August 18, 1964 FOMC Minutes

FOMC minutes

The problem was real and, if he understood Mr. Furth correctly, it was serious whatever definition of the deficit one might favor. It certainly existed in the minds of foreigners who read the figures published on the U.S. payments balance. He also disagreed with the argument that this problem should be dealt with primarily by means other than monetary policy. Other approaches, such as moral suasion and the interest equalization tax, might also be helpful, but monetary policy certainly had a role to play in the attack on the problem, particularly since capital flows had been so important in the deficit. Also, Mr. Hayes said, he would like to point out that no one had suggested shrinking the domestic econony in the effort to deal with the balance of payments problem. In his judgment the economy was robust and not fragile. What he thought the Committee had in mind was some slight slowing of the rate of credit expansion. Even that was uncertain; he would hope that the effect on the domestic economy would be negligible. Finally, on the question whether the Committee had to refrain from all policy moves because of possible psychological market reactions, Mr. Hayes' the longer the Committee permitted the freezing of inter feeling was that to persist the worse its position became for taking action later. est rates Mr. Daane said, in reference to Mr. Hayes' comment on his (Mr. that it had been his intention to Daane's) proposal for the directive, of the present firmer money market conditions with call for a continuation the clear understanding that somewhat higher bill rates might eventuate, would be coming into the market and particularly since the Treasury was expected to be light. In his judgment the corporate demand for bills

language he had suggested would not be inconsistent with a slightly higher bill rate. As he conceived it, however, this language would be inconsist ent with negative free reserves. He felt strongly that negative figures would produce major expectational effects in the market. He had suggested a target range of zero to $100 million rather than zero to $50 million in order to reduce the probability that a negative figure would be produced inadvertently. Mr. Hayes noted that the Committee's, previous directive had called for "maintaining about the same conditions in the money market" and that there had been some small changes within the context of that directive. In his opinion, if the consensus favored a modest further firming the directive issued at this meeting should say so explicitly. Mr. Mitchell concurred in this view. He noted that what was at issue was the question of a change in policy. To sharpen the focus on this question, he said, the alternatives posed might best be the original staff draft and the language proposed by Mr. Hayes. Mr. Robertson suggested that the Committee might best resolve the issue by considering the following language: "To implement this policy, System open market operations shall be conducted with a view to maintain ing slightly firmer conditions in the money market, while accommodating moderate expansion in aggregate bank reserves." Mr. Swan commented that this language still left a great deal of uncertainty with regard to the targets implied. Chairman Martin remarked that this problem was unavoidable. He thought it was the intent to suggest

trending, in a modest and gradual fashion, toward zero but not negative free reserves, giving due consideration to the tone and feel of the market. The objective was to achieve a very modest firming. Mr. Hayes said the Committee must recognize that once free reserves to the zero level, human skill was not adequate to were brought close guarantee that negative reserves might not result inadvertently. He agreed that it clearly was the intent to avoid negative figures if possible. Mr. Daane said he would not subscribe to the conclusion that the Committee was prepared to accept the possibility that negative free re serves might inadvertently result in, say, two or three successive state ment weeks, because he would expect such a development to produce an adverse reaction in the market. In his judgenent it would be hard to from a level of free reserves that already was near $60 million. trend down Daane evidently did not want to change policy Mr. Hayes replied that Mr. now. Mr. Daane agreed, saying that within the present from what it was he was willing to accept the slightly firmer conditions policy posture that had come about. discussion, Chairman Martin suggested that the After further with a first paragraph as proposed by the Committee vote on a directive with a second paragraph as suggested by Mr. Robertson. staff and 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 Account in accordance with the following current economic policy directive:

It is; the Federal Open Market Comittee's current policy to accommodate moderate growth in the reserve base, bank credit, and the money supply for the purpose of facilitating continued expansion of the economy, while fostering improvement in the capital account of U.S. international payments, and seeking to avoid the emergence of inflationary pressures. This policy takes into account the continued orderly expansion in economic activity, and essential stability in interest rates, unit labor costs, and commodity price averages, including the moderate reactions in markets generally to military incidents in the Far East and Mediterranean. It also gives consideration to the recent. improvement in rates of unemployment and industrial capacity utilization, the substantial increases in the money supply in June and July, and the large U.S. balance of payments deficit in July. To implement this policy, System cpen market operations shall be conducted with a view to maintaining slightly firmer conditions in the money market, while accommodating moderate expansion in aggregate bank reserves.. Votes for this action: Messrs. Martin, Hayes, Balderston, Hickman, Mills, and Shuford. Votes against this action: Messrs. Daane, Mitchell, Robertson, Swan, and Wayne. Chairman Martin commented that he knew everyone present appreciated the importance of preserving the confidentiality of Open Market Committee deliberations and decisions. It was agreed the next meeting of the Committee would be held on Tuesday, September 8, 1964. Thereupon the meeting adjourned. Secretary