March 2, 1965 FOMC Minutes

FOMC minutes

the time even if that resulted in some further stiffening of bill rates. He would be willing to accept some stiffening of long-term rates also if that were to develop. To make clear that the Committee wished no cessa tion in the application of the policy adopted on February 2, Mr. Balderston suggested that the second paragraph of the draft policy directive be mod ified to read, "To implement this policy, System open market operations over the next three weeks should be conducted with a view to extending the recent firming of conditions in the money market." He would delete the reference to the money supply in the first paragraph because, as he had noted earlier, he considered the money supply figures to be a deceiving guide. Chairman Martin said he thought that Mr. Balderston's charts were interesting and that the Committee should keep them in mind. As to policy, evidently the Committee felt that it should not retreat from the step taken at the previous meeting, but the majority apparently did not favor going as far as Mr. Balderston had suggested. As to the directive, he would prefer not to eliminate the reference to the money supply. As he had said before, words meant different things to different people, and he did not see how the semantic problem could be resolved today. What was necessary, he thought, was to try to put together the best possible language, recognizing that there inevitably would be some gray areas. Mr. Mitchell said he had not meant to imply that money supply be excluded from all of the Committee's policy directives; references should he had suggested omitting the reference from this particular directive be cause recent changes in money were difficult to interpret. By calling for

accommodation of growth in total bank credit the Committee would be reccg nizing what was happening to deposits, including CDs and other time de posits. Mr. Koch noted that the staff had debated the question at issue in preparing the draft directive and he might try to clarify the rationale of the proposed language. The thought was that the phrase "to accommodate growth in the reserve base, bank credit, and the money supply," could be reasonably taken to refer to the three variables as a group and not individ ually, and with respect to a longer time period than just a few weeks. Mr. Mitchell commented that the problem under discussion pointed up the desirability of employing an alternative form for the directive, such as that of the "trial" directive, which was more specific. Mr. Hayes remarked that the staff's memorandum on member bank reserves indicated that the aggregate money supply had increased in every recent month except February, and the figure for that month was labeled "estimate." He thought that these data did not invalidate the general proposition that the money supply had increased in recent months. Ac cordingly, he did not consider the reference to be objectionable. Chairman Martin said that that was his view also. He then noted that Mr. Mitchell had suggested deleting the proposed phrase "and to avoid the emergence of inflationary pressures" from the first paragraph. He (Chairman Martin) would prefer to retain that phrase because he thought there still were inflationary pressures in the economy. In his judgment the volume of credit, however measured, was dangerously high at present

and this would be revealed by coming developments. He hoped he was wrong, but that was his conviction. After further discussion Chairman Martin suggested that the Committee vote on the directive as drafted by the staff. 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: In light of the economic and financial developments reviewed at this meeting, including the generally strong and continuing expansion of the domestic economy and the continuing adverse position of our international balance of payments, it remains the Federal Open Market Committee's current policy to accommodate growth in the reserve base, bank credit, and the money supply but at a more moderate pace than in recent months. This policy seeks to support fully the national program to strengthen the international position of the dollar, and to avoid the emergence of inflationary pressures. To implement this policy, System open market opera tions over the next three weeks shall be conducted with a view to maintaining the slightly firmer conditions in the money market that have prevailed in recent weeks. Votes for this action: Messrs. Martin, Hayes, Bryan, Daane, Mitchell, Robertson, Scanlon, and Clay. Votes against this action: Messrs. Balderston, Ellis, and Shepardson. said that he had voted against this action because, Mr. Balderston as he had indicated earlier, he thought a further move to tighter condi required at present. Mr. Shepardson observed that he had distions was sented on the same grounds.

Mr. Ellis said he had dissented for two reasons. First, he also favored a firmer policy. Secondly, he did not believe that the present directive form was sufficiently clear and definite to serve adequately as an instruction to the Account Manager. To the extent that his dissent was on procedural grounds, he proposed to limit it only to this occasion and not to repeat it at subsequent meetings, even though he might continue to object to the form of the directive. Mr. Mitchell commented that he shared Mr. Ellis' views on the directive but had voted favorably because he thought the policy decision was appropriate. Mr. Bryan indicated that he had voted favorably on the same basis as Mr. Mitchell had. It was agreed that the next meeting of the Committee would be held on Tuesday, March 23, 1965, at 9:30 a.m. Thereupon the meeting adjourned. S c etary er