary policy was and had to be geared accordingly. The head of the U. S. delegation gave an extended explanation of the main factors accounting for the U. S. payments deficit and of the national policies that were being pursued to achieve correction. He laid particular stress on the U. S. directing its policies at fundamental forces of imbalance and eschewing policies that involved direct governmental interference with market processes. To lay the foundation for a better export performance, Govern ment policies had been aimed at maintaining relative price and wage cost stability, more widespread educational and promotional efforts among potential exporters, and more competitive export credit programs. As to Government expenditures abroad, he underscored the efforts being made to hold down military outlays, to tie aid, and to control foreign expenditures of other governmental agencies. On capital movements and their sensitivity to higher U. S. interest levels, the U. S. spokesman thought that the domestic credit demands would be more responsive than foreign demands would be, but he recognized the need for a close relationship of U. S. short-tern rates with those in other markets, arguing that maintenance of such a relation ship was already a phase of U. S. policy and on the whole a successful phase. He further stressed that U. S. credit ease this past year was more the result of a large increase in financial savings by the public than of easy monetary policy and that our money supply increase had been small in comparison with increases experienced by most European countries. As the U. S. spokesman saw it, the tax program, fundamentally, had the object of increasing domestic in centives to invest, thereby stimulating domestic demands for savings. Until this stimulus took hold, the U. S. probably had to get along with some continuing net outflow of capital, and an accompanying payments deficit. The U. S. authorities hoped and believed that the deficit for 1963
would be significantly smaller than in 1962. Part of this smaller deficit, he suggested, might be financed by U. S. Government borrowing abroad, part by larger holdings of dollars by some countries, and part by gold outflow. The Chairman's summary at the close of the first day's discussion, but not significantly modified the next day, indicated that there was agreement that U. S. payments equilibrium had to be reached soon, but without steps that might interfere with domestic expansion or otherwise do harm to the U. S. or the world economy. At the same time, domestic U. S. expansion would not by itself bring external payments equilibrium, and consequently monetary policy, which up to now had been primarily domestically oriented, might need soon to give greater attention to the correction of external disequilibrium. The summary stressed the differences of view as to whether monetary policy should be adapted promptly or await enactment of the tax cut. The Chairman gave his personal view that, while the U. S. might be able to borrow surplus dollars from some European central banks for interim balance of payments purposes, such accommodation on any scale would not be appropriate unless and until U. S. fiscal and monetary policies were oriented in a way that would definitely foster and help to produce a payments equilibrium. He observed in conclusion that when a country's financial policies are regarded as appropriate, its trading partners have an obligation to assist in bridging the presumably short time span necessary for such policies to bear fruit. No official record is kept of the Working Part 3 dis cussion, and therefore no minutes will be available as a report of the meeting. Each delegation takes such notes as it pleases, and this resume is therefore no more than a summary of personal and other U. S. notes. It was agreed at the close of the meeting that no report of the discussion about U. S. policy would be communicated by the Chairman to any other OECD body. The next meeting of Working Party 3 is scheduled for late April. The U. S. deficit problem will again be on the agenda of that meeting, with a Secretariat paper on the U. S. situation to be developed in the interim. The meeting will also have on its agenda, however, a review of barriers to foreign borrowing and capital outflow in such surplus countries as France, Italy, and possibly Germany. This is a subject that the U. S. delegation has long pressed for agenda listing and discussion.
In reply to a question, Mr. Young said that all of the principal European countries were concerned about inflation and cost increases. They felt that in part these problems reflected their balance of payments surpluses, which they ascribed in turn to the U. S. balance of payments deficit. They considered themselves handicapped, primarily because of external influences, in going forward with the kinds of policies called for by their own domestic situations at the present time. Although various countries had sterilized their gold and dollar reserves to a degree, monetary increases were occurring at annual rates of 10 or 12 per cent or more. They maintained that they did not have the same latitude in this regard as the United States. The Chairman then called for the usual go-around of comments and views with respect to economic conditions and monetary policy beginning with Mr. Hayes, who presented the following statement: A number of current statistical indicators were on the down side in January, emphasizing the hesitancy that has been characteristic of the domestic business situa tion. Such hesitancy is not, of course, unusual in the early months of a new year, and especially bad weather have played a part in producing some of and strikes may these declines. Moreover, a number of other elements continue to indicate a moderate degree of strength, such as consumer spending on automobiles and consumer inten tions to buy in the future. New orders for durables took a turn for the better, fourth quarter plant and equipment spending turned out to be a bit higher than expected, and available fourth quarter profits reports look rather good. On balance the outlook is probably still for a continued moderate advance in over-all activity but, partly because of disappointment and uncertainty as to the tax program,
business optimism has probably diminished a little in the past month or two. Recent bank loan data confirmed the earlier impression that the loan run-offs in January largely offset the unusually substantial loan expansion in December and that the underlying strength of loan demands has not shown any marked change for some months. Such net improvement as has taken place since the beginning of December has centered in security loans and loans to sales finance companies, with business loans showing no real vigor. Data for the first three weeks of February may possibly lend themselves to the interpretation that a somewhat better "tone" of loan demands is currently developing. In general. liquidity continues to be ample. It may be worth noting in passing that there has been a sizable increase in stock market customer credit since the cut in margin requirements last July, the current level of about $5.6 billion being 14 per cent above the level at that time. I share the feeling of uneasiness that has been ex pressed from time to time by the Chairman over the possibil ity that easy credit availability may have given undue impetus to speculative activities in the last year or so, especially in the real estate area. data as yet on the While there are only fragmentary of payments, they seem to point to a February balance deficit at roughly the same annual rate continuing over-all as the last couple of years, which is certainly not good careful reappraisal of the 1963 outlook by enough. Another the Government's balance-of-payments technicians yielded a set of forecasts anticipating a deficit ranging from $2.5 to $3.9 billion as compared with the $3.7 billion deficit recorded in 1962 before taking into account certain special I have found especially disturbing the transactions. tendency in the last six months or so toward a somewhat export position, when many had counted on stronger weaker exports as the principal key to payments equilibrium. This situation suggests the vital need for strict control of and lends weight to Per Jacobsson's recent proposal costs that this country should try to achieve stability in money rather than progressive wage increases geared to wage rates productivity gains, in order to bring down average national to stabilize its cost structure. rather than merely The outflow of gold was resumed last week and the prospect is for substantial gold sales during the coming months. No other results can be expected with the over-all payments deficit at its present level. Although there can
be no precise measure of what constitutes the danger point for our gold stock in terms of the psychology of persons and institutions, both here and abroad, capable of moving large funds out of this country, we are clearly getting closer to the danger point as the gold stock diminishes while the balance of payments deficit continues unabated. I remain convinced that diminished credit availability and somewhat higher interest rates, particularly for short term maturities, can make an important contribution to a better balance of payments position, partly because of the psychological effects that such tendencies might have on thinking, both here and abroad, with respect to the outlook for the dollar. In passing I might say that I do not share Per Jacobsson's faith in a continuing downward trend of interest rates in Europe, which he counts upon to make easier the maintenance of low rates in this country. There is no reason to believe that some of the European countries will refrain from restrictive measures either to cope with the danger of serious inflationary price and wage trends or to prevent the development of appreciable drains on their monetary reserves. Already in France there has been a start on such restrictive actions. Admittedly a move toward lesser ease would involve some risks with respect to the domestic economy, but I believe they are minor risks in comparison with the growing danger to the dollar's international standing. It would be highly desirable to have any decisive move toward less ease on the part of the System receive the support of the Administration. Also, having in mind that monetary policy by itself cannot hope to cure a balance of payments deficit of the magnitude in question, I would hope that such a policy move would be accompanied by decisive actions in other areas on the part of the Administration to reduce the balance of payments deficit. But unless the System is pre pared to play its part, it can hardly expect to see a concerted and effective attack on what I believe to be our most critical financial or economic problem. As we are in the midst of the Treasury's advance refunding, in which market participants have extended maturities and dealers have acquired large positions that need to be worked down, we must obviously avoid any policy changes for the time being. However, shortly before the next meeting of the Committee there might be an opportunity for a start on open market operations designed to reduce somewhat the current degree of monetary ease. There might also be an opportunity late in the month for an increase in
the discount rate, if the System were willing to give a clear signal of its concern for our international position. Alternatively, the latter half of April should provide a "free period" when action of this kind might be consideredobviously with due consideration to any changes in under lying conditions that may have occurred in the interim. With respect to the directive, it would seem to be appropriate to change the wording somewhat, even in the absence of the slight change of policy I am proposing, if for no other reasons than to demonstrate that the direc tive's wording does not have the same "frozen" quality as the former (b) clause. In reply to inquiry by the Chairman as to whether he had specific suggestions for modification of the current economic policy directive, Mr. Hayes said that he would recommend irclusion in the first paragraph sentence stating that the current policy of the Committee recognized of a of a balance in the international accounts of the United that achievement States was required to assure a sound continuing growth of the domestic sentence would give recognition in the directive to economy. Such a what was in his opinion a most important consideration, namely, that in this country's international accounts was a great lack of balance over the domestic economy and that the achievement of a balance shadow required to assure continuing domestic economic in such accounts was growth. Mr. Hayes also recommended changing the second paragraph of to specify that open market operations during the next the directive would, as soon as practicable consistent with Treasury three weeks financing operations, be conducted with a view to maintaining a slightly greater degree of firmness in the money market than in recent weeks.
Mr. Shuford observed that domestic business activity apparently was continuing at about the same level that had pre vailed for the past several months. The broad measures of economic performance did not seem to have broken out of the narrow range in which they had moved since last summer. A similar situation existed in the Eighth District, where there had been no significant changes from the levels of last fall and early winter. Employment showed no change since November, the level being slightly lower than last sum mer but a little higher than a year ago. Industrial use of electric power and department store sales had changed little in the past nine months, although each was somewhat higher than a year ago. In the financial area, preliminary figures indicated' that total deposits were about unchanged from January to February. Business loans appeared to have declined somewhat. that monetary developments in the Mr. Shuford commented nation, as well as fiscal developments, had been expansionary during the latter part of 1962. The rates of increase in bank reserves, bank credit, and the money supply were greater than appeared to be desirable for any extended period of time. Since December, however, been less stimulative. Reserves in support monetary developments had deposits had declined, and the money supply had of private demand risen at a reduced rate.
Mr. Shuford went on to say that his uneasiness with regard to the balarce of payments situation had increased during the period since he began attending meetings of the Open Market Committee regu larly several months ago. There appeared to have been no significant improvement in that situation, and it might be necessary at some juncture to take steps of a more positive nature than any taken in recent months. It seemed to him, however, that corrective steps in areas other than monetary policy were necessary if the fundamental problem was going to be solved. Monetary policy must play a part, and at the appropriate time it might be necessary, as he had indicated, to take more positive steps. He hoped, however, that if actions were other areas first, at least they would be taken in not instituted in coordination with monetary policy actions. monetary policy for the short-run future, Mr. Shuford As to would favor no change. He would like to see a continuation said he the same degree of money market firmness that had prevailed of about during the past several weeks. He would favor no change in the di this time. (In this connection Mr. Shuford mentioned count rate at been a brief reference to the possibility of a discount that there had of the most recent meeting of the St. rate increase toward the end Louis directors. He did not know what conclusions the directors might the matter was explored more extensively.) reach if
Mr. Bryan said that the trend of Sixth District employment figures had changed very little. On the other hand, personal income had increased somewhat. Bank loans and investments were rising; the financial series were strong. He did not find evidence in the District or in the nation that the economy had moved very much or that it was clearly poised for a decisive move in either direction. As he saw it, Mr. Bryan said, no change in policy was called for at this time., The reserve picture struck him as quite appropriate. The supply of reserves was above the guideline used by the Board's staff and slightly above the guideline that he (Mr. Bryan) had been using. He would not change the discount rate at this time. As to the balance of payments, Mr. Bryan said that he was indeed concerned. However, he would like to play on a team, so to speak, and he would like to see more things done outside the area of monetary policy, If other corrections were made, he would favor the in a complementary way. At present it appeared use of monetary policy to him that about the only thing monetary policy could seek to accom plish would be to diminish capital outflows, which would require sub interest rate increases in order to be effective. If foreign stantial aid and perhaps military expenditures could be reduced further, and if from excessive travel abroad, then American citizens were discouraged he would want to take action in the area of monetary policy. Under present circumstances, however, he thought it would be perilous for
the System to undertake the deflating of the domestic economy that in his opinion would be necessary to reduce capital outflows sufficiently to provide a solution to the balance of payments problem. Mr. Bopp said that in advance of this meeting he had prepared a statement for presentation. However, he had been influenced by the discussion that had taken place this morning. Accordingly, instead of the somewhat more stimulative monetary policy that he had intended to advocate, he would now favor no change in policy for the next three weeks. At the same time, the paper that he had prepared suggested the general tenor of his thinking, and he would like to read it. Mr. Bopp then presented the following statement: As one looks at the economy in early March, it is hard to distinguish the real situation from fluctuating moods and sentiment. When it comes to business conditions in a Federal Reserve District, we have the further complication of lagging information. Business in the Third District probably worsened in January, but there are some inconsistencies in the available bag of indicators. Although unemployment is up again and total employment has not increased for some time, the demand for wanted ads and average work week) may have strength labor (help little in December and January. Since January, unemploy ened a have decreased seasonally and steel production has ment claims indicating that February may have seen some slight rebounded, improvement in Third District economic activity. This tentative possibility is supported by banking de Loans turned up in the last two weeks, halting velopments. seasonal decline. This upturn, brief as it has the typical and more sharply defined than in been so far, seems quicker in recent years. Last year there was no comparable periods of loan expansion, following the seasonal re definite sign the turn of the year, until at least March. In ductions after 1961 there was no definite loan expansion until April. Business loans, loans to sales finance companies, real estate loans, and the "all other" category have climbed over the last two weeks.
In short, changes in the level of activity in the Third District have been modest and mixed, as has been true in the country as a whole. Unfortunately, the general level at which these changes are taking place remains at the inadequate plateau reached last summer. I agree that it would be appro priate to stimulate aggregate demand by means of tax reduction. What we have had, however, is considerable talk of tax reduc tion accompanied by actual increases in Governmental revenues via social security and higher postal rates, temporarily offset in January by VA insurance dividends. To me this means that until we secure actual relief from fiscal policy, monetary policy will continue to have to bear a disproportionate share of our total program to stimulate demand. Our current directive is permissive of moderate growth in bank credit and in reserves. Meanwhile, we have more than adequate raw materials, plant, equipment, and manpower to sup port expansion in real terms. Under these circumstances, it me we should stimulate the demand for credit rather seems to than accommodate the supply to autonomous increases in demand. in such a program, especially internation There is a risk ally. Some feel also that additional credit would go to wrong uses. For my own part, I am willing to rely on the market to the credit, in the belief that lenders are sophisti distribute repayment of principal as well as interest. cated and desire I am unhappy with our over-all economic In conclusion, program. I wish the mix were different. I would support a different monetary policy as part of an over-all program directed toward both our domestic and our international prob lems. As of today, however, I do not see prompt development of such an over-all program; and therefore reluctantly, come that a somewhat more stimulative credit to the conclusion policy is appropriate. repeated that in light of the discus In conclusion, Mr, Bopp sion thus far at this meeting he would recommend no change in policy rather than the shift in policy recommended in at the present time statement. his prepared Fulton reported that business activity in the Fourth Mr. on the upgrade in February despite continued District was perceptively
harsh weather. New auto sales ran above the January level; used car sales also were satisfactory, with steady prices and reasonable in ventories. Department store sales sagged further on a seasonally adjusted basis, with a five-week moving average standing at the lowest level since last mid-July. It was felt, however, that continued snow and cold had been a major contributor to this situation. Steel ingot production had expanded considerably in the District, but not quite as much as nationally. New orders had in creased, indicating inventory building on the part of users. The mills themselves were producing some ingots for their own inventory, to be finished later on order. Discussions with businessmen revealed hedge buying against a strike, which was likely to have an adverse production in the last half of the year. effect on activity had moved up sharply in the District; Construction projects had increased the total for both commercial several large buildings. Despite continued cold weather, the rate and residential Dist -ict declined in all but one of of insured unemployment in the areas during the first three weeks of February. the major labor market basis, the total was 5 per cent lower during On a seasonally adjusted been in any previous week this week ended February 23 than it had the in the steel-producing areas. The greatest improvement occurred year. in loans thus far in 1963 had been slightly larger The decline reflecting a sharp drop in loans on securities than in previous years,
and a smaller than usual increase in consumer loans. Business loans had declined at about the same rate as in the past two years. The decline in total deposits was less than in previous years due to different patterns of public and time deposits. As for monetary policy, Mr. Fulton felt that a continuation of the level of free reserves and short-term interest rates that had existed in the past three weeks would be appropriate for the coming period. He would not propose a change in the discount rate. In the directive, he would remove the phrase "and in view of the forthcoming Treasury financing" in the first sentence of the second paragraph. Otherwise, the directive seemed to him to be appropriate. said it seemed to him that the staff description Mr. Mitchell of the domestic economic situation was accurate. There had been sub in the last quarter of 1962, but it had stantial monetary expansion economic action to provide assurance that not yet resulted in enough the economy was definitely on the upturn. In view of this uncertainty, a change in monetary policy at the present time he did not believe would be justified by domestic considerations. side, Mr. Mitchell said, he was On the balance of payments time. That was not due to anything more optimistic than in a long instead, it reflected the difficulties of this this country had done; principal competitors. He felt that the possibilities country's mentioned by Mr. Furth had a chance of being realized this year. The
trading position of many countries was deteriorating, and Common Market developments seemed to have had at least a psychological impact favor able to the dollar. Further, Americans might be having second thoughts about investing abroad due to political and economic developments. After comparing the restrictions in European capital markets with the relatively free capital markets in this country, Mr. Mitchell expressed the view that the maintenance of the short-term interest rate was generating the kind of abnormalities in the U. S. economy that had been generated by pegging the price of Government bonds prior to 1951. The support of the short-term rate perhaps had not reached a critical stage, but he felt it was an abnormality that had a worsening influence on current problems. With liquidity at a high level, it was desirable and possible to achieve some funding if the gap between short- and long-term rates could be widened. Advice was being received from Europe that long-term rates should be increased. Obviously, however, that would come as a shock to the confidence of the American people. If investors in this country came to believe that the Federal Reserve was fixing interest rates all would be serious misunderstanding of its along the maturity line, there The basic balance of payments problem was function and operations. serious, but he would like to see action taken on other fronts. certainly was going to be accomplished just by He did not believe that too much the short-term rate. Recently he had made certain suggestions protecting
about tax considerations, and since that time many people had been talking to him in terms that tax considerations were important in many fields. They appeared to have a distinct bearing on decisions as to where money would be placed in the world's markets. If he thought the balance of payments problem really could be corrected by the use of monetary policy, Mr. Mitchell said, he would favor doing as much as possible, but he did not believe this would provide a solution. On the other hand, monetary policy could be of some help in relation to the domestic situation. At the present moment he felt that monetary policy was doing enough in the latter regard, but it might be called upon to do more before long, partly due to the uncertainty about passage of the Administration's tax pro posals and the question whether, in any event, such action would provide too much or too little of a stimulative effect. In substance, monetary policy seemed to be about the only tool available to encourage the domestic economy to expand. As he had said, however, it was his conclusion that at this particular time monetary policy need not be changed. He would be willing to modify the policy directive in accordance with any of the suggestions that had been made except those of Mr. Hayes. Mr. King noted that he had been more or less out of touch with economic developments during the past several weeks. Therefore, he had no particular recommendation as to monetary policy at the present time.
With respect to the policy directive, it appeared that one or two of the technical changes mentioned at this meeting might be appropriate. Mr. Shepardson expressed the view that the economic situation had been covered well in the staff reports at this meeting. There was uncertainty as to future economic developments. There was also un certainty as to what might be done by way of implementing some of the suggested approaches to the balance of payments problem. Altogether, the outlook seemed rather unclear at this time. Accordingly, he felt that it would be appropriate to continue the present monetary policy for the next three weeks. Mr. Robertson stated that his views were very much in accord with those expressed by Messrs. Bopp and Mitchell. In exposition of his thinking, he presented the following statement: I have been somewhat heartened by the developments since our last meeting. For one thing, the decline in bill rates that has taken place was allowed to proceed without strong counteraction by the Trading Desk to push it back up to its mid-February high. It is no secret that I was concerned lest we fall into a "bill rate only" dir ctive to the Manager of the Account that would require him to oppose bill rate declines even at the expense of restricting reserve availability and tightening general money market conditions much more than was called for by the larger aims of monetary policy. I was glad to see the Manager refrain from any appreciable restrictive action in the face of the bill rate decline of the last three weeks, allowing the technical and expectational factors that were peculiar to the bill market to ease there, without altering the even-keel conditions slightly position in other sectors of the money and credit markets. take some encouragement from the apparent I also pause, if not reversal, in the contraction in reserve
utilization by the banking system that had seemed to be developing around the time of our last meeting. I continue to think that our domestic business s:tuation is such as to benefit from maintenance of a general atmosphere of credit availability, with bank loan funds abundant and with growth proceeding in the money supply as well as in time and savings deposits. The current business climate, fraught with uncertainties as to tax cut prospects, strike possi bilities, and the strength of final demands in some key markets, is not well braced to stand any additional un certainty regarding possibly tighter money conditions. If, in all these circumstances, businesses appear willing to proceed with a high level of investment (as may be learned in a few days from reports of survey results), then the proper course for policy would seem to be to accommodate and sustain such demands, rather than to take any action that might restrain them. Our international financial flows are giving us less at other times to curtail money and credit reason than Those kinds of flows that might be deemed availability. to moderate changes of monetary policy most susceptible currently, and the relevant bill rate are less troublesome if anything, mildly encouraging to a differentials are, flow in our direction. This is a good time, I think, to reiterate two points concerning our capital flows. First, U. S., Canadian, and U. K. bills rate relationships between any significant unilateral rise in the U. S. are such that might even lead to some inflow of funds from bill rate and Canada. In the current economic and political Britain sizable reserve losses to circumstances of both countries, not, I submit, desirable--and certainly not the U. S, are taking deliberate action to something that we should be outflows, for all their reserve create. Second, capital impact, are not an unmixed evil. Unlike trade deficits, in then some return flow capital outflows have inherent dividend earnings accrue, debts prospects. Interest and investments abroad are sold have to be repaid, and equity time passes, the return flow of from time to time. As is bound to rise, and it is very hard funds to the U. S. rise will not more than keep pace to believe that such a particularly with some gross new capital outflows, with about the size of foreign capital recipient countries uneasy a real sense of the word, net capital investment. Thus, in can be eventually self-dampening. outflows
I do not assert that this characteristic of capital flows permits us not to worry about them at all. My point is that we do not have to set monetary policy as if it were the only brake upon a potentially limitless and use less outflow. With all these considerations in mind, it seems to me that the best course for monetary policy over the next three weeks is to hold more or less a steady course. I suggest that the resolution of doubts be on the side of ease; but no greater policy change would seem practical considering the current Treasury financing. I am concerned, however, that our directive to the Manager be such as to suggest the Committee's operational intent fairly and as concretely as feasible. To that end, should like to suggest the following somewhat more ex I plicit language as a substitute for the second paragraph in the present directive: "To implement this policy, operations for the System Open Market Account during the next three weeks shall be conducted with a view to maintaining reserve availability at about the average marginal level thus far this year, fluctuating as necessary marked swings in money market conditions to moderate and to partly offset any tendency for aggregate re serve expansion to deviate substantially from the for 1962 as a whole." average rate To give you a concrete idea of the reserve statistics would be asking the Desk to which this kind of directive keep in mind, let me report that thus far this year free have averaged about $330 million and borrowings reserves total reserve expansion for around $135 million, and that the year 1962 as a whole averaged a shade over 3 per cent, include the reserves freed by the reserve require if you last fall. I would not want to include ment reduction in any directive, because I would these specific figures Manager or the public to be led into not want either the that the Committee wished to achieve any precise thinking or that it had any illusions that statistical objectives, the Manager could in fact hit such statistical targets were desired. Rather, I think the purpose even if they should be to suggest, in clearly objective of our directive of money market and reserve climate that terms, the kind be seeking to achieve and the general way the Desk should should modify its operations if results in which the Desk do not turn out as desired.
Mr. Mills said that as he surveyed the areas for policy determination by the Open Market Committee, it appeared that at present they had been narrowed and were conditioned by Treasury operations. The success of the Treasury's advance refunding might have a darker side in that, by removing a certain volume of relatively short maturities into the longer term areas, there was the possibility of downward pressure being exerted on the short-term interest rate. If such a development should occur, it would leave the Federal Reserve in the unenviable position of choosing whether to support the short-term interest rate in an effort to keep it at some particular level or whether to allow the rate to fall to a level determined by market factors. The second alternative would be his personal choice, because he felt that too great a preoccupation with maintaining the interest rate structure would be likely to put pressure on the money supply at a time when it should be maintained or encouraged to increase. Fortunately, the unwinding of dealer positions in the refunding operation would produce a cushion that might absorb additional demands for credit without undue tightness. Mr. Mills reiterated the concern he had expressed on previous occasions that a pegging of the short-term interest rate gave a false picture of the state of the Government securities market and other securities markets. If it were abandoned, he felt that the sensitive ness of a free market would produce a realistic short-term rate of interest, one that would be found not to be out of line with balance of payments considerations.
As to the balance of payments, Mr. Mills said he was among those who felt that monetary policy was not a panacea for correction of the problem. He thought that primary responsibility must rest with the Treasury Department and that strong measures might be called for in the near future, in which event monetary policy would be principally a coordinate to the broader policies that would have to be adopted. Referring to the remarks of Mr. Bopp, Mr. Mills expressed con cern that the availability of credit be adequate to sustain the money supply. The uses of that credit could not, of course, be controlled by the Federal Reserve System, acting within its present field of responsibility; the System could not determine whether the credit would seep into undesirable speculative areas, real estate or otherwise. This was a problem that might have to be faced through reconsideration, at some rather remote time, of selective credit controls. For the moment, Mr. Mills said, he would favor no change in monetary policy. Neither would he favor a change in the discount rate. As to the policy directive, he found himself disillusioned. The changes in wording seemed to have become almost a matter of gamesmanship. Various changes were made, but when the movements in reserve statistics were measured against the words of the directive, he found it difficult to see a correlation. Mr. Wayne reported that recent statistics and survey returns suggested some general improvement in Fifth District business conditions.
Seasonally adjusted bank debits, nonagricultural employment, and manu facturing man-hours rose in January following December declines. While recognizing the limited significance of regional developments duri-g a single month, it was interesting to note that factory man-hours rose sharply counter to the national trend as broadly based increases reachec substantial proportions in chemicals and several lines of durable goods Recent developments reflected in the Reserve Bank's survey included a small rise in optimism among businessmen generally and some improvement in the demand for bituminous coal. In the textile industry, however, current operations continued to be hampered and the outlook remained clouded by the enigma of what Government action, if any, would be taken the difference between domestic and export, cotton prices. to eliminate Textile orders had been light for several months and inventories, although high at the mills, were said to be low in distributive channels. A solution to the raw cotton price problem would eliminate most of the current uncertainty, but prospects of reaching such a solution had steadily worsened. The national economy, Mr. Wayne observed, seemed to be continu horizontal movement. Since the first of the year there ing its general had been moderate gains in several major sectors of the economy but, as noted, in most sectors activity had been Mr. Noyes had already fluctuating around levels first reached some six or eight months ago. At the same time there had been a few substantial declines and an
small declines, which might raise a question as to the accumulation of strength of the present stability. Also, the hope for a tax reduction, which had been a sustaining element for several months, seemed to be fading as prolonged discussion made it more and more apparent that decisive action would be long delayed and would provide little stimulus this year. All of these considerations certainly did not indicate that a precipitate decline was just around the corner, nor did they suggest any breakout on the up side. To him the prospects were for a continuation of the game of plus and minus, but the Com mittee should be alert to any increase in the number of minus signs. In the policy area, Mr. Wayne noted that there was still little room for maneuver. With the Federal funds rate sticking closely and firmly to the ceiling for almost a month and the bill rate not far below it, except for a short period dominated by special developments, there could be very little tightening without raising the question of a hike in the discount rate. To raise the discount rate or even to create conditions that would generate widespread speculation about such a raise would, he believed, be a serious mistake from all points of view. In the other direction there might be a little more elbow room, but to utilize it would quite likely cause the System to forfeit the slight improvement the dollar had accomplished in relation to the Canadian dollar and the pound sterling in recent weeks. Also, any easing that could safely be tried would not be sufficient to have any
appreciable effect on the domestic economy. Since basic conditions had not changed significantly since the previous Committee meeting, he favored a continuation of present policy and renewal of the current directive, except to eliminate the reference to "forthcoming Treasury financing." He would not change the discount rate, as his previous remarks indicated. (Mr. King withdrew from the meeting at this point.) Mr. Clay reported that the recent trend of nonfarm economic activity in the Tenth District presented a close parallel to the national picture. This similarity included the fact that substantial variation existed among the various metropolitan areas. Employment, after account was being sustained at record levels. As ing for seasonal movements, had been the case nationally, Tenth District employment in Government and in service and distribution industries was advancing, while manu facturing and most other goods-related activities were experiencing reduced employment levels. The decline in manufacturing employment since mid-1962, however, had been only about half the national rate. employment also was holding up better in the Tenth District Construction country. This was related, in turn, to the somewhat than across the of contract-letting last year in the Tenth District, where stronger rate to the nation were notable in awards for nonresidential gains relative and for public works and utilities. construction
The volume of farm marketings in the Tenth District seemed likely to remain high during 1963 because of an anticipated record level of marketings of livestock. Cattle numbers had increased 25 per cent in the District since 1957, compared with a 14 per cent increase for the nation as a whole. The outlook for crop production than a year ago because of deficient supplies of was less favorable surface moisture in a major part of the area. With normal spring however, crops, along with pastures, could improve rapidly. rains, It now appeared that prices of most major farm commodities produced in the Tenth District would be lower than in 1962. Unless crop production (a major proportion of which was subject to price supports) should turn out to be unusually good, cash receipts from this year were expected to be somewhat less than in farm marketings payments to farmers, however, were likely to be 1962. Government higher because of the certificate payments to be made to producers with the wheat and feed grain programs. Barring an cooperating drought, gross farm income in the Tenth District might extensive It would take unusually favorable condi approach the 1962 record. income to surpass last year's record. tions, however, for gross farm was concerned, Mr. Clay noted that So far as monetary policy to face the same kind of dual domestic and the Committee continued with which it had been struggling for international economic problems for the future was not very clear on either many months. Perspective
of these problems. It was clear, however, that the domestic economy remained sluggish in its performance and that this country's interna tional balance of payments remained seriously adverse. As perspective became clearer, the resolution between alternatives might become more apparent. For the present, it would appear to him appropriate to pursue essentially the same basic policy that had been the Committee's goal in recent weeks. Pursuit of this policy until the next meeting of the Committee would, he suggested, have as targets 2.85 to 2.95 per cent for the Treasury bill rate and 3 per cent or slightly less for the Federal funds rate. It would be the intent to supply member bank reserves in sufficient amount to permit moderate bank credit expansion on a seasonally adjusted basis. No change in the Reserve Bank discount rate would be contemplated. While the general posture of policy would be in line with the present directive, he felt that the directive should be rewritten so as to avoid a cumulative restriction of bank credit in view of the current reference to recent months, presumably referring primarily to late 1962. Mr. Scanlon reported that there had been little change in the level of employment and retail trade in the Seventh District thus far in 1963. Steel output was continuing to increase as steel users began to build inventories. About 55 per cent of the purchasing agents of Chicago who buy steel as a "major production item" intended to increase steel holdings as a strike hedge, according to a recent survey. The
improved level of steel orders was reported by people in the industry to be broadly based, with railroad car builders and structural steel fabricators among the industries increasing their orders. Auto output had begun to decline gradually despite a continu ing high level of sales. Inventories of new cars probably reached about 1,050,000 at the end of February. This was a record level for the period and was surpassed only by a few months in the middle of 1960. Manufacturers probably would not permit any further increase of inventories, and production schedules would be set on the basis of daily sales. A number of capital goods producers had reported good order trends in December and January. This was true of railroad equipment, machinery, trucks, and some types of industrial farm and construction equipment. There had been reports also of a sharp rise since November in orders for gears, bearings, and hydraulic drives--items that are used mainly in the manufacture of capital goods. New orders of these firms had tended to "lead" capital goods output in the past. at Seventh District weekly reporting banks indicated Developments there had been some slowing of credit demand by business and consumers compared with the latter months of 1962. Most of the growth in total loans over the past month had been in dealer loans secured by U. S. Governments, and reflected unusually large portfolios of such loans at several District banks. On the whole, reserve positions of the money
market banks had been quite comfortable, and the major portion of Federal funds purchases had been by one bank. Borrowing at the dis count window had been nominal. With the usual increase in business needs for funds in March, and possible further Treasury borrowing, Mr. Scanlon felt that it should be possible to maintain short-term rates while obtaining some further reserve expansion. Therefore, the existing directive appeared appropriate to him, except that he would change the reference to timing of the Treasury financing. He would not favor a change in the discount rate at this time unless it were to be part of a package that would include corrective balance of payments action in areas outside monetary policy and would be a clear signal to the world of this country's intent to defend the value of the dollar. Mr. Deming reported that Ninth District economic activity had held up well during the first two mon:hs of 1963 despite unusually cold weather. January personal income ran at a rate 7 per cent ahead of a year earlier, and on a seasonally adjusted basis was almost 1 per cent ahead of December, both gains better than those registered for the country as a whole. Nonagricultural employment in Minnesota in Febru ary was 0.6 per cent larger than in January, seasonally adjusted, and for the first two months of this year averaged 2.3 per cent higher than in 1962. Department store sales were running 3 per cent higher than last year. Manufacturing activity, particularly in durables, seemed
to be fairly strong; construction, considering the weather, was surprisingly strong. The Reserve Bank's opinion survey taken late in February showed little change in expectations from the survey taken five weeks earlier; 48 per cent foresaw improvement as probable or certain over the next several weeks, 37 per cent foresaw continued stability, and 15 per cent foresaw some decline. The group foreseeing decline in the near future was of about the same magnitude as in all surveys taken since early last fall. The shift in outlook since year end reflected a rise in numbers seeing continued stability and a fall in those foreseeing expansion. Recent data on District banking indicated that the loan and deposit weakness in January at city banks did not continue into Febru ary. Loan increases in the first three weeks of February pointed to a new record for the month at those banks; the decline in investments was smaller than usual (although larger than in 1961 and 1962) and total deposits apparently would be up for the month, whereas they usually decline. Country bank data for the first half of February indicated normal seasonal movements. As to policy for the short run, Mr. Deming said he would be inclined to "stay about where we are" during the next three weeks. Conse quently, he would not wish to change the policy directive to any significant extent. He was not even sure that it would be necessary to
delete the reference to the "forthcoming Treasury financing," although it was true that the language now in the directive was intended to refer to Treasury financing different in scope from the prospective financing during the next three weeks. He would not recommend changing the discount rate at this time. Looking somewhat further ahead, Mr. Deming indicated that he would like to associate himself almost completely with the comments of Messrs. Mitchell and Robertson on the balance of payments. He was particularly impressed by Mr. Robertson's comments about the U. S. U. K.-Canadian triangle. Money chasing itself within this triangle would appear to have no real effect, except statistically, on the U.S. balance of payments. Canadian borrowing in U. S. markets in February had evidently accounted for a substantial part of the U.S. that that had been pointed that month, He was glad payments deficit in out at the Working Party 3 meeting. it was possible to advance a hypothesis Mr. Deming noted that that there was "overly excess liquidity" in the American financial into foreign loans and investments leading to some spillover system, Should this be the case, it might be and hence into capital outflows. mopping up some of the monetary policy aimed at possible to follow a excess liquidity without any appreciable affect upon the avail overly funds for the domestic economy or upon domestic interest ability of rates, Such a policy, which he would not advocate for the time being,
would be implemented by aiming at somewhat lower free reserve levelsand perhaps would result in somewhat higher member bank borrowing levels--without attempting deliberately to aim at a higher interest rate structure. If such a program led to somewhat higher rates, they would not be resisted strongly, but they would not be sought. Mr. Swan reported that in January there was a drop in the over all rate of civilian unemployment in the Pacific Coast States from 5.7 per cent to 5.4 per cent, which was the lowest rate since April 1960. Increases in employment reflected substantial gains in construction, services, and manufacturing. The gains in manufacturing employment occurred despite the fact that ordnance and aircraft, two defense related industries, showed small declines. However, in the electronics group, which is also considered defense-related, there was a continuance of the rapid growth of employment that had been experienced for some time, with the January figure more than 12 per cent above the figure for a year earlier. Available data for February were, of course, extremely frag mentary. However, department store sales, which in January returned to the previous high of November, apparently were well maintained in February, while Western steel production increased in the first three weeks of the month. There still seemed to be plenty of funds seeking investment in the real estate area. Share accounts and real estate loans at savings and loan associations increased more rapidly in the
District than in the nation from December to January. Both were about 24 per cent above January 1962, which again represented a somewhat larger increase than for the country as a whole. District weekly reporting banks showed a good loan increase in the first three weeks of February. In this period, they switched from the status of net buyers of Federal funds to net sellers on a rather substantial basis. However, this did not seem to reflect any change in their basic reserve position; instead, it reflected a shift of some larger banks from Treasury bills to the Federal funds market in view of the higher rates available. In fact, District weekly reporting member banks accounted for virtually the entire decline in holdings of Treasury bills and of all Government securities at all weekly reporting banks in the country in these three weeks. Turning to national economic developments, Mr. Swan noted that there was no indication of any significant change. Evidence was lacking of a more rapid rate of advance, and no one could anticipate what was going to happen in the area of tax reduction. In his opinion, a modest tightening of monetary policy would not in itself have any significant effect on the balance of payments problem. Also, the Treasury advance refunding would be in process for a few more days, and there was in prospect an offering of short-term securities around the middle of March. In view of these factors, he would not recommend any change in policy at this time. Instead, he would argue
for continuation of present policy for the forthcoming three-week period. He would not recommend changing the discount rate. As to the policy directive, Mr. Swan said his first reaction had been that no change was needed. However, he would support the suggestion that had been made for removal of the reference to the "substantial increases" in bank credit, money supply, and the reserve base in recent months. Two months had passed in 1963, and the substantial increases occurred in the latter part of 1962. He also felt that the reference to forthcoming Treasury financing ought to be changed. The financing operations in prospect were not of the same magnitude as those that had occasioned the inclusion of this language in the existing directive. However, some reference to Treasury financing might be desirable. Mr. Swan then referred to the remarks that had been made about the possibility of substantial downward pressure on short-term rates of the advance refunding, due to the reduced volume of as an outgrowth short-term securities. There was the possibility, he suggested, of goals, one in terms of maintaining about the having two conflicting in the money market and the other in terms of same degree of firmness downward pressure on the bill rate. Conceivably, the down offsetting great that the only way to offset it would be ward pressure could be so degree of firmness in the money market. He would not by increasing the like to see a precipitate drop in the bill rate, but neither would he like to see a substantial firming in the money market solely out of
consideration of the bill rate. Perhaps, therefore, there would be some advantage if the directive called for "cushioning" rather than "offsetting" downward pressure on short-term rates. Mr. Irons reported that there had been no noteworthy develop ments in the Eleventh District. Economic activity continued at about the same level that had prevailed for some time. He was somewhat concerned about scattered conversational references to a possible deterioration in the quality of bank credit, growing out of the desire of banks to increase earnings to meet higher interest rate payments. Also, the booming volume of construction activity, particularly of office buildings and high-rise apartments in the major cities of the District, might warrant some concern. In most respects, however, District trends did not seem greatly different from the national trends. Among more knowledgeable businessmen he saw no particular lack of confidence, but certainly confusion and uncertainty had increased with respect to both domestic and foreign affairs. If this continued, it might lead to some loss of confidence. People seemed more concerned about the budget deficit, the balance of payments situation, and the outflow of gold than they did about a tax cut. For the forthcoming three-week period, Mr. Irons recommended maintenance of the status quo in terms of policy. He would seek to avoid deviating from the degree of market firmness that had existed. As he saw it, the System had been trying to get at the best of both
worlds by following a moderate policy course, on the one hand trying to provide reserves for domestic expansion--without going to excessand on the other hand trying to be firm enough to minimize capital outflows. He did not know whether the System could do much more until it was found necessary to make some drastic move by shifting the emphasis in one direction or the other depending upon whatever condi tions might be present at the time of such decision. He doubted that much was going to be accomplished by minor shadings, such as changes of a few basis points in the short-term rate. Therefore, he would continue the status quo for the time being. As to the policy directive, Mr. Irons indicated that he tended to agree with the comments of Mr. Mills. He had recently reviewed and compared all of the policy directives issued by the Committee since June 1962, and it appeared to him that the Committee probably could operate satisfactorily today under the directive issued on July 10, 1962. He sensed a growing tendency to feel that the directive should be changed at every meeting, even if only for reason of semantics. the directives were published, the large number of changes--aside When from necessary technical changes--might be confusing. His inclination, therefore, would be to continue the existing directive. Mr. Irons said that he would not recommend In conclusion, changing the discount rate at this time.
Mr. Ellis commented that January statistics on unemployment, length of work week, and consumer spending seemed to suggest some slight improvement in New England economic conditions. Basically, however, the situation was unchanged. Mr. Ellis then referred to three items of information that had been of some interest to him. The first had to do with a retraining program in the Boston area to develop clerk-typists. Some 3,500 persons from the list of job seekers were contacted, but only 243 After further screening only 11 were found to be interested responded. and eligible for retraining. The second piece of information related American Guarantee Company, which had caused to the bankruptcy of the policies with regard to banks to re-examine their lending a number of The firm in question had, operated on a national leasing companies. machinery and equipment. It now turned out that the basis, leasing credit to marginal risks that apparently could company was extending and delinquencies had been covered by the not get credit elsewhere, third piece of information, Mr. Ellis reported rewriting of leases. As a Bank was in process of tabulating the results of that the Boston Reserve of manufacturers' capital expenditure plans. Pre its regional survey that outlays in 1963 might be somewhat lower liminary results indicated although outlays of nonelectrical machine industries were than in 1962, to rise substantially. The survey also suggested that there expected reliance on external sources of funds than in 1962. would be greater
Mr. Ellis said it seemed to him that business conditions and business sentiment were about as good as could have been expected during the February-March period when the general outlook was tradi tionally obscure. The winter, he noted, had been severe in many areas. Conditions continued to be strong enough to support an expansion of the money supply in the face of the monetary policy adopted by the Open Market Committee in December 1962. As he understood the phrase "overly excess liquidity" used by Mr. Deming, this was the same factor that had motivated him (Mr. Ellis) to support the shift in policy in December. He would be prepared to push that policy further if the economic trend became more clear and the economy demonstrated strength in the spring. of payments, Mr. Ellis said that at the moment As to the balance he was much in sympathy with the comment of Mr. Bryan that he would like to play on a team. Monetary policy had an important role to play if a strongly formulated and executed general policy for dealing with the balance of payments problem was developed. In fact, Mr. Ellis, said, he would not be above seeing the Federal Reserve take some initiative in that idea. However, he shared the concern of those who would promoting be apprehensive about vigorous action being taken in the form of monetary policy alone. For the moment, Mr. Ellis continued, he would support a position of no change in policy. As to the policy directive, he would favor
eliminating the reference to the "substantial" increase in bank credit, money supply, and the reserve base in recent months. He would also eliminate or modify the reference to "forthcoming Treasury financing." Mr. Ellis said that he would not favor a change in the discount rate at this time. Mr. Balderston commented that spring prospects seemed to him to have improved, even if only because of prospective inventory hedging in anticipation of a possible steel strike. He supposed that a price would be paid somewhat later, perhaps in the second half of the year, and that there would continue to be worries emanating from wage negotiations. Mr. Balderston went on to say that he had been impressed by the comments at this meeting with regard to the balance of payments problem, including those that suggested the possibility of a "package" approach. Personally, he had been much concerned that: this country did not have the wherewithal to continue spending, lending, and investing as it had been doing throughout the world. It seemed vital to world trade in the future that this country's financial markets, which had been developed over a long period of time, not be destroyed by the imposition of selective controls. He would hope that this country's money markets might continue to be available to the world without restriction. If that was to be the case, however, it seemed important that Governmental spending and lending be cut back. The package approach seemed important,
and it was important for the Federal Reserve System to play its proper role. Mr. Balderston then referred to the thought expressed by Mr. Treasury operations permitted the Open Market Com Deming that once test the effect on interest rates of some mopping up of mittee might It seemed to him that there were evidences of current liquidity. "overly excess liquidity," perhaps in the stock market and in the extent of short-term lending abroad. He had no hope that a modest rate structure, short or long, would stop the change in the interest to other countries and the resultant drain on the outflow of capital seemed to be too wide. To gold stock. The rate differential U. S. however, that American banks were soliciting foreign the extent, appeared that some mopping up of liquidity might be worth business, it trying, for he felt fairly sure that there had been a good deal of there was an opportunity, he would seepage. Consequently, whenever to mop up some of the liquidity that seemed to like to see an effort whenever the Government was prepared to move be giving trouble. Then, forward with a package program, the System should be prepared to play its full part. Mr. Balderston said he would Turning to the policy directive, changes at this time. He would be inclined to make only necessary withhold any overt policy move, such as a change in the discount rate, hand, for he would not want to use until a payments crisis was at ammunition prematurely.
Chairman Martin commented that this was a relatively easy meet ing to summarize. It was clear that the majority of the Committee favored no change in policy at this particular time. He subscribed to that view, but he would like to make certain observations. He agreed, the Chairman said, with the comments that had been made about the difficulty of obtaining clear perspective,both in terms of the balance of payments and the domestic economy. The outlook was With respect to the comments that had been made anything but clear. short-term interest rate, he wished to say that he found about the this a very confusing area. What impressed him, however, was the number of distortions that were involved when one talked about free was, for example, the matter of the 4-1/4 per cent markets. There interest rate ceiling on financing the Federal debt and what that had done to the debt structure. The success of the Treasury's advance his expectations, and it had changed the refunding had exceeded composition of the Federal debt in a very short period of time. How ever, the Treasury was now confronted with political uncertainties in regard to the debt ceiling in a peculiarly difficult period. When one market," allowance had to be made for this kind used the phrase "free of distortion and dislocation. Further, while it might be said that there had been free markets, nevertheless there had been discretionary for many years. These were all factors that must monetary management be taken into account.
With respect to the balance of payments, Chairman Martin said be continued to feel that conditions were gradually moving toward a crisis of some sort. It might not be near at hand; it might be a year or two years in coming. Nevertheless, it seemed to him that present conditions could not continue indefinitely. In his view, too much attention probably was being paid to stimulating the domestic economy through monetary policy and not enough to dealing with the balance of payments. He subscribed to the opinion that the balance of payments problem had become the real shadow over the domestic business scene. The Federal Reserve System, with the regulation of money and credit as its primary responsibility, must evaluate as closely as possible what was involved in the present situation both in respect to the domestic economy and from the standpoint of the balance of payments. The Open Market Committee ought to concentrate on the problem and see if it could not hammer out a policy that would be a little clearer. There had been references at this meeting to team play and a package deal, Chairman Martin noted. In one sense this was an exc:llent suggestion, and he would be in favor of it. It should be borne in mind, of course, that the President was more concerned about the balance of payments than almost any other problem. There was no doubt where the President stood, and it should be fully recognized that this problem had been for some time a matter of major concern within the Administration. If the Federal Reserve could mesh in with anything the Administration
was doing, that would seem very desirable. On the other hand, in talk ing about team play, it should not be forgotten that most of the time the Federal Reserve, in the field of money and credit, had been con sidered off the team when it did not do everything that was wanted by the Administration in power. This was a matter of history. Therefore, one must be careful about approaching the idea of team play in the sense of the Federal Reserve wanting to play a leading role or to become the driving force. One must be careful that the Federal Reserve did not get itself into the position of trying to do more than monetary policy should do. As a matter of history, monetary policy had been asked to do too much in the past in handling both inflation and deflation. At the present time, encouragement could be taken from the President's attitude. Everything possible should be done to determine the proper role of the System, both as adviser and in terms of operations. To that end, the Chairman commented, Mr. Young had put together with the help of staff members of the Board, the New York Bank, and the San Francisco Bank a group of papers that would be distributed today. conclusions of the individual authors as to the These papers presented impact on the domestic economy and on the balance of payments of certain including what he would refer to as a less easy assumed policies, monetary policy, an even less easy policy, and a drastically less easy policy. The papers were intended to be a kind of guide to the Committee members in their thinking on the alternatives that would be available
if the System was faced with the problem of an international payments crisis. The Chairman went on to observe that the System, if it did not have the support of the Administration, would be defeated psycholog ically almost at the start on certain moves that monetary policy could make in relation to the balance of payments problem. It needed the Administration's tacit support. Anything that was done at this juncture ought to be, in that sense, part of a package deal, but the problem should be thought through carefully. For example, in the group of papers that were to be distributed there was one by an individual who took one point of view and another by a person who took the opposite point of view regarding the impact on the balance of payments of a certain move. The papers should not be widely distributed, but the time had come when the Committee should start concentrating on the problem. Perhaps other papers would be developed on the subject. If the System wanted to become part of a team play, those within the System must sharpen their thinking on the impact of various moves. It was with that in mind that the staff documentation had been prepared. The staff papers referred to by Chairman Martin were then dis tributed to the members of the Committee. Turning to today's meeting and monetary policy for the period immediately ahead, the Chairman expressed the view that it would be unwise, from a procedural standpoint, to project shifts in policy within
an ensuing three-week period even if all of the Committee members were agreed. In his opinion it would be better, if any shift in policy was to be considered, to have another Committee meeting. In other words, it seemed to him undesirable to engineer even modest changes in policy within the period prior to another scheduled meeting. It would be pref erable to have another meeting, if necessary, and consider the proposed shift in policy. Generally speaking, he felt that this was the best for the Committee to operate. way In view of the Treasury's problems, relating to both the debt limit and current and prospective financing, the Chairman expressed the view that the Committee would be pursuing the right course if it main tained virtually the status quo during the next three weeks. As some of the comments today suggested, Chairman Martin pointed out, the members of the Committee must continue to work on the formula tion of the policy directives. As he had said several times, words mean different things to different people around a table. There could hardly be a complete meeting of the minds when certain words were used. As to of the directive at this meeting, it would appear that the formulation the minimum changes would be (1) to eliminate the reference to "substantial" and the reserve base in recent increases in bank credit, money supply, to the implementation of policy "in a period months, and (2) to refer following a major Treasury financing" instead of referring to "the forth financing." He inquired whether general agreement could coming Treasury be reached on a directive incorporating those minor changes.
Mr. Bopp stated that he would go along with such a directive if, in the light of the question raised earlier by Mr. Swan, the Account Manager felt that it would be reasonable to call for operations with a view to maintaining about the same degree of firmness in the money mar ket and at the same time to offsetting downward pressures on short-term interest rates. Mr. Stone indicated that he felt it should be possible to operate satisfactorily under such a directive. upon motion duly made Thereupon, and seconded, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Open Market Account in accordance with the fol lowing current economic policy directive: Committee's current policy to accommodate It is the moderate growth in bank credit, while aiming at money market that would minimize capital outflows internation conditions This policy takes into account the continuing adverse ally. United States balance of payments position and the increases money supply and the reserve base in recent in bank credit, months, but at the same time recognizes the limited progress the continuing underutilization of of the domestic economy, and the absence of general inflationary pressures. resources, this policy in a period following a major To implement Treasury financing, System open market operations during the three weeks shall be conducted with a view to maintaining next firmness in the money market that has about the same degree of in recent weeks and to offsetting downward pressures prevailed interest rates, while accommodating moderate on short-term reserve expansion. Votes for this action: Messrs. Martin, Hayes, Balderston, Bopp, Clay, Irons, Mills, Mitchell, Robertson, and Stepardson. Votes against Scanlon, this action: None.
Chairman Martin noted that the Committee staff had prepared a draft of possible current economic policy directive in the thought that it might form a basis for discussion at this meeting. He would ask the Secretary to distribute copies of the draft directive to the Committee members for their information and review, since it was apparent that the Committee must continue to work on the problem of formulating its directives in the most effective manner. In distributing copies of the draft directive, Mr. Young com mented that whenever there were suggestions for changes in the directive, it might be helpful if the proposed changes were sent to the Secretary in advance of the Committee meeting so that copies of draft directives incorporating such changes could be prepared for distribution to the Committee. Secretary's Note: In advance of this meeting there had been distri buted to the Committee by the Secretary a background statement of current economic position, with the understanding that the statement would be included in the minutes of this meeting. The statement read as follows: The domestic economic picture reflected several special influences, such as unusually severe winter weather and strikes in some key industries, which added to the low visibility of the statistical readings on the performance of the economy. Most changes in recent weeks, both favorable and unfavorable, have been quite small. Automobile production and sales remained very high again in February. Retail sales other than automobiles, however, apparently were slightly below their late 1962 record levels in
January and February. Personal income increased in January owing to large veterans payments which more than offset a sizable increase in employee contributions to social insur ance and a decline in dividend payments from the unusually high December rate. Aside from these changes, personal in come was about the same as in December 1962. The labor market again showed little change, altnough the seasonally adjusted rate of unemployment edged up in January and again in February. New orders received by durable goods producers rose appreciably in January to a level slightly above the October 1962 high. Inventory holdings in manufacturing showed no change in January and were only slightly above mid-June 1962. The industrial production index in January was fractionally lower but stayed in the 119 to 120 range it had been in since July 1962. prices in January rose ;ery slightly, return Consumer 1962 level; they were 1.4 per cent above ing to their November a year earlier with food and services mainly responsible. commodity prices continued to show little change Wholesale from the preceding month or from a year earlier. bonds showed little change in recent Yields on corporate bonds they increased moderately in weeks, while on municipal response to continuing heavy dealer inventories. Yields on Treasury intermediate- and long-term issues also rose somewhat, activities. Treasury bill rates reflecting Treasury refunding dropped slightly below mid-February levels. Yields on mort a little. Stock market prices declined appre gages declined ciably during the past two weeks after rising vigorously for more than three months. Capital market financing by corporations and State and local governments was in moderate volume again in February to continue moderate in March, especially in and is expected the corporate area. substantially further in February on a Bank credit rose seasonally adjusted basis, reflecting chiefly increases in smaller than usual decline in hold financial loans and a much securities. The seasonally adjusted ings of U. S. Government apparently was maintained at the money supply in February of January, while time and savings deposits daily average level further. Total reserves and required increased substantially deposits declined about seasonally over reserves behind private reserves averaged somewhat lower the past four weeks. Free member bank borrowings higher. and
According to tentative preliminary estimates, the payments deficit was much lower in February than in January. But in view of the influence of the dock strike on trade figures, the average for the past two or three months is more significant than the individual monthly data, and this average shows only a very modest improvement over 1962. The monthly decline in U. S. gold reserves in both January and February was slightly larger than the 1962 average. Exchange markets were generally quiet since the February 12 meeting of the Committee. next meeting of the Federal Open Market It was agreed that the would be held on Tuesday, March 26, 1963. Committee Secretary The meeting then adjourned.
Also: Record of Policy Actions