August 20, 1963 FOMC Minutes

FOMC minutes

although perhaps for varied reasons. He could not help but say, the Chairman added, that in his judgment both the domestic economy and the balance of payments had benefited from the present posture of System policy, although that might take a couple of months to demonstrate. concerning the domestic economy and In view of the general sentiment apprehensions in the European market, he felt there might be possibilities of increased investment in the United States. There were the makings of a change, even though it might take come time to develop. The interest equalization tax proposal had been received badly by the market, it. rather generally as a first step toward exchange having been construed controls, but he believed the sentiment might now be shifting in favor of the Treasury's position. It was his impression that the proposal might get a better reception in the Congress than had seemed likely earlier. The Chairman continued to feel that the balance of payments the greatest single shadow over the domestic economic problem was picture. He believed the posture of the System placed it in a fairly good middle ground, and he questioned whether any further lessening of ease at this point would actually be of benefit. Instead, he was that maintenance of the status quo probably was called inclined to feel As Mr. Balderston and others had pointed out, the for at the moment. going to come into the market during the next few weeks. Treasury was Whether the Treasury would decide on an advance refunding, he did not

know; that was going to involve a rather difficult decision for the Treasury. In any event, however, it should be borne in mind that for a long period Treasury debt management policy had been-not only supplementary but complementary to Federal Reserve monetary policy. This was a period when it would seem well to let the Treasury feel its way along, without additional complications, on whatever debt management decisions it might make. Chairman Martin said that although he remained rather skeptical about the so-called twist operation, he did not believe in changing horses in the middle of the stream. The benefit of the doubt, he thought, should be given to the operation because it was directed toward helping the alance of payments problem as much as possible and with a minimum of drag on the domestic economy. The Chairman added that he thought the Desk had performed well in the past period. Certain market participants with whom he had talked had been impressed, despite their preconceptions, with the activities of It seemed to him that, as he had said, it would be well to the Desk. give the twist operation the benefit of the doubt and pursue it somewhat further. The Chairman also said that he would like to make a comment about the word "peg," which was being used rather freely. He still a peg in the sense of standing ready to purchase securities thought of any time the price reached a certain level. While he believed in a

free market, he did not delude himself into thinking that System activities were not bound to influence the market, although Federal Reserve operations should be of a residual or marginal character. Chairman Martin concluded by saying that since the Treasury was facing a difficult period and since there appeared to have been some element of success in what the System had done thus far, it would seem to him advisable to continue the status quo. The outcome was not clear but the System would benefit in the sense that the whole world would of payments problem was being tackled. If the realize that the balance current program did not work, presumably other operations would be instituted. For all of these reasons, he would favor maintaining the status quo for the time being. The Chairman then proposed that the question of policy for the period immediately ahead be considered by the Committee on the basis the first paragraph of the policy directive without change of continuing and changing the second paragraph to read that open market operations with a view to maintaining the prevailing degree of should be conducted the money market, while accomodating moderate expansion in firmness in aggregate bank reserves. Thereupon, upon moticn 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 Account in accordance with the following current economic policy directive:

policy to accommodate is the Committee's current It bank credit, while putting increased moderate growth in conditions that would contribute emphasis on money market account of the U. S. an improvement in the capital to This policy takes into consideration balance of payments. payments position and its adverse balance of the continuing high level of domestic business effects and the cumulative increases in bank credit, money activity, as well as the recent months. At the same and the reserve base in supply, the continuing underutilization time, however, it recognizes of resources. open market operations this policy, System To implement maintaining the prevailing with a view to shall be conducted money market, while accommodating of firmness in the degree in aggregate bank reserves. moderate expansion Votes for this action: Messrs. Martin, Irons, Mills, Mitchell, Bopp, Clay, Balderston, Shepardson, and Treiber. Robertson, Scanlon, this action: none. Votes against Mr. Treiber said he would with respect to his vote, In a comment additional bills should by the Treasury of that if the issuance understand some modest.amount, that the short-term rate of in an increase in result not be inconsistent with the directive. would the Federal Open Market the next meeting of It was agreed that September 10, 1963. would be held on Tuesday, Committee The meeting then adjourned. Assistant Secretary