December 14, 1965 FOMC Minutes

FOMC minutes

Mr. Balderston said he would divide the four weeks between this meeting and the next into two parts. As the Committee knew, bill rates tended to be seasonally high during the Christmas period and then to decline. He would hope the Desk would dampen any bill rate increases during the first two weeks and then, if necessary, support bill rates in the two weeks remaining before the Committee met again. For both intervals he would use the 4.30-4.45 per cent range suggested by the staff as a guide. The staff had indicated that a net borrowed reserve figure of $100 million might be consistent with such a bill rate objective over the next four weeks as a whole, and he was merely suggesting that the Desk might need to treat the two parts of the period separately. In any case, it now appeared that there would be net free reserves for a second successive week, and he would hope that such figures could be avoided in the future. might well be confused with respect to the Otherwise the public System's intentions in raising the discount rate. Chairman Martin said he had little to add to what already had been said. He thought the discussion today provided good evidence of the futility of trying to project developments under the circumstances of the moment. In due course the storm was likely to be followed by a calm in which the Committee could remold its policy. He had always found the year end a partic ularly difficult time to assess conditions.

The Chairman said he thought that the members of both the majority and minority had conducted themselves well through the recent period, and that the System had played a constructive role in 1965. Of course, no one could be absolutely certain that his judgments were correct in every detail. Chairman Martin then turned to the question of the directive. As he had indicated earlier, to him Mr. Swan's proposal did not differ in substance from the staff's draft, but that was a matter of judgment. In any case, he saw no objection to the proposal and he suggested that the Committee vote on it. Mr. Galusha asked whether the Manager thought the proposed directive gave him room to deal with all of the changes that could occur in the period until the next meeting, including the possible shift in the direction of seasonal pressues. Mr. Holmes replied that seasonal pressures might well ebb during the interval and the Desk would certainly have that possibility in mind. The period ahead was a highly uncertain one, however, and he did not think that all possible developments could be articipated. Mr. Galusha then noted that as he understood the general consensus there would be no attempt through open market operation to reverse the impact of the discount rate change, and Mr. Holmes replied that was clear in the proposed directive.

In the course of further discussion the Committee agreed to some language revisions in the directive proposed by Mr. Swan. 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 ir. the System Account in accordance with the following current economic policy d.rective: The economic and financial developments reviewed at this meeting indicate that domestic economic expansion is gaining in strength in a climate of optimistic business sentiment, with continuing active demands for credit and some further upward creep in prices. Although there appears to have been some recent improvement in our international payments, the need for further progress remains. In this situation, it is the Federal Open Market Committee's policy to complement other recent measures taken to resist the emergence of inflationary pressures and to help restore reasonable equilibrium in the country's balance of payments, while accommodating moderate growth in the reserve base, bank credit, and the money supply. Until the next meeting of the Committee, and taking into account the forthcoming Treasury financing activity and widely fluctuating seasonal pressures at this time of year in addition to the recent increase in Reserve Bank discount rates, System open market operations shall be directed to moderating any further adjustments in money and credit markets that may develop. It was agreed that the next meeting of the Committee would be held on Tuesday, January 11, 1966, at 9:30 a.m. Thereupon the meeting adjourned. Secretary

Attachment A CONFIDENTIAL (FR) December 13, 1965 Draft of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on December 14, 1965 The economic and financial developments reviewed at this meeting indicate that domestic economic expansion is gaining in strength in a climate of optimistic business sentiment, with con tinuing active demands for credit and some further upward creep in prices. Although there appears to have been some recent improvement in our international payments, the need for further progress remains. In this situation, it is the Federal Open Market Committee's current policy to complement other recent measures taken to resist the emergence of inflationary pressures and to help restore reasonable equilibrium in the country's balance of payments, while accommodating moderate growth in the reserve base, bank credit, and the money supply. To implement this policy, and taking into account the recent increases in Federal Reserve Bank discount rates and forthcoming Treasury financing activity, System open market operations until the next meeting of the Committee shall be conducted with a view to moderating further adjustments of noney and credit market conditions in a period of widely fluctuating seasonal pressures.