January 11, 1966 FOMC Minutes

FOMC minutes

Chairman Martin observed that he felt more and more humble as time went on about what really could be accomplished in the area of monetary policy. He often had remarked that he did not fully understand the role of the money supply in the economy, and he had to say now that after having been concerned with the subject for many years he understood it less than he had twenty years ago. One was dealing with human choices and value judgments, and that required the ability to change one's conclusions from day to day and month to month. He did not mean that one should not have convictions on the subject, but that there should be flexibility in views. In his judgment one ought to worry most about the man who was sure he knew the answers; the nature of the policy problem as to preclude fixed positions. He, for one, did not was such think he had the answers, any more than anyone else. It was maintain an open mind and to probe constantly for necessary to new approaches, new devices, and new instruments. thought the Committee was more or less in Chairman Martin members might best concentrate on agreement on policy today. The in the future, in light of the what policy would be appropriate the contents of the in the situation and considering new factors would be operating in an The System now coming Budget Message. contemplated a that had not been entirely new environment--one employment of generally and over-full ago--of full employment year

skilled workers. He personally would favor a little inflation if he thought it would benefit the unemployables, but he did not think it would; rather, it would do them harm. He had debated that issue for years with academicians, some of whom, he believed, had an emotional bias on the subject. In his opinion there was some justification for their view in the short run but not in the longer run. The Chairman then suggested that the Committee vote on a directive consisting of the staff's draft with amendments along the lines of those proposed by Messrs. Robertson and Daane. 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 follow ing current economic policy directive: The economic and financial developments reviewed at this meeting indicate that domestic economic expansion has strengthened further in a climate of optimistic business sentiment and with some further upward creep in prices. Interest rates are higher in most markets in to strong credit demands and recent official response actions. Our international payments position rate improved considerably during 1965 but further progress is needed to attain effective balance. In this situation, the Federal Open Market Committee's policy to resist it is of inflationary pressures and to help restore the emergence equilibrium in the country's balance of payments, reasonable the growth in the reserve base, bank credit, by moderating and the money supply. the Treasury financing schedule, System In light of open market operations until the next meeting of the

Committee shall be conducted with a view to maintaining about the current conditions in the money market. Mr. Swan said that it would be useful if the staff could provide some indication of the effects on seasonal factors for financial series as the economy approached full utilization of In particular, he would like to know whether seasonal resources. fluctuations tended to be damped under those circumstances. that the staff would develop information on Mr. Holland replied that subject. meeting of the Committee would It was agreed that the next 1, 1966, at 9:30 a.m. held on Tuesday, February be Thereupon the meeting adjourned.

ATTACHMENT A CONFIDENTIAL (FR) January 10, 1966 Draft of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on January 11, 1966 The economic and financial developments reviewed at this meeting indicate that domestic economic expansion has strengthened further in a climate of optimistic business sentiment and with some further upward creep in prices. Interest rates are higher in most markets in response to strong credit demands and recent official rate actions. Our international payments position improved con siderably during 1965 but further progress is needed to attain effective balance. In this situation, it remains the Federal Open Market Committee's policy 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. In light of the Treasury financing schedule, System open market operations until the next meeting of the Committee shall be conducted with a view to moderating any further firming of money market conditions that may develop. Note: The second paragraph of this draft directive is intended interpretation of an "even keel" policy stance under as one possible the conditions existing at present. Alternative possible interpreta tions might involve instructions to maintain "about the current in the money market" or "about the same conditions in the conditions as have prevailed on average since the preceding meeting" money market to the Manager as to whether emphasis should be with guidance given on net borrowed reserves or on short-term interest placed primarily rates if the current or recent relations prove inconsistent.