May 28, 1963 FOMC Minutes

FOMC minutes

standards were being reduced more by savings and loan associations and others than by commercial banks. In any case, however, it was important for the Committee and the System as a whole to know what was going on rather than to be surprised at a later date. Chairman Martin noted that sometimes there tended to be comments at Committee meetings that sounded as though the economy was going to be made or broken by shifts of, say, $50 or $100 million in free reserves. This, of course, was not the case. At the same time, as he had stressed at the May 7 meeting, he felt that the posture of the Federal Reserve System was very important at this juncture. On the whole, and through the years, he believed that the posture of the System had been quite sound. He believed, also, that the policy developed recently was good, provided it did not get ahead of itself. The Committee was dealing with short periods of time in its policy discussions, he pointed out, since it met every three weeks. The Chairman went on to say that two matters seemed to him of paramount importance at the moment. First, there was the problem of the Treasury in relation to the debt ceiling. The impact of this situation on the money market should not be overlooked. The problem was important from the standpoint of monetary policy as well as debt Chairman Martin referred to developments in the management. Second, foreign exchange market as critical. It might be months or years before the situation reached the point of serious trouble but develop ments seemed to him to be moving in that direction.

In view of the problems to which he had referred, the Chairman expressed the view that this would be an unfortunate time for the Federal Reserve System to be making relatively unimportant moves in the money market. At the same time, the posture developed by the Federal Reserve was highly important. Continuing, the Chairman noted that at last week's meeting of the Federal Advisory Council with the Board of Governors the President of the Council had pointed out that in a situation of slightly less easy credit some forms of credit, such as for hotel speculation, might be deferred in favor of more sound loans. Shortly after that meeting, he (Chairman Martin) had heard of a specific instance where a large was deferred because the bank concerned had real estate transaction found a more constructive outlet for its funds. While this coincidental occurrence should not be overemphasized, he thought it was interesting. The availability of credit, the Chairman added, inevitably has some bearing on the quality of credit. It is virtually impossible, likewise, to separate completely the cost of credit and its availability. Similarly, despite Federal Reserve actions, interest rates must be viewed against the shifting background of the economy as a whole. Generally speaking, when the economy moves downward, rates move down and vice versa. When the economy is on a plateau, rates tend to be stationary. Chairman Martin expressed the view that current Federal Reserve policy was appropriate and said he would favor a continuation of the

status quo. He hoped that was the posture the System would assume at this time. It was then suggested that a vote be taken on no change of policy during the forthcoming three weeks to determine whether that of the Committee, and language for a revised second was the consensus of the current economic policy directive that would reflect paragraph a decision by the Committee was suggested. such Thereupon, upon motion duly made 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 following current economic policy directive: policy to accommodate the Committee's current It is growth in bank credit, while putting increased moderate conditions that would contribute emphasis on money market capital account of the U. S. balance to an improvement in the This policy takes into consideration the of payments. continuing adverse balance of payments position and its cumulative effects and the improved domestic business outlook, in bank credit, money supply, and as well as the increases reserve base in recent months. At the same time, however, the underutilization of resources. it recognizes the continuing this policy, System open market operations To implement a view to continuing the degree of shall be conducted with firmness in the money market that has prevailed recently, moderate reserve expansion. while accommodating Votes for this action: Messrs. Martin, Hayes, Balderston, Bopp, Clay, King, Mills, Scanlon, and Irons, Vote against this action: Shepardson. Mr. Mitchell.

In a comment made with respect to his vote, Mr. Mills brought out that his views were not in agreement with the shift in policy that had been decided upon at the May 7 Committee meeting. However, he voted in favor of the policy directive approved at this meeting because he felt that a shifting of policy back and forth at this time would be more harmful than helpful. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, June 18, 1963. The meeting then adjourned. Secretary