June 18, 1963 FOMC Minutes

FOMC minutes

gold, he could think of nothing that would be much more likely to trigger a loss of confidence by U. S. citizens generally. With reference to the question of short-term rates, he warned against placing too much reliance on the fact that covered rates were now fairly well in balance. This represented overemphasis on one phase of the short-term rate picture. A great many flows were going on without reference to the covered rates. As to the suggestion that a move on the part of the System should be one intended to have some lasting effect, Mr. Hayes said that if a higher short-term rate structure could be achieved, possibly that would have lasting effects for years in the balance of payments area. As to long-term rates, he had only suggested softening the effects of policy move at this time to see whether they could be confined mostly a to the short-term area. If so, obviously this would have advantages for the domestic economy. On the question whether any change in the discount rate should be in the order of one-half per cent or one per cent, Mr. Hayes said he in his own mind that an increase of one-half per cent came out clearly would be vastly preferable. The necessity of having to make a larger adjustment might be obviated by making a smaller move sooner. An increase cent would provide a strong signal of what the System of one-half per intended, especially since the discount rate had been at 3 per cent for such a long time. It should have the effect of encouraging actions

by other parts of the Government as effectively as a larger increase, but it would be less conducive to a move on the prime rate. It would do less to complicate the Treasury's problem, to engender political difficulties, and to generate offsetting actions abroad. As to whether there was indeed a payments crisis at hand, Mr. Hayes noted that no one could tell for certain about the timing. As Mr. Balderston said, this had been developing slowly over a period of time. Mr. Hayes was rather surprised that some of the Committee members seemed to feel that something might have been happening during the past few weeks about which they had not been informed. It was a matter of judgment as to when a process that had been developing over a long period of time would get to the breaking point. He agreed with what Mr. Shepardson and Mr. Balderston had said about anticipating rather than waiting. A mild move would run much less risk of harm to the domestic economy than a severe move, and he could not see why anyone would want to wait until the last moment before doing anything. It was human nature, of course, to want to pass the buck to someone else to solve a problem, but he could see signs that the Government in general was increasingly aware of the seriousness of the problem. The System should not fail to be among the ranks of those who were ready to do their part. Mr. Mitchell did not agree that the System could make any policy move that would change the fundamental relationship of the two ends of

the interest rate structure. In order for that to occur, the marginal efficiency of capital in this country must rise, and no policy the System could adopt would make that happen. What could develop was an artificial structure in which interest rates would be fixed, as they had been at the short end. This was one reason why people had so much money; there was no reason to fund under the existing rate structure. Mr. Mitchell agreed that the question of timing was an important point. In his view there should be either a structural change at home or def inite evidence that the economy was on its way before it would be appropriate to use the kind of medicine Mr. Hayes was advocating. It would never solve the question of the marginal efficiency of capital in this country. Mr. Hickman commented that the marginal efficiency of capital involved an equating of expected future returns and present costs. The expectational element depended in part on the degree of concern about the balance of payments situation. If this was a factor deterring in vestment it would appear that a firmer monetary policy would raise the marginal efficiency of capital. In other words, decisions to invest involved judgments as to the future, which included concern about the precarious position of the dollar. It seemed to him that there was much to be said on both sides of the question. The raising of interest rates might deter some investment, but at the same time it would represent a forward step in dealing with the balance of payments problem. Failure

to take action might result in undermining the quality of credit and lay the groundwork for a recession in the future. In his opinion, an unduly easy monetary policy was not going to help unemployment or promote the longer run utilization of capital in this country. discussion concluded with further comments by the Chairman The of the Committee, reflecting their views on various and other members credit situation and the balance of payments aspects of the domestic problem. next meeting of the Open Market Committee It was agreed that the would be held on Tuesday, July 9, 1963. meeting then adjourned. The Secretary