May 11, 1965 FOMC Minutes

FOMC minutes

The principal implication Mr. Ellis associated with the current rate of time deposit growth was that it probably represented a less excessive situation than prevailed in January and February. Growth in those two months quite clearly represented shifting from one type of account holding to another in response to the higher time deposit rates allowed under Regulation Q. Recent liquid asset growth had exceeded the true rate of saving out of income so in part it had to represent one-time switching of assets. Mr. Ellis remarked that the steel moratorium, slower auto sales, a moderation in the balance of payments crises, and slower expansion of retail sales all suggested that some of the pressure at the margin on bank loans to business might diminish. The current reports on business loans, however, gave a contrary indication. Mr. Ellis noted that the staff memorandum listed several factors that would be operating in money markets in the next few weeks, even within the framework of even keel. He would single out two that might operate to avo:.d further weakening of bill rates. First, the Treasury would not need to continue operations at the short end of the market to render its anchor issue more attractive. Secondly, reserve projec tions indicated that instead of injecting substantial funds to achieve reserve objectives, the System Account might be able to make net sales in meeting the objectives for the next two weeks. Thus, within the framework of even keel, Mr. Ellis hoped and anticipated that there would be a rise of a few points in short bill rates and continued firm ness in the money market, with member bank borrowing averaging $450 reserves in the $100-$150 million range. million and net borrowed

On the draft directive, Mr. Ellis favored dropping the word "apparent." On reflection he also would endorse Mr. Shepardson's suggestion to drop the word "further"; he was not sure what the word implied but on his interpretation it conflicted with the preceding phrase regarding avoiding the emergence of inflationary pressures. He did not think the Committee could continue for long to characterize a nine per cent growth rate in the reserve base as "moderate," or to permit such a rate to be maintained without recognizing that it was promoting inflationary pressures. Mr. Balderston commented that since the next meeting of the Committee would be held in only two weeks he would favor the status quo with respect to policy. He thought that in the interval before the next meeting Committee members might well consider carefully the points Mr. Bryan had made today. He (Mr. Balderston) was impressed not only by the fact that total reserves had been growing at a 9 per cent rate since the beginning of the year but also by the fact that demand deposit turnover at reporting centers outside New York was about 8 per cent higher in March than six months earlier. subscribed to the changes in the draft directive Mr. Balderston by Mr. Ellis; he would delete the words "apparent" and "further." suggested Martin remarked that there seemed to be general agree Chairman with respect to policy, although some differences of opinion ment today wording of certain phrases in the first paragraph existed as to the best directive. There ensued some further discussion of the directive of the language to be employed.

Thereupon, upon motion duly made and seconded, and by unanimous vote, 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: The economic and financial developments reviewed at this meeting indicate a generally strong further expansion of the domestic economy and some improvement in our inter national balance of payments, but with gold outflows con tinuing. In this situation, it remains the Federal Open Market Committee's current policy to reinforce the volun tary restraint program to strengthen the international position of the dollar, and to avoid the emergence of inflationary pressures, while accommodating moderate growth in the reserve base, bank credit, and the money supply. To implement this policy, while taking into account the current Treasury financing, System open market opera tions over the next two weeks shall be conducted with a view to maintaining about the same conditions in the money market as have prevailed in recent weeks. It was agreed that the next meeting of the Committee would be held on Tuesday, May 25, 1965, at 9:30 a.m. Thereupon the meeting adjourned. ecretary

Attachment A CONFIDENTIAL (FR) May 10, 1965 Draft of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on May 11, The economic and financial developments reviewed at this meeting indicate a generally strong further expansion of the domestic economy and some apparent improvement in our international payments position, but with gold outflows continuing. In this situation, it remains the Federal Open Market Committee's current policy to rein force the voluntary restraint program to strengthen the international position of the dollar, and to avoid the emergence of inflationary pressures, while accommodating moderate further growth in the reserve base, bank credit, and the money supply. To implement this policy, while taking into account the current Treasury financing, System open market operations over the next two weeks shall be conducted with a view to maintaining about the same conditions in the money market as have prevailed in recent weeks.