March 1, 1966 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D. C., on Tuesday, March 1, 1966, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Bopp Mr. Clay Mr. Daane Mr. Hickman Mr. Irons Maisel Mr. Mr. Mitchell Mr. Robertson Mr. Shepardson Messrs. Wayne, Scanlon, Francis, and Swan, Alternate Members of the Federal Open Market Committee Messrs. Ellis, Patterson, and Galusha, Presidents of the Federal Reserve Banks of Boston, Atlanta, and Minneapolis, respectively Mr. Holland, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Broida, Assistant Secretary Mr. Molony, Assistant Secretary Mr. Hackley, General Counsel Mr. Brill, Economist Eastburn, Garvy, Green, Koch, Mann, Messrs. Solomon, Tow, and Young, Associate Partee, Economists System Open Market Account Mr. Holmes, Manager, Manager, System Open Market Mr. Coombs, Special Account to the Board of Governors Mr. Fauver, Assistant Division of Research and Mr. Williams, Adviser, Statistics, Board of Governors Adviser, Division of International Mr. Reynolds, Finance, Board of Governors Axilrod and Gramley, Associate Advisers, Messrs. and Statistics, Board Division of Research of Governors Office of the Eaton, General Assistant, Miss Board of Governors Secretary,
Mr. Strothman, First Vice President, Federal Reserve Bank of Minneapolis Messrs. Willis, Ratchford, Brandt, Baughman, and Jones, Vice Presidents of the Federal Reserve Banks of Boston, Richmond, Atlanta, Chicago, and St. Louis, respectively Messrs. Nelson and Lynn, Directors of Research at the Federal Reserve Banks of Minneapolis and San Francisco, respectively Mr. Meek, Manager, Securities Department, Federal Reserve Bank of New York In the agenda for this meeting, the Secretary reported that advices had been received of the election by the Federal Reserve Banks of members and alternate members of the Federal Open Market Committee for the term of one year beginning March 1, 1966, and it appeared that such persons would be legally qualified to serve after they had executed their oaths of office. The elected members and alternates were as follows: Alfred Hayes, President of the Federal Reserve Bank of New York, with William F. Treiber, First Vice President of the Federal Reserve Bank of New York, as alternate; President of the Federal Reserve Bank of Karl R. Bopp, Philadelphia, with Edward A. Wayne, President of the Reserve Bank of Richmond, as alternate; Federal President of the Federal Reserve W. Braddock Hickman, with Charles J. Scanlon, President Bank of Cleveland, Federal Reserve Bank of Chicago, as alternate; of the President of the Federal Reserve Bank George H. Clay, J. Swan, President of the of Kansas City, with Eliot Federal Reserve Bank of San Francisco, as alternate; H. Irons, President of the Federal Reserve Bank Watrous Francis, President of the Dallas, with Darryl R. of Reserve Bank of St. Louis, as alternate. Federal
Upon motion duly made and seconded, and by unanimous vote, the following officers of the Federal Open Market Committee were elected to serve until the election of their successors at the first meeting of the Committee after February 28, 1967, with the under standing that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Jr. Chairman Wm. McC. Martin, Alfred Hayes Vice Chairman Robert C. Holland Secretary Merritt Sherman Assistant Secretary Assistant Secretary Kenneth A. Kenyon Assistant Secretary Arthur L. Broida Assistant Secretary Charles Molony General Counsel Howard H. Hackley Assistant General Counsel David B. Hexter Economist Daniel H. Brill David P. Eastburn, George Garvy, Ralph T. Associate Economists Green, Albert R. Koch, Maurice Mann, J. Charles Partee, Robert Solomon, Clarence W. Tow, and Ralph A. Young Upon motion duly made and and by unanimous vote, seconded, the Federal Reserve Bank of New was selected to execute York for the System Open transactions until the adjourn Market Account meeting of the ment of the first Open Market Committee Federal February 28, 1967. after duly made and Upon motion seconded, and by unanimous vote, and Charles A. Alan R. Holmes to serve at Coombs were selected
the pleasure of the Federal Open Market Committee as Manager of the System Open Market Account and as Special Manager for foreign currency operations for such Account, respec tively, it being understood that their selection was subject to their being satisfactory to the Board of Directors of the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that Messrs. Holmes and Coombs were satisfactory to the Board of Directors of the Federal Reserve Bank of New York for service in the respective capacities indicated. Upon motion duly made and seconded, vote, the minutes of and by unanimous the meeting of the Federal Open Market Committee held on February 8, 1966, were approved. Consideration then was given to the continuing authoriza tions of the Committee, according to the customary practice of reviewing such matters at the first meeting in March of every year, the actions set forth hereinafter were taken. and With respect to the continuing authority directive relating to transactions in U.S. Government securities and bankers' in a memorandum to the Chairman Martin noted that acceptances, had recommended a February 24, 1966, the Manager Committee dated $2 billion to $1.5 billion in the dollar limit reduction from 1(a) on the aggregate amount by which established in paragraph securities might be increased Account holdings of Government System
or decreased between meetings of the Committee. As indicated in the memorandum, a copy of which has been placed in the Committee's files, the higher limit had been established on December 6, 1965, because of certain circumstances which seemed to have passed. Thereupon, upon motion duly made and seconded, and by unan imous vote, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Open Market Account in accordance with the following continuing authority directive relating to transactions in U.S. Government securities and bankers' acceptances: 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent current economic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities in the open market, from or to Government securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices and, for such Account, U.S. Government securities with the to exchange maturing allow them to mature without replacement; Treasury or that the aggregate amount of such securities provided at the close of business on the day held in such Account Committee at which action is taken of a meeting of the to a current economic policy directive shall with respect by more than $1.5 billion not be increased or decreased with the opening of business during the period commencing such meeting and ending with the on the day following on the day of the next such meeting; close of business acceptances of or sell prime bankers' (b) To buy of the Federal in the Regulation the kinds designated from or to in the open market, Open Market Committee maintained at and foreign accounts acceptance dealers
the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market discount rates; provided that the aggregate amount of bankers' acceptances held at any one time shall not exceed $125 million or per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York; (c) To buy U.S. Government securities with matu rities as indicated below, and prime bankers' acceptances with maturities of 6 months or less at the time of purchase, from nonbank dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities or acceptances in 15 calendar days or less, at rates not less than (1) the discount rate of the Federal Reserve Bank of New York at the time such agreement is entered into, or (2) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower; provided that in the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers' acceptances covered by any such agreement are not repurchased by the seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. U.S. Government securities bought under the provisions of this section shall have maturities of 24 months or less at the time of purchase, except that, during any period beginning with the day after the Treasury has announced a refunding operation and ending on the day designated as the settlement date for the exchange, the U.S. Government securities bought may be of any maturity. 2. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York to purchase directly from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be to time for the temporary accommodation of the necessary from time that the rate charged on such certificates shall Treasury; provided cent below the discount rate of the Federal be a rate 1/4 of 1 per
Reserve Bank of New York at the time of such purchases, and provided further that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $500 million. Chairman Martin then noted that on February 21, 1966 Mr. Young had distributed to the Committee certain materials prepared by the Secretariat relating to a proposed reorganization of the Committee's instruments governing System foreign currency operations. (Copies of Mr. Young's memorandum and attachments have been placed in the Committee's files.) The Chairman invited Mr. Young to comment on the materials. that the members would recall that at the Mr. Young said 23, 1965 the Committee had asked the staff to meeting of November review System operations in foreign currencies and to submit a had progressed to an advanced stage report. Work on the report same time, the staff had made not been completed. At the but had existing foreign currency instrumentsa study of the Committee's guidelines, and continuing authority the authorization, content could be that their essential directive--and had concluded in two new instruments--an and clearer form recast into simpler the materials distributed and a directive. Among authorization new instruments, an explanatory were drafts of the proposed instruments with marginal and copies of the existing memorandum, of all passages in the disposition made notes indicating developing the proposed new instruments.
Mr. Young noted that the subject was a complex one and that the members had had relatively little time to study the documents distributed. For those reasons, and also because the staff report on foreign currency operations was not yet available, he thought the Committee might want to defer action regarding the recommendation that the three existing instruments be replaced by two new ones. Chairman Martin suggested that the Committee reaffirm its existing foreign currency instruments today and plan on considering the proposed replacements at its next meeting, when all members would have had an opportunity to review them carefully. There was general agreement with this suggestion. Thereupon, upon motion duly made and seconded, and by unan imous vote, the Authorization Regarding Open Market Transactions in Foreign Currencies, as reaffirmed on March 2, 1965, was reaffirmed: Pursuant to Section 12A of the Federal Reserve Act and in accordance with Section 214.5 of Regulation N of the Board of Governors of the Federal (as amended) Reserve System, the Federal Open Market Committee takes the following action governing open market operations opening and maintenance by the Federal incident to the New York (hereafter sometimes referred Reserve Bank of as the New York Bank) of accounts with foreign to central banks. I. Role of Federal Reserve Bank of New York The New York Bank shall execute all transactions pursuant to this authorization (hereafter sometimes referred to as transactions in foreign currencies)
for the System Open Market Account, as defined in the Regulation of the Federal Open Market Committee. II. Basic Purposes of Operations The basic purposes of System operations in and holdings of foreign currencies are: (1) To help safeguard the value of the dollar in international exchange markets; (2) To aid in making the existing system of international payments more efficient and in avoiding disorderly conditions in exchange markets; (3) To further monetary cooperation with central banks of other countries maintaining convertible currencies, with the International Monetary Fund, and with other international payments institutions; (4) Together with these banks and institutions, to help moderate temporary imbalances in international payments that may adversely affect monetary reserve positions; and run, to make possible growth in (5) In the long the liquid assets available to international money markets in accordance with the needs of an expanding world economy. III. Specific Aims of Operations Within the basic purposes set forth in Section II, with a view to the shall be conducted the transactions following specific aims: compensate, when appropriate, the (1) To offset or gold reserves or dollar effects on U.S. of disequilibrating fluctuations liabilities payments to or flow of in the international from the United States, and especially those temporary forces are deemed to reflect that transitional market unsettlement; or abrupt changes in and smooth out (2) To temper spot exchange rates and moderate forward
premiums and discounts judged to be disequilibrating; (3) To supplement international exchange arrange ments such as those made through the International Monetary Fund; and (4) In the long run, to provide a means whereby reciprocal holdings of foreing currencies may contribute to meeting needs for international liquidity as required in terms of an expanding world economy. IV. Arrangements with Foreign Central Banks In making operating arrangements with foreign central banks on System holdings of foreign currencies, the New York Bank shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. The Bank shall instruct foreign central banks regard ing the investment of such holdings in excess of minimum working balances in accordance with Section 14(e) of the Federal Reserve Act. The Bank shall consult with foreign central banks on coordination of exchange operations. Any agreements or understandings concerning the administration of the accounts maintained by the New York Bank with the central banks designated by the Board of Governors under Section 214.5 of Regulation N (as amended) are to be referred for review and approval to the Committee, subject to the provision of Section VIII, paragraph 1, below. V. Authorized Currencies The New York Bank is authorized to conduct trans System Account in such currencies and within actions for the limits that the Federal Open Market Committee may from time to time specify.
VI. Methods of Acquiring and Selling Foreign Currencies The New York Bank is authorized to purchase and sell foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the Stabilization Fund of the Secretary of the Treasury established by Section 10 of the Gold Reserve Act of 1934 and with foreign monetary authorities. Unless the Bank is otherwise authorized, all trans actions shall be at prevailing market rates. VII. Participation of Federal Reserve Banks All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3 G (1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. VIII. Administrative Procedures The Federal Open Market Committee authorizes a Subcommittee consisting of the Chairman and the Vice Chairman of the Committee and the Vice Chairman of the Board of Governors (or in the absence of the Chairman Vice Chairman of the Board of Governors the or of the members of the Board designated by the Chairman as alternates, and in the absence of the Vice Chairman of his alternate) to give instructions to the Committee within the guidelines issued by the Special Manager, in which it is necessary to the Committee, in cases before the Committee a decision on operations reach can be consulted. authorized under the preceding All actions reported to the Committee. paragraph shall be promptly Chairman, and in his authorizes the The Committee and in the Chairman of the Committee, absence the Vice of the Board of the Vice Chairman absence of both, Governors:
(1) With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Secretary; (2) To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on such policy matters as may relate to the Secretary's responsibilities; (3) From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Problems. IX. Special Manager of the System Open Market Account A Special Manager of the Open Market Account for foreign currency operations shall be selected in accordance with the established procedures of the Federal Open Market Committee for the selection of the Manager of the System Open Market Account. The Special Manager shall direct that all transactions in foreign currencies and the amounts of all holdings in each authorized foreign currency be reported daily to designated staff officials of the Committee, and shall regularly consult with the designated staff officials of the Committee on current tendencies in the flow of interna tional payments and on current developments in foreign exchange markets. The Special Manager and the designated staff offi cials of the Committee shall arrange for the prompt transmittal to the Committee of all statistical and other information relating to the transactions in and the amounts of holdings of foreign currencies for review by the Committee as to conformity with its instructions. The Special Manager shall include in his reports to the Committee a statement of bank balances and investments payable in foreign currencies, a statement of net profit or loss on transactions to date, and a summary of outstanding unmatured contracts in foreign currencies.
X. Transmittal of Information to Treasury Department The staff officials of the Federal Open Market Committee shall transmit all pertinent information on System foreign currency transactions to designated officials of the Treasury Department. XI. Amendment of Authorization The Federal Open Market Committee may at any time amend or rescind this authorization. Upon motion duly made and seconded, and by unanimous vote, the Guidelines for System Foreign Currency Operations as amended on November 23, 1965, were reaffirmed: 1. Holdings of Foreign Currencies Until otherwise authorized, the System will limit its holdings of foreign currencies to that amount necessary to enable its operations to exert a market influence. Holdings of larger amounts will be authorized only when the U.S. balance of international payments attains a sufficient surplus to permit the accumulation of holdings of major convertible ready currencies. Foreign currency holdings shall be invested as far in conformity with Section 14(e) of the as practicable Federal Reserve Act. 2. Exchange Transactions be geared to shall exchange transactions System cushion or moderate flows so as to pressures of payments funds and their movements of disequilibrating and foreign official effects on U.S. destabilizing on exchange markets. reserves and be geared to shall these transactions In general, expected to that are with movements pressures connected future; when expressly reversed in the foreseeable be
authorized by the Federal Open Market Committee, they may also be geared on a short-term basis to pressures connected with other movements. Subject to express authorization of the Committee, the Federal Reserve Bank of New York may enter into reciprocal arrangements with foreign central banks on exchange transactions ("swap" arrangements), which arrangements may be wholly or in part on a standby basis. Drawings made by either party under a reciprocal arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. The New York Bank shall, as a usual practice, purchase and sell authorized currencies at prevailing market rates without trying to establish rates that appear to be out of line with underlying market forces. If market offers to sell or buy intensify as System holdings increase or decline, this shall be regarded as a clear signal for a review of the System's evaluation of international payments flows. It shall be the practice to arrange with foreign central banks for the coordination of foreign currency transactions in order that System transactions do not conflict with those being undertaken by foreign monetary authorities. 3. Transactions in Spot Exchange The guiding principle for transactions in spot exchange shall be that, in general, market movements in exchange rates, within the limits established in the International Monetary Fund Agreement or by central bank practices, index affirmatively the interaction of underlying economic forces and thus serve as efficient guides to current financial decisions, private and public.
Temporary or transitional fluctuations in payments flows may be cushioned or moderated whenever they occasion market anxieties, or undesirable speculative activity in foreign exchange transactions, or excessive leads and lags in international payments. Special factors making for exchange market instabilities include (i) responses to short-run increases in international political tension, (ii) dif ferences in phasing of international economic activity that give rise to unusually large interest rate differentials between major markets, or (iii) market rumors of a character likely to stimulate speculative transactions. Whenever exchange market instability threatens to produce disorderly conditions, System transactions are appropriate if the Special Manager, in consultation with the Federal Open Market Committee, or in an emergency with the members of the Committee designated for that purpose, reaches a judgment that they may help to re establish supply and demand balance at a level more consistent with the prevailing flow of underlying payments. Whenever supply or demand persists in influencing exchange rates in one direction, System transactions should be modified, curtailed, or eventually discontinued pending a reassessment by the Committee of supply and demand forces. Insofar as is practicable, the New York Bank shall spot transactions at or purchase a currency through value, and sell a currency through spot below its par at or above its par value. transactions at rates rates other than those set Spot transactions at paragraph shall be specially forth in the preceding members of the or by the by the Committee authorized VIII of the Authorization designated in Section Committee for Open Market Transactions in Foreign Currencies, that purchases of exchange to meet System except without special authorization may be executed commitments above par when necessary. at rates
4. Transactions in Forward Exchange Transactions in forward exchange, either outright or in conjunction with spot transactions, may be undertaken: (1) When forward premiums or discounts are incon sistent with interest rate differentials and are giving rise to disequilibrating movements of short-term funds; it is deemed appropriate to supplement (2) When existing market supplies of forward cover, directly or indirectly, as a means of encouraging the retention or accumulation of dollar holdings by private foreign holders; (3) To allow greater flexibility in covering System commitments, including those under swap arrangements; (4) To facilitate the use of holdings of one currency for the settlement of commitments denominated in other currencies. Forward sales of authorized currencies to the U.S. Stabilization Fund out of existing System holdings or in conjunction with spot purchases of such currencies also may be undertaken in order to allow greater flexibility in covering commitments of the U.S. Treasury. In all other cases, proposals of the Special Manager to initiate forward operations shall be submitted to the Committee for advance approval. Upon motion duly made and seconded, and by unanimous vote, the following continuing authority directive to the Federal Reserve Bank of New York with respect to foreign currency operations was approved: The Federal Reserve Bank of New York is authorized directed to purchase and sell through spot transactions and currencies in accordance with any or all of the following
the Guidelines for System Foreign Currency Operations as reaffirmed March 1, 1966; provided that the aggregate amount of foreign currencies held under reciprocal currency arrangements shall not exceed $2.8 billion equivalent at any one time, and provided further that the aggregate amount of foreign currencies held as a result of outright purchases shall not exceed $150 million equivalent at any one time: Pounds sterling French francs German marks Italian lire Netherlands guilders Swiss francs Belgian francs Canadian dollars Austrian schillings Swedish kronor Japanese yen The Federal Reserve Bank of New York is also authorized and directed to operate in any or all of the foregoing currencies in accordance with the Guidelines up to a combined total of $275 million equivalent, and by means of: (a) purchases through forward transactions, for the purpose of allowing greater flexibility in covering commitments under reciprocal currency agreements; forward as well and sales through (b) purchases as spot transactions, for the purpose of utilizing its holdings of one currency for the settlement of commitments denominated in other currencies; transactions and through spot (c) purchases sales through forward trans concurrent actions, for the purpose of restraining short-term outflows of funds induced by arbitrage considerations; and for the forward transactions (d) sales through influencing interest arbitrage purpose of and of minimizing speculative flows of funds disturbances.
The Federal Reserve Bank of New York is also authorized and directed to make purchases through spot transactions, including purchases from the U.S. Sta bilization Fund, and concurrent sales through forward transactions to the U.S. Stabilization Fund, of any of the foregoing currencies in which the U.S. Treasury has outstanding indebtedness, in accordance with the Guidelines and up to a total of $100 million equivalent. Purchases may be at rates above par, and both purchases and sales are to be made at the same rates. The Federal Reserve Bank of New York is also authorized and directed to make purchases of sterling on a covered or guaranteed basis in terms of the dollar up to a total of $200 million equivalent. The Federal Reserve Bank of New York is also authorized and directed to assume commitments for forward sales of lire up to $500 million equivalent as a means of facilitating the retention of dollar holdings by private foreign holders. Upon motion duly made and seconded, and by unanimous vote, the following procedures with respect to allocations of the System Open Market Account were approved without change: 1. Securities in the System Open Market Account shall be reallocated on the last business day of each of adjustments proportionate to the month by means that would have been required to equalize adjustments reserve ratios of the 12 approximately the average Banks based on the most recent available Federal Reserve business days' reserve ratio figures. five staff shall calculate, in the 2. The Board's day, the reserve ratios of each morning of each business effects of the allowing for the indicated Bank after of the Interdistrict Settlement Fund for the settlement If these calculations should disclose a preceding day. reserve ratio of any Bank, the Board's deficiency in the of the System Open Market shall inform the Manager staff adjustment as of the who shall make a special Account, ratio of that Bank day to restore the reserve previous
to the average of all the Banks. However, such adjust ments shall not be made beyond the point where a deficiency would be created at any other Bank. Such adjustments shall be offset against the participation of the Bank or Banks best able to absorb the additional amount or, at the discretion of the Manager, against the participation of the Federal Reserve Bank of New York. The Board's staff and the Bank or Banks concerned shall then be notified of the amounts involved and the Interdistrict Settlement Fund shall be closed after giving effect to the adjustments as of the preceding business day. 3. Until the next reallocation the Account shall be apportioned on the basis of the ratios determined in paragraph 1, after allowing for any adjustments as provided for in paragraph 2. 4. Profits and losses on the sale of securities from the Account shall be allocated on the day of delivery of the securities sold on the basis of each Bank's current holdings at the opening of business on that day. A proposed list for distribution of periodic reports prepared by the Federal Reserve Bank of New York for the Federal Open Market Committee was presented for consideration and approval. Thereupon, upon motion duly made and seconded, and by unanimous vote, authorization was given for the following distribution: 1. The Members of the Board of Governors. Presidents of the twelve Federal Reserve Banks. 2. The Federal Open Market Committee. 3. Officers of the *4. The Secretary of the Treasury. the Treasury for Monetary Affairs *5. The Under Secretary of Under Secretary for Monetary Affairs. and the Deputy of open market operations only. *Weekly reports
*6. The Assistant to the Secretary of the Treasury working on debt management problems. *7. The Fiscal Assistant Secretary of the Treasury. 8. The Director of the Division of Bank Operations of the Board of Governors. 9. The officer in charge of research at each of the Federal Reserve Banks not represented by its President on the Federal Open Market Committee. 10. The alternate member of the Federal Open Market Committee from the Federal Reserve Bank of New York; the Assistant Vice Presidents of the Federal Reserve Bank of New York working under the Manager of the System Account; the Managers of the Securities Department of the New York Bank; the Vice President of the Foreign Function having supervisory responsibility for operations; the Senior Foreign Exchange Officer of the Foreign Function; the Managers of the Foreign Department; the officer in charge, the Assistant Vice President, and the Adviser of the Research Department of the New York Bank; and the confidential files of the New York Bank as the Bank selected to execute transactions for the Federal Open Market Committee. of a member of the Federal Open Market 11. With the approval Committee or any other President of a Federal Reserve notice to the Secretary, any other employee Bank, with of the Board of Governors or a Federal Reserve Bank. The Committee reaffirmed by unanimous vote the authorization, first given on March 1, 1951, for the Chairman to appoint a Federal Reserve Bank to operate the System Open Market Account temporarily in case the Federal Reserve Bank of New York is unable to function. The following resolution to provide for the continued opera tion of the Federal Open Market Committee during an emergency was by unanimous vote: reaffirmed market operations only. *Weekly reports of open
In the event of war or defense emergency, if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secretary or Acting Secretary of the Board of Governors of the Federal Reserve System) certifies that as a result of the emergency the avail able number of regular members and regular alternates of the Federal Open Market Committee is less than seven, all powers and functions of the said Committee shall be performed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Committee, subject to the following terms and conditions: Such Interim Committee shall consist of seven members, comprising each regular member and regular alternate of the Federal Open Market Committee then available, together with an additional number, suffi cient to make a total of seven, which shall be made up in the following order of priority from those available: (1) each alternate at large (as defined below); (2) each President of a Federal Reserve Bank not then either a regular member or an alternate; (3) each First Vice President of a Federal Reserve Bank; provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of Federal Reserve Districts, (b) the President and the First Vice President of the same Federal Reserve Bank shall not serve at the same time as members of the Interim Committee, and (c) whenever a regular member or regular alternate of the Federal Open Market Committee or a person having a higher priority as indicated in clauses he shall become a (2), and (3) becomes available (1), member of the Interim Committee in the place of the person then on the Interim Committee having the lowest The Interim Committee is hereby authorized priority. action by majority vote of those present to take one or more members thereof are present, whenever vote for the action taken provided that an affirmative is cast by at least one regular member, regular alternate, of a Federal Reserve Bank. The delegation or President and other procedures set forth above shall of authority only during such period or periods as there be effective of seven regular members less than a total are available of the Federal Open Market and regular alternates Committee.
As used herein the term "regular member" refers to a member of the Federal Open Market Committee duly appointed or elected in accordance with existing law; the term "regular alternate" refers to an alternate of the Committee duly elected in accordance with existing law and serving in the absence of the regular member for whom he was elected; and the term "alternate at large" refers to any other duly elected alternate of the Committee at a time when the member in whose absence he was elected to serve is available. The following resolution authorizing certain actions by the Federal Reserve Banks during an emergency was reaffirmed by unan imous vote: The Federal Open Market Committee hereby authorizes Bank to take any or all of the actions each Federal Reserve set forth below during war or defense emergency when such Federal Reserve Bank finds itself unable after reasonable efforts to be in communication with the Federal Open Market Committee (or with the Interim Committee acting in lieu of the Federal Open Market Committee) or when the Federal Open Market Committee (or such Interim Commit tee) is unable to function. (1) Whenever it deems it necessary in the light of economic conditions and the general credit situation then prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Bank may purchase and sell obligations Federal Reserve of the United States for its own account, either outright under repurchase agreement, from and to banks, dealers, or or other holders of such obligations. prospective seller of obligations (2) In case any to a Federal Reserve Bank is unable of the United States representing such to tender the actual securities conditions resulting from the obligations because of Bank may, in its such Federal Reserve emergency, to such safeguards as it deems discretion and subject seller, in lieu of the accept from such necessary,
actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank stating in substantial effect that the seller is the owner of the obligations which are the subject of the purchase, that ownership of such obligations is thereby transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. (3) Such Federal Reserve Bank may in its discretion purchase special certificates of indebtedness directly from the United States in such amounts as may be needed to cover overdrafts in the general account of the Treasurer of the United States on the books of such Bank or for the temporary accommodation of the Treasury, but such take all steps practicable at the time to Bank shall insure as far as possible that the amount of obligations acquired directly from the United States and held by it, with the amount of such obligations so acquired together all other Federal Reserve Banks, does not and held by $5 billion at any one time. exceed actions above set forth shall Authority to take the time as the Federal Reserve be effective only until such again to establish communications with the Bank is able Federal Open Market Committee (or the Interim Committee), and such Committee is then functioning. By unanimous vote the Commit tee reaffirmed the authorization, at the meeting on first given December 16, 1958, providing for personnel assigned to the System Office of Emergency Planning, Special Facilities Branch, on a basis to have access to rotating the resolutions (1) providing for operation of the continued during an emergency and Committee certain actions (2) authorizing by the Federal Reserve Banks during an emergency. was unanimous agreement There be taken to no action should that
change the existing procedure, as called for by resolution adopted June 21, 1939, requesting the Board of Governors to cause its examining force to furnish the Secretary of the Federal Open Market Committee a report of each examination of the System Open Market Account. Reference was made to the procedure authorized at the meeting of the Committee on March 2, 1955, and most recently reaffirmed on March 2, 1965, whereby, in addition to members and officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made employee of the Board of Governors or of a available to any other approval of a member of the Committee Federal Reserve Bank with the President, with notice to the Secretary. or another Reserve Bank It was stated that lists of currently authorized persons Reserve Bank (excluding secretar at the Board and at each Federal personnel) had recently been ies and records and duplicating by the Secretary of the Committee. The current lists confirmed the custody of the Secretary, and it was were reported to be in to the Secretary at any time. noted that revisions could be sent It was agreed unanimously that should be taken at this no action time to amend the procedure authorized on March 2, 1955.
This concluded the consideration of the continuing authoriza tions of the Open Market Committee, and the Committee turned to a review of operations during the period since the meeting of the Committee held on February 8, Before this meeting there had been distributed to the members of the Committee a report from the Special Manager of the System Open Market Account on foreign exchange market conditions and on Open Market Account and Treasury operations in foreign currencies for the period February 8 through February 23, 1966, and a supplemen tal report for February 24 through 28, 1966. Copies of these reports been placed in the files of the Committee. have Supplementing the written reports, Mr. Coombs stated that the Treasury gold stock would remain unchanged again this week. Fund opened the month with a gold balance of The Stabilization roughly $80 million, with prospective sales during the month of at to the French, $19 million to settle the U.S. least $34 million and about $18 million the Gold Pool deficit for February, share of sales would just about transactions. Those for other scattered holdings. It was still hoped clean out the Stabilization Fund's as much as $200 million compelled to sell Russians would be that the imports during March and April, of gold to finance Canadian wheat reductions in to fend off further enable the U.S. and that might sales did not If the Russian stock until April. the Treasury gold
come through, the Treasury presumably would have to transfer $75 to $100 million from its stock to the Stabilization Fund before the end of this month. Mr. Coombs reported that strong buying pressure had continued on the London gold market, and that the Pool had been forced to put in a total of $78 million worth of gold since the beginning of the year. It was hoped that sizable Russian gold sales would relieve the pressure on the Pool's resources during the next two months or so, but thereafter the Russians probably would stay out of the market. As he had mentioned on previous occasions, he did not think the outlook in the gold market was favorable. He was apprehensive that serious trouble might be encountered in that area before the year was over, with possible repercussions on other markets. On the exchange markets, Mr. Coombs said, sterling had run into new troubles during the past two weeks. The Bank of England had had to give support to the rate each day last week, probably to a total of $50 million or so, and it was in the market again yesterday. However, yesterday the British authorities had let the rate slip below par. That involved some risk; whenever the rate moved below par there was the risk that selling pressures would cumulate. In his judgment, however, their decision to back away rather than to try to hold the rate was a wise one because market participants felt that with a British election in prospect a new
element of uncertainty had been injected into the market. A number of factors seemed to be involved in the difficulties for sterling. The U.K. trade figures for January were disappointing, although that perhaps was fortuitous; more seriously, the trend of wages and prices remained inflationary; and the expectations of an election, now scheduled for March 31, had further unsettled the market. Also unsettling was the discussion of a suggestion by a group of European and American economists that the margins for exchange rate fluctuations might be widened. That suggestion was disturbing because of fears that sterling might move to the lower range, and that such a development might be a limit of the wider prelude to devaluation. Mr. Coombs went on to say that the Bank of England began the month of February with net outpayments of close to $400 million, of which $290 million represented debt payments to the System and to the U.S. Treasury. During February, more than $300 million of fell due and, with the adverse shift in the forward contracts also a number of those contracts were apparently market atmosphere, sterling balances rather than settled by running down existing with dollars. Despite the fact that buying the sterling needed during the month to the of England's reserves benefited the Bank undertaken by the Federal of $100 million by operations extent of Italy, they approached New York and by the Bank Reserve Bank of
the month end with a prospective deficit of somewhat more than $250 million. Today Chancellor Callaghan was expected to announce that the British Government had taken into the reserves nearly $900 million of the British Government's portfolio of U.S. secu rities which had been progressively liquefied during the past year or so. That would serve not only to cover the February deficit, but would also add about $630 million to British official reserves. At the same time, the British Government would announce that the $750 million swap line with the Federal Reserve had been completely repaid. Mr. Coombs said that he would like to bring the Committee up to date on the progress being made at the Bank for International Settlements meetings in negotiating a new international credit to deal with the sterling balance problem. As package designed Mr. MacLaury, and he had mentioned at previous Committee Mr. Hayes, the general objective was to put together an over-all meetings, of which the U.S. share would be package of roughly $1 billion, the credit package provided last $315 million, to supersede The credit lines that had been September to the Bank of England. were due to reach central banks by most of the continental granted terms about the middle of March. At the end of their six months' was made in shaping up a BIS meeting, further progress the last acceptable to most of probably be technically draft which would
the European central banks concerned. Two of the European central banks, however, insisted that they could not participate in any new package until the British Government negotiated a backstop arrangement of medium-term credit from the International Monetary Fund or other sources, which would provide refinancing of central bank credits if the Bank of England should be unable to repay them at their final maturity. Meanwhile, Mr. Coombs continued, it was informally agreed that on March 15 the European parties to the September credit package would extend their credit lines for another three months, for the limited purpose of offsetting reserve drains occasioned but by liquidation of the sterling balances. In his opinion it was unfortunate that the new credit authorizations would be subjected to a more restrictive use than those of September. However, there might not be too much difference in substance because any future attack on sterling would, in all probability, be speculative down of the sterling balances. by a substantial running accompanied that no serious damage would He was inclined to think, therefore, U.S. Treasury were to pursue Federal Reserve and the be done if the part of their by informally restricting a roughly parallel course the Bank of England to use in financing combined credit lines to present moment, the balances. At the liquidation of sterling $1,070 million, comprised lines amounted to unused portion of those
of the Federal Reserve swap line of $750 million, a Treasury authorization of $200 million established last September, and the $120 million remaining under a Federal Reserve authorization for $200 million, also provided last September. He suggested that $400 million of the $1,070 million temporarily be earmarked for the specific purpose of offsetting drains on British reserves arising out of liquidation of the sterling balances. If and when the BIS proposal for a new credit package should become effective, the U.S. share of such credit assistance directed to the sterling balance problem would decline from $400 million to $315 million. Mr. Coombs said he suggested that the Committee proceed informally in the matter because the negotiations on the new credit package were still in process. It was not as yet clear whether the Basle decision to restrict use of the temporary new credit lines could be maintained. With British elections ahead, and with the possibility existing of a new run on sterling, the continental Europeans might find it necessary to take a less restrictive informally, the System could accommodate attitude. By acting situation without endangering its own itself to the present fluid position or that of the Bank of England. that his personal inclination would be Mr. Daane commented U.S. credit arrangements with the British as flexible to keep the and not to take the more restrictive attitude. as possible
However, he supposed that if the U.S. joined with other countries in a package that involved restrictions it would have to go along with them. Mr. Coombs remarked that if more restrictive terms were adopted and if the British wanted to draw on the credit lines, the Europeans probably would insist that their credits not be drawn on unless there was a pro rata drawing on the U.S. for the same purpose. Thus the initiative could be left with the British; even if the Committee were to place no restrictions on the use of System credits, the Bank of England would be compelled to restrict its use of them in order to draw on the European central banks. Mr. Coombs added that that circumstance provided an excellent example of the way in which the U.S. could find itself locked into situations by application of the principle of multilateral surveillance, which gave enormous bargaining power to small countries that might be inclined to take extremely conservative positions. Chairman Martin commented that the matter Mr. Coombs had raised was an extremely important one, and that it would be desirable for all members of the Committee to follow developments with respect to sterling closely over the coming weeks. Mr. Daane remarked that it was desirable, in his judgment, for the Committee to allow the Special Manager the maximum possible degree of flexibility to deal with the situation.
In reply to questions by Mr. Mitchell, Mr. Coombs said that the Bank of England's total use of its swap line with the System probably had amounted to about $2 billion. The Bank had twice drawn the full amount available and it had made a number of additional drawings of a few days each around month-ends. Of the $200 million authorized in September for System covered purchases of sterling, $80 million had been used. Last fall $30 million had been employed in direct support of the sterling rate. The remainder had been used last week, when the System bought $50 million of sterling from the Bank of England against dollars. Since the System had swapped the sterling with the BIS for lire, and had used the lire as part of the repayment of its swap drawing on the Bank of Italy, last week's transaction served the interests of both the System and the Bank of England. There was no risk exposure to the System in using the authorization in question, because the sterling acquired under it was fully guaranteed by the Bank of England. The authorization for covered sterling purchases did not specify any time limit but it was, of course, subject to review and modifica tion by the Committee. The System held somewhat less than $25 sterling in its working balances, but he million of uncovered to about $20 million in the next planned to reduce that amount week or so. In response to other questions, Mr. Coombs noted that the roughly $930 million. The September credit package had totaled
U.S. share, divided equally between the System and the Treasury, was $400 million, or somewhat over 40 per cent; other central banks, not including the Bank of France, participated to the extent of about $530 million. The new package under discussion totaled slightly more than $1 billion, of which the U.S. share of $315 million would be a little over 30 per cent; and the Bank of France might possibly participate. The terms being considered allowed for 3-month credits renewable for periods of up to nine or twelve months. Thus, they would be consistent with the Committee's oneyear outside limit on swap drawings, although they might call for a somewhat more generous interpretation of renewal possibilities within that limit. If the arrangements were completed, the System and the Treasury might reduce their authorizations for covered sterling purchases from the present combined level of $400 million Alternatively, the authorizations might be to $315 million. $315 million earmarked for the more continued at $400 million, with matter remained to be negotiated with the restrictive purpose. The Treasury. he thought the latter course--continuing the Mr. Daane said Mr. Coombs agreed. be preferable. $400 million authorization--would amount to cutting back former course, he said, would To pursue the of England at the instigation facilities to the Bank U.S. credit That, in his judgment, group of European countries. of a small
would be an unfortunate precedent, which might be followed by efforts to get other countries to reduce their lines of credit to the U.S. Mr. Swan asked whether the informal earmarking Mr. Coombs had suggested earlier would be for British drawings under the swap line or for U.S. covered purchases of sterling under the September authorizations. Mr. Coombs replied that to retain the greatest flexibility it might be best to relate the earmarking to the overall total of available U.S. credit lines to Britain--including the System's $750 million swap arrangement with the Bank of England, which was now wholly on a standby basis; the Treasury's $200 million authorization for covered sterling purchases, which was not now in use; and the $120 million remaining under the Committee's $200 million authorization for covered sterling purchases. From the technical point of view, however, he was anxious to keep available for market intervention for general purposes the authorization for covered purchases of sterling, since that could be done at the Under certain circumstances the Bank of System's initiative, hesitant about drawing on the swap line, and in England might be gave the general impression of defensive any case such drawings York Bank in the market were Operations by the New operations. they could be an extremely likely to be far more effective; powerful tool.
Mr. Mitchell asked whether an increase in the size of the swap arrangement with the Bank of England might be desirable. Mr. Coombs replied that he would prefer to see the size of some of the other swap lines increased first, because the line with the British was on the high side relative to others. In general, he thought the System's network, taken as a whole, was too small, considering the continuing growth of international trade and payments. It would be desirable to increase it by $1 billion or so. In reply to questions by Mr. Wayne, Mr. Coombs said he was not sure that an increase in the swap line with the Bank of England would have an adverse effect on the willingness of other central banks to extend credit to the British. It was true that some European central bankers thought the U.S. had been overly lenient in its dealings with the British and that it should have taken a firmer line. His own feeling was that a much more serious situation would have resulted had the U.S. followed such advice. He did not think the attitude of particular countries, such as France or the seriously damage the chances of negotiating Netherlands, would swap lines because the United States had increases in the System's power. One general difficulty at the a great deal of bargaining moment was that the whole international financial system was being subjected to formal review; many approaches were being considered,
of which swap arrangements were only one, and there was some tendency for action to be frozen pending the outcome of those discussions. Also, at present the U.S. was mainly focusing its bargaining power on the negotiations for increasing international liquidity through a collective reserve unit and expanded IMF facilities. that he thought it reasonable to draw Mr. Hayes commented a distinction between the size of the standby facilities the System extended to the Bank of England, which was a matter of public record, and the maximum amount of assistance the U.S. might be prepared to extend to the British under emergency conditions. He could conceive of circumstances in which the U.S. would be willing to provide additional credits on an ad hoc basis but not through an enlarged swap arrangement. Mr. Hickman asked whether there was any evidence that market participants were beginning to take short positions in sterling and, if so, whether it would be desirable for the System in the market to buy pounds. to intervene there was some indication that Mr. Coombs replied that forward contracts were using existing people who had maturing to settle them rather than buying spot holdings of sterling He recently had indicated to the Bank sterling for that purpose. prepared to buy sterling on a of England that the System was
covered basis, but the Bank had felt such action was not desirable at present. In his judgment their position was correct; the market was convinced that a sterling rate above par would not be realistic now, although no one could be sure what the equilibrium rate was. If the sterling rate began to slide, however, the System could step in. Chairman Martin noted that any further liquefication of the British portfolio of U.S. securities would involve an additional drain on the U.S. balance of payments. Mr. Wayne then asked whether the step Mr. Coombs had noted the British would announce about $900 million of their U.S. holdings into their today--taking have much impact on the U.S. balance of payments. reserves--would per cent of the impact had already Mr. Coombs replied that about 85 $500 million had shown up on the U.S. payments balance; been felt quarters of 1965 alone. in the second and third upon motion duly Thereupon, and seconded, and by unan made the System open market imous vote, in foreign currencies transactions February 8 through during the period 28, 1966, were approved, ratified, and confirmed. System's $100 million noted that the Mr. Coombs then mature on Bank would with the Netherlands swap arrangement standby of its approval the Committee's and he requested March 15, 1966, outstanding on No drawings were another three months. renewal for
this arrangement; indeed, for the first time in a long time no drawings by either party were outstanding on any of the System's swap lines. Renewal of the standby swap arrangement with the Netherlands Bank for a further period of three months was approved. Before this meeting there had been distributed to the members of the Committee a report from the Manager of the System Open Market Account covering open market operations in U.S. Government securities and bankers' acceptances for the period February 8 through 23, 1966, and a supplemental report for February 24 through 28, 1966. Copies of these reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Holmes commented as follows: A further sharp rise in long-term interest rates was the main feature of the period since the last meeting of the Committee and market participants appear convinced that more of the same lies ahead. the background of vigorous economic expansion Against and growing inflationary fears, a heavy calendar of corporate, municipal, and Government agency issues with a cautious investor response. met generally of higher yields and lesser availability Anticipation on in the year has tended to bring of funds later ahead of need, while making borrowers into the market periodically on the verge of investors--who seem succumbing to the temptations of the historically prevailing in many sectors of the high yields now to wait and see. market--inclined encountered some Government agency issues response to period. The poor during the difficulties and an certificates, participation the Export-Import
announcement of a $410 million FNMA issue scheduled for mid-March, reminded the market of the substantial extent to which the 1967 budget relies on agency asset sales. The poor response to the Export-Import Bank financing--$360 million placed out of a $700 million offering, despite a 5-1/2 per cent coupon--was not a true reflection of the state of the agency market. The Export-Import Bank participation certificate had few attractive features in present market conditions. The 18-month call feature made it unattractive for long-term investors, and the lack of marketability made it unattractive to corporations and others with liquid funds to invest. Given their tight money positions, commercial banks were understandably anxious to reserve lendable funds to serve customer relationships, rather than purchase a beneficial interest in loans made by the Export-Import Bank. System action to make the certificates eligible at the discount window was apparently not rated an important inducement. The FNMA participation certificates, on the other hand, will provide a more meaningful test for the market. There already appears to be a substantial interest in the longer maturities to be offeredprovided the price is right--but pricing of the intermediate maturities may be a problem. Other recent routine agency issues--a $340 million 9-month million 8-month FHLB issue--met FICB issue, and a $506 with only a lukewarm response despite a 5.15 per cent coupon. And a $250 million 14-month FNMA issue--priced cent--was a real success only because to yield 5.38 per large--and unexpected--demand from an international of The contrast of this at the last minute. institution with the earlier ease of placing most recent experience that serious rethinking of agency issues is a warning financing may be general approach to agency the the months ahead. required in market, yields in the In the Government securities or more in the past rose by 1/4 per cent 5-10 year area curve and in the yield the "hump" weeks, extending three cent on issues for to over 5 per bringing yields 1974. With Governments in the 20-year maturities out to cent, yields in 4-3/4 per area yielding around maturity well above 1960 Government list are the long end of the now close to their issues are while new corporate peaks,
previous postwar highs. Dealers have been extremely cautious, keeping their net positions in coupon issues close to zero or short and seeking to find a price level that will bring in buyers. There has been some bank selling, and some investors have made modest purchases as prices declined. While the market has been under pressure at times, most of it appears to have been professionally generated, and it has not been accompanied by panicky or urgent investor selling in any size. Thus, while rates have moved rapidly at times, the market has not been disorderly. While most market participants feel that the adjustment has further to go, the technical position of the market is strong. Favorable developments in the shape of a determined move in the fiscal policy area, or good news from Viet Nam, could still have a pronounced steadying effect on the Government bond market. The short-term area of the market has been some what steadier, although CD rates have inched higher, the three-month Treasury bill has touched 4.70 on several occasions, and the one-year bill auctioned six days ago went at an average of 4.95 per cent--1/4 per cent higher than a month ago and equivalent to 5.21 per cent on a bond yield basis. Despite a strong demand for short-dated Treasury bills from public funds and from the temporary investment of money either raised in the capital markets or awaiting investment there, dealers have been very cautious and have been working with minimal trading positions in bills. As a result, dealer financing needs have been reduced, and this has tended to reduce the strain on the money market banks and on other short-term markets generally. At the same time, however, Federal funds rates have been consistently at a premium, with the likelihood that continued pressure on bank reserve positions may result in an effective rate of 4-3/4 per cent on funds from time to time in the near future. to be in a relatively good position Dealers appear into the March tax and dividend period, but heavy to go at banks will intensify the runoffs of CD maturities seasonal pressures and some strain on short-term rates prospect in the next few weeks. is a likely Even keel considerations posed no handicap to over the past three weeks. open market operations had managed to dispose of the bulk of the Dealers
modest amounts of the new issues they had acquired in the February refunding by the payment date on February 15, although some buying of the new 5's by Treasury trust accounts was necessary to slow the decline of prices below par. During the last two weeks, both the new 4-7/8 per cent 18-month notes and the longer 5 per cent notes have performed well, with the latter up 2/32 over the period, in sharp contrast to the performance of the rest of the market. While the settlement of the February refunding posed no problems, operations were handicapped by a persistent tendency for reserve availability to exceed projections as float ran unusually high and required reserves fell short of seasonal expectations. Con sequently, in the weeks ending February 16 and February 23 action taken to supply reserves before the weekend had to be reversed later on. On one occasion reserve objectives had to be temporarily sidetracked to take account of the unsettled state of the market. During the period, the System purchased short-dated Treasury coupon issues for the first time since last September. Purchases of such issues had not been made since that time because of a succession of cir cumstances--including a desire to avoid action at a time where strong market feelings of developing upward rate pressures were being confounded by various official statements about interest rate objectives. Recently we have been seeking an opportunity to provide some portion of reserve needs by undramatic purchases of available coupon issues. Such an opportunity arose on February 17 when we had a substantial amount of reserves to supply at a time when there was a scarcity of Treasury bills available in the market. Our purchases, confined to 1966 and 1967 maturities, made some dealers think twice about their short positions some temporary short-covering, but and induced otherwise had no effect on the bond market. In the we plan to purchase additional modest amounts future of coupon issues from time to time when supplying while trying to avoid an impression that reserves, attaches to our purchases. special significance a few words may be in order about In conclusion, the Treasury's cash position in the weeks ahead. drains anticipated before Given the heavy cash mid-April, there is a mid-March and again before may want to take that the Treasury possibility
advantage of its temporary borrowing facilities at the Reserve Banks. At the moment, there is some uncertainty about the outlook, which is partly dependent on how much various agency asset sales may raise in the coming months. All in all, it appears that the Treasury's cash position is developing at least as satisfactorily as had been anticipated earlier. Given the pre-refunding of part of May maturities, direct Treasury financing problems do not at this moment appear troublesome over the balance of the fiscal year. Mr. Scanlon asked whether the Manager thought he had accom plished the firming action the Committee had decided on at its previous meeting. Mr. Holmes replied that a good start had been made, but he would consider the action to be still in process. Mr. Maisel noted that in his statement the Manager had referred several times to problems associated with Federal agency issues. Developments with respect to agency issues might dominate the Government securities market over coming months, since the Treasury was depending on them to build up its cash balance. Accordingly, there might be advantages if the System traded in Perhaps the continuing authority directive ought agency issues. to be reviewed to consider whether it should be revised to authorize did not know enough about the subject to such transactions. He but felt that consideration firm opinion at the moment, hold a possibility. More generally, he thought should be given to that to examine the question of the it would be useful for the staff the market for the System and between relationship appropriate on discussing the the Committee to plan issues, and for agency at a future meeting. subject
Mr. Hayes agreed that the subject of agency issues was important, and noted that the Treasury was studying it now. However, while the System might be able to offer the Treasury some advice on debt management aspects, he could see nothing to indicate that it would be desirable for the System to trade in those securities. Mr. Daane felt that exploration of the fundamentals of the subject would be worthwhile. But he agreed with Mr. Hayes that the System should not enter the agency issue market, particularly in view of the budgetary implications. Chairman Martin observed that the question Mr. Maisel had raised might well be considered in the study of the Government securities market that the System and the Treasury jointly were about to launch. There was general agreement with that suggestion. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions in Government securities and bankers' acceptances during the period February 8 through 28, 1966, were approved, ratified, and confirmed. The staff economic and financial report at this meeting (Copies of the of a visual-auditory presentation. was in the form charts have been placed in the files of the Committee.) of the review, presented by The introductory portion Mr. Brill, was as follows:
The time of year has come again for the staff to present to the Committee an annual exercise in which we dissect the economic model underlying the Budget and explore the financial implications of the projected spending and income flows. The purpose of these exercises is to gauge the pressures in financial markets one might expect to encounter in pitting a particular monetary policy against the pattern and level of demands for goods and services projected by the Administration. Today, however, our presentation must take a somewhat different tack. The economic world has been moving swiftly since early January, when the final touches were being put on the Council's model. Moreover, data now available for late 1965 reveal a surge in activity barely evident in the economic information available at that time. It would hardly profit to ignore these new data and new developments in setting forth to explore the financial outlook. We have, therefore, modified the CEA model, revisingin most cases upward--the projected spending and income estimates. It is this revised model that serves as the basis for our analysis of the financial outlook. First, however, we will review briefly the salient elements of the CEA model. Mr. Koch commented as follows: The Administration GNP projection for 1966 is centered on $722 billion, give or take $5 billion. In current dollars, the increase for the year is $46 billion, about the same as in 1965. With the GNP price deflator projected to rise about 1.8 per cent, the increase in constant dollars amounts to 5.0 per cent, with 5.5 per cent in 1965. Projected growth compared throughout the year, with the is fairly uniform fourth quarter projected at $739 billion. expansionary forces are In the CEA model, the main and business spending for Federal spending for defense purchases of goods and services fixed capital. Federal 1965 and 1966, mostly for rise $7 billion between rising rapidly, the proportion defense. But with GNP devoted to defense increases little. of GNP expected to advance almost Transfer payments are in at a $2 billion with Medicare coming $5 billion, rapidly thereafter. midyear and rising annual rate at
Grants-in-aid to State and local governments, included in transfers and other payments, also show a considerably larger rise than during 1965. Thus, in addition to the direct contribution to GNP from rising purchases of goods and services, scheduled increases in other Federal payments would support rising private demands. This expansion of Federal expenditures is just about matched by the growth of tax receipts. The first quarter bulge in receipts reflects increased social security taxes. Thereafter growth in receipts stems mainly from increased personal and corporate income. Consequently, the Federal deficit, as measured in the national income accounts, is estimated to remain not far from the level of late 1965 throughout most of The other major expansionary force in the Council model, business fixed investment, is projected to rise 10 per cent for the year, compared with 15 per cent in 1965. Increases in spending after midyear are quite moderate. At year end, fixed capital investment accounts for 10.6 per cent of GNP, little different from the share in late 1965. Over all, developments projected for 1966 in the CEA model are not far from a replica of those in 1965. The increase in defense spending is larger than last year, but this is about offset by a smaller rise in business fixed investment. The steady growth in State and local spending continues. Disposable income rises about as much as in 1965, and with the consumer spending rate remaining unchanged, consumption increases about the same amount as last year. substantial growth in total demands, further With is exerted on available resources, particularly pressure rise in the GNP deflator manpower. But the projected declining food prices the same as in 1965, with is about faster rise in industrial to offset a somewhat helping calculated to decline rate is prices. The unemployment for the year, compared of 3-3/4 per cent to an average with 4.6 per cent in 1965. the CEA projection was As Mr. Brill noted earlier, new data and new developments in late 1965; constructed perspective on the need for a new since then suggest data for the fourth The revised GNP the outlook. in demands than suggest greater strength quarter alone was evident earlier.
The staff's reassessment raises expenditures moderately in several key categories, and the over-all effect of this implies significant differences in the degree of resource utilization. Basically, we look for more business investment spending and larger State and local purchases. The effects of this on income also raise consumer outlays. We have not, however, departed from the CEA projection of defense expenditures. Like everyone else, we are aware of the uncertainty attaching to the ultimate magnitude and time pattern of the defense but military clairvoyance is not our forte. effort, The staff's projection of State and local purchases is significantly larger than the Council's. Pressures are strong for expansion of spending on a host of community services--from education to waste disposal. of these increased services will be A sizable volume through the scheduled increase in Federal financed Federal purchases are also shown as grants-in-aid. strongly, in line with the Budget message. increasing suggests a marked increase in Available evidence business fixed investment this year. In about a week, we shall have a new reading on business spending plans; this we have assumed continuation throughout pending the year of the expansion rate indicated in the earlier survey for the first half. Indeed, on the basis of a recently released private survey, our own estimate may prove too low. Projecting a slowdown after midyear, as in the CEA model, hardly does justice to the very expansive psychology now pervading the economy, nor to the underlying determinants of this type of spending. and profits are projected to Sales are rising rapidly, rise faster than GNP, although not as much as last year. is currently harder pressed than Manufacturing capacity late 1955, and new orders for machinery at any time since equipment are still mounting, as are unfilled orders. and by the fourth quarter, nearly 11 Thus, we expect that for by business spending cent of GNP will be accounted per on fixed capital. rose sharply late in 1965, Inventory investment of steel stocks. Continued despite rapid liquidation likely, in a setting for inventory are strong demands sales and growing prospects rapid expansion in final of delays, and price increases. of supply shortages, delivery
In absolute terms, projected inventory accumulation may appear high. Nevertheless, the stock-sales ratio is expected to remain at the 1965 level. Unlike other types of economic activity, prospects for housing starts are for some further decline. For the single-family component of private starts, underlying demographic factors will continue relatively neutral, and upgrading may be limited by further increases in building costs. The already higher level of borrowing costs will also be a factor whose effect may be felt increasingly as the year progresses. In the case of multi-family starts, which accounted for all of the year-to-year drop in 1965, a further downward adjustment is indicated. U.S. exports of goods and services are expected to increase rapidly this year, with demand conditions buoyant. However, U.S. imports will abroad generally also be rising rapidly, and net exports may thus be only moderately larger. An improvement of $800 the margin of uncertainty is million is projected, but of goods and services include military large. Imports expenditures abroad; these are expected to increase about $1/2 billion this year. Merchandise imports are not expected to rise as fast this year as last, mainly because steel imports further from the high 1965 level. should not increase Nevertheless, total merchandise imports are projected to rise as fast as GNP, and hence, as in 1965, to in relation to GNP than in any other remain higher year since the Korean War. for government spending and Increases projected generate a large rise in investment outlays would Disposable personal income consumers' after-tax income. and the projected increase is expected to rise rapidly, than in 1965. Gains in employment for the year is more are projected at the wage and salary disbursements and transfer payments 1965, and government rapid rate of late will rise sharply. total consumer spending this growth of income, With rise than last year, show a larger dollar is projected to percentage increase. but about the same last year from rate advanced The consumer spending a slight decline But in 1966 1964 level. the reduced rise is a much smaller in part because appears likely, autos and for year in expenditures this anticipated durable goods. spending on in total consumer hence
After 4 years of sharp increases, sustained high auto demand, rather than a large further increase, seems the more likely prospect. This assumption is consistent with the findings of the latest Census survey of intentions to buy. Spending on nondurable goods and services, on the other hand, is expected to increase in step with disposable income, and the decline in the over-all spending rate for 1966 would therefore be small. Summarizing the expenditure changes, the staff projection for the year is a GNP in current dollars of about $731 billion, 8 per cent above 1965, with a fourth quarter GNP close to $750 billion. Allowing for an increase of 2.2 per cent in the deflator, the increase in real GNP would be 5.9 per cent, almost a full point more than the CEA projection, and the largest increase of recent years. Mr. Partee continued the discussion, focusing on the implications for resource use and prices, as follows: With GNP growing rapidly, manpower demands will intensify this year. The supply of trained workers is already diminished, and substantial additions of younger workers and women to the labor force will be required. Bringing into employment many inexperienced workers will tend to offset the gains in output per manhour arising from the enlarging volume of new plant Thus, we would expect productivity growth capacity. to slow somewhat further from last year's reduced pace. The length of the workweek in the private economy, which is already high, should show little change. On these assumptions, civilian employment would to increase by 2.2 million from fourth quarter have fourth quarter, in order to produce the projected to the build-up of the armed forces is scheduled GNP. And to absorb an additional 300,000 men. To meet these very strong demands for manpower, force may expand by 1.9 million, about the total labor more than the long-term trend would suggest. 600,000 throughout the year, with the Unemployment would fall unemployment rate dropping to 3.3 per cent for the nearly a full percentage point below fourth quarter, the fourth quarter 1965 rate.
In recent months, wage rate increases have accelerated in many industries, as available supplies of labor have been reduced. Consequently, increases in average hourly earnings during 1965 were larger than from 1960 to 1964 and were generally above the guidepost. The largest gains occurred in such industries as retail trade and services, where average wage rates are low and excess labor supplies until recently had acted to limit wage advances. Increases in minimum wage rates were also a factor in raising wages in some of these industries in 1965. In manufacturing, wage gains generally have continued to be moderate and close to the guidepost. Here too, however, there has been some tendency for average wage increases to accelerate, reflecting higher overtime costs, selective upgrading of jobs and pay scales to reduce the incidence of voluntary quits, and more rapidly rising wages in the non-union sectors of manufacturing. The prolonged stability in unit labor costs in manufacturing since 1959 thus seems likely to give way, as direct and indirect wage costs come under pressure from intensive utilization of manpower resources and slower productivity growth. In the immediate months ahead, the degree of acceleration in the advance of wage rates should be moderate, because few major contracts can be reopened this year. Nevertheless, any increase in the advance of wage rates would tend to steepen the rise in industrial commodity prices already underway. Manufacturing capacity also is likely to be under sustained pressure. In January, the capacity utilization rate was about 92 per cent. This year, capacity is estimated to grow by 7.0 to 7.5 per centBut manufacturing output is much more than last year. to rise almost as much, so that the capacity projected utilization rate would remain around 92 per cent. In rate was reached in boom, a 92 per cent the 1955-57 late 1955. only one quarter--in environment of further rapid The projected in demands and strong pressures on labor, expansion conducive to somewhat should be capacity, and materials price increases this year. larger and more widespread are larger and more increases in costs But unless or unless Vietnam now seems likely, pervasive than in the acceleration buying sprees, inspire developments
the rise of industrial prices should be moderate. As a rough estimate, we would expect industrial prices to rise on average about 2.5 per cent this year, compared with the 1.5 per cent increase of the past 12 months. In contrast, prices of foodstuffs--up 10 per cent over the past year--are likely to turn down before year end, barring very unfavorable weather. The high hog prices of the past six months are stimulating recovery in production, and prices of hogs and pork could begin to fall as early as this spring. These prospective developments should limit the rise in the total wholesale price index, perhaps to about one-half the 4 per cent increase of the past 12 months. In terms of consumer prices, foods should reverse direction this spring or summer. Any decline in prices of foodstuffs, however, will be more than offset by further and larger increases this year in the nonfood categories. Prices of nondurable goods and services are expected to rise more in this year's stronger markets. And consumer durables prices are likely to rise somewhat, in contrast with last year's declines, which reflected mainly reductions in excise taxes. Turning now to financial implications, it seems clear that the increased spending contemplated in the staff's GNP model--a gain of 8 per cent in current dollars--could not occur without a significant increase in credit demands. Our financial projection seeks to assess the potential dimensions of the resulting credit flows, in order to gain some insight into the pressures that might develop in financial markets. The financial projection is to be interpreted in the light of two principal assumptions that underlie it. that the expansion in GNP shown First, it is assumed despite mounting pressures in here can be realized markets for credit portrayed in the projection. To the spending plans would be revised in response extent that the financial developments portrayed, the financial to pressures would themselves be affected. flows and market respect to monetary policy, we Second, with restrictive posture than in postulate a somewhat more growth in reserves and bank 1965--in terms of the GNP model suggests heightened deposits--because Without prejudging how restrictive price pressures. have assumed that growth of total policy should be, we
reserves would be about 4 per cent--compared with a bit over 5 per cent last year. Consistent with that reserve expansion, and given other aspects of the projection, we would expect a reduction in growth of the money stock to about a 3 per cent annual rate, the lowest since 1962, as the influence of rising interest rates partly offsets the public's growing demand for transactions balances. Growth in time deposits also is assumed to decline, with a less rapid expansion in negotiable CD's held by corporations the principal factor. Bank credit expansion, consequently, would slow to about 8 per cent for the year, compared with 10 per cent in 1965. Mr. Gramley continued the discussion, focusing on the implications of the policy assumption, together with the GNP model, for developments in markets for credit, as follows: With these assumptions in mind, we turn now to the credit flows consistent with the GNP model. Total funds raised are seen as rising nearly 13 per cent, to $81 billion in 1966, with most of the increase coming from Federal borrowing. Total Federal borrowing may be more than $9 billion this year, when planned sales of loan participation certificates and Federal agency issues are added to Treasury financing. Private borrowingalready large last year--is expected to rise, but only moderately further. In fact, the ratio of private borrowing to private spending would decline slightly in 1966. This is attributable partly to a slight decline projected for local borrowing, reflecting a larger increase State and than in expenditures. Also, consumer credit in receipts is expected to rise at about last year's rate--despite consumer spending--since auto a sharp increase in total to increase less rapidly than purchases are projected last year. The projected expansion of total funds raised is, larger than what the by the way, only moderately have implied. In that GNP model would Administration's of private spending would a less rapid growth model, have resulted in a smaller expansion of private credit, would have been somewhat but Federal borrowing
higher--because of lower tax receipts. On balance, total funds raised might have risen about 10 per cent, as opposed to 13 per cent in our projection. Corporate demands for credit are projected to rise substantially further this year, even though total private credit flows increase only moderately. The increase projected for corporate fixed investment and inventories is sharp, almost twice the expected increase in gross retained earnings. Consequently, external borrowing rises further from last year's already high level. This increase in corporate borrowing may take the form principally of an expansion in bond issues. Given the difficulties likely to be faced by banks in to meet all loan demands, growth in supplying funds corporate bank loans could scarcely be accommodated at than last year's. Consequently, we a pace much faster are projecting corporate bank loan expansion at no more than the high 1965 pace, with nearly all of the 1966 increase in borrowing hitting the security markets. bond market, as a result, is expected to The corporate be a major focal point of pressures in credit markets as the year progresses. The securities markets during 1966 must also absorb sharply increased marketings of Federal securities, including participation certificates. As a result, the projected growth in total funds raised is concentrated largely in security issues rather than projection calls for a slight decline in in loans. The and for little change in other loans mortgage borrowing, from the exceptionally high 1965 pace. nonetheless, will face The banking system, on available resources this year. heightened pressures total bank credit is noted earlier, growth in As But expansion in bank loans projected to slow down. to be as much, or a than mortgages is expected other little room for last year, leaving bit more, than other earning assets. expansion in banks to cut back sharply Consequently, we expect securities, and to acquisitions of municipal on their somewhat larger volume securities in liquidate Federal mortgages at They might also acquire than last year. slower pace. a somewhat bank earning assets of changes in This projection the ratio of increase in significant further implies a
bank loans to deposits, and banks would thus be likely to tighten their lending policies substantially further over the course of the year. The bank share of total funds supplied is projected to decline significantly in 1966, reflecting both the reduced growth rate of bank credit and the expansion in total credit flows. The share falls below that of the past 5 years, but banks would be supplying a much larger portion of total funds than during earlier postwar expansions, when inflows of time deposits to banks were small. The share of funds supplied by nonbank interme also is projected to decline in diaries, meanwhile, 1966. Inflows of savings to mutual savings banks and savings and loan associations may decline slightly further, under the pressure of competition from commercial banks and rising market rates of interest. there would have to be a jump in To fill the gap, supplied directly to credit markets the portion of funds the nonfinancial public--that is, by businesses, by and local governments, and especially households. State taken a substantial boost in In the past, it has bring these investors into security interest rates to markets in volume. Evidence from past periods of monetary restraint to the orders of magnitude that provides clues as involved in such an adjustment of interest might be credit flows indicated and the policy rates. Given the it seems plausible that late assumed in the projection, Treasury bills may be 50 basis in 1966 rates on 3-month or so above current levels. At these rates, points once again encounter difficulties in banks would present Regulation Q ceilings. attracting CD's under might rise a little Yields on 3-5 year Governments especially if the Treasury faster than those on bills, much debt shortening by offering seeks to prevent too continues to be inhibited issues, and intermediate-term 4-1/4 per cent securities by the from issuing long-term ceiling. would likely be under rates of interest Long-term rates probably pressure. Mortgage continuing upward the heavy commitment gradually, given would adjust upward market, although lenders to the mortgage of institutional become significantly terms would undoubtedly other mortgage could move yields, however, Municipal more restrictive. bank demand. response to reduced in up substantially
Yields on corporates would also rise sharply in response to a swelling volume of flotations, and sometime during the year we might see 6 per cent rates even for top quality issues. At these rates, corpora tions would be forced to reconsider the desirability of financing investment through capital market issues--as opposed to other sources of finance--and also to reconsider investment programs. Outflows of private capital should be held down this year by tighter domestic credit conditions, working hand-in-hand with voluntary restraints. But the net outflow of U.S. private capital was cut back very sharply last year, partly as the result of a repatriation of liquid funds that is unlikely to be repeated. Consequently, no further cut back in net outflows is projected--instead, some increase seems likely. Direct investment outflows this year are likely to be held below last year's level by the Commerce Department's voluntary program, but they will be at a higher rate than in the second half of 1965. A year-to-year reduction of about $300 million is projected; this would be consistent with a $700 million cut in terms of the Commerce program, which employs a somewhat different measure of direct investment abroad. Other outflows of U.S. capital--including bank lending, transactions in foreign securities, and movements of liquid funds--are projected at about the same rate as in the second half of 1965, somewhat above the average for all of last year. The concluding part of the staff presentation was given by Mr. Brill, as follows: to the policy implications of the Before turning let me stress again the foregoing analysis, particularly at involved in projections, uncertainties as rapidly as ours when the economy is moving a time few months. The growth projected has been in the past but we could be underestimating in GNP is substantial, that is significant for ahead by a margin the expansion policy purposes. resources suggested the pressure on available Given be underestimating the the projection, we could also by pushing on prices. Certainly, our strength of factors
projection suggests stronger upward pressure on prices this year. But barring a wave of scare buying by consumers and businesses, or further escalation in Vietnam, the potential price rise doesn't appear to be of 1955-56 proportions. What appears more likely is some moderate acceleration of the rise in the industrial commodities index, perhaps to a rate of about 2-1/2 per cent, as against 1-1/2 per cent over the past 12 months. The index for all commodities would increase less, because of the expected drop in food prices. The equivalent, in terms of the GNP deflator, would be a rise of somewhat less than 2-1/2 per cent. But for international reasons particularly, any increased pressures on industrial prices would be unfortunate. Merchandise imports already are very high, and military spending abroad is increasing. Outflows of capital for direct investment, though projected to decline in 1966, will remain large. Altogether, our balance of payments position seems likely to remain troublesome. Would the degree of restraint postulated in our financial projection be sufficient to check the advance of spending and prices? Given the present state of knowledge, we must still rely heavily on intuitive to the strength and timing of responses to judgments as monetary policy. My own judgment is that a constraint on reserve growth this year to 4 per cent would raise interest rates high enough to begin cutting deeply into private demands. In fact, if additional fiscal policy actions were taken to slow the expansion in private spending, the projected degree of monetary restraint might even prove over time to be excessive. How rapidly should this degree of restraint be There are advocates of a rapid and dramatic achieved? monetary action, one that might bite quickly into spending plans and might, at the same time, unblock fund-flows by assuring investors that interest rates had attained peak levels. Recognizing merits to this argument, I still find myself favoring gradual intensification of restraint. First, the pace at which long-term interest rates have been rising in recent weeks borders on the precipitous. Financial markets are taut--indeed, It might be well to pause a bit and see how unsettled. the economy adjusts to so sharp and extensive a change
in borrowing costs and asset values. Second, investor attitudes are now strongly shaped by Vietnam uncertainties, and these attitudes would not necessarily be modified by a dramatic monetary action, whatever explanation accompanied it. These factors, plus our inability to pinpoint the desirable degree of restraint, argue to me for a series of cautious moves, rather than for a large, rapid or dramatic action. Translating this general policy stance to specific operating targets, we may note first that total reserve growth thus far in 1966 has been somewhat above the 4 per cent figure for the year assumed in the projectionprincipally because of an increase in reserves to support growth in Treasury balances. The money stock in January and February together grew only a little faster than the projected 3 per cent rate, although some increase in the expansion rate of money may occur in the weeks ahead, since Treasury deposits are projected to decline. Thus far, time deposit growth has been much slower than the projection given here. To stay on the course of reserve growth assumed in the projection would seem to indicate the need to move somewhat further in the direction of lessened reserve availability, perhaps to a range around $200 million for net borrowed reserves. Over the next few weeks, pressures on bill rates resulting from that course of action might arise, but probably would not be severe, because dealer inventory positions are relatively low and investors still seem to be disposed to keep their portfolio maturities short. The 3-month bill might thus move in a range between 4.70 and 4.80 per cent. But interest rates in bond markets are already moving up sharply, and tighter bank reserve positions would accentuate that movement, particularly in light of the burgeoning calendar of new corporate and municipal offerings. Given the present unsettled condition of the bond markets, postponing a significant deepening of the net borrowed reserve target for three weeks or more may be more appropriate. Even with net borrowed reserves averaging near $150 million, continued upward pressure on long-term rates can be expected, but Treasury bill rates probably would show only a moderate further adjustment.
Mr. Ellis asked if Mr. Brill would explain the background for the staff's projection of inventory developments. Mr. Brill said that the staff estimated that the first quarter rise in inventories was likely to be at a rate close to that of the fourth quarter. The large fourth-quarter increase had been a surprise to everyone, particularly since steel stocks were being liquidated rapidly then. Moreover, the increase now shown in the published figures for the fourth quarter was likely to be revised upward again by a significant margin. In this context the increase projected for the first quarter might be considered moderate, given the turnaround in steel, the general ebullience in the economy, and the probable increase in the price component of the figures. Some of the efforts to build stocks might fail, but the short-fall was not likely to be great. Daane asked whether the staff thought an Administration Mr. announcement of further fiscal action would have a substantial in quieting present expectations. effect effect would depend on the Mr. Brill remarked that the modification of the investment action announced. A type of fiscal on the forces have a bigger impact for example, might tax credit, upward thrust to the economy than that were providing the main a general tax increase. would his judgment any He added that in Mr. Holmes agreed. impact on have a large policy would a firmer fiscal steps toward
expectations in financial markets. Fiscal policy was an area of great concern to market participants, who were focusing on the projected demands on capital markets. Chairman Martin then called for the go-around of comments and views on economic conditions and monetary policy, beginning with Mr. Hayes, who made the following statement: The business situation and outlook remain very strong, with the Vietnam buildup a major contributing factor. The most disturbing feature of the economy at present is the growing evidence of inflationary As recognition of these pressures and worry pressures. inflation are becoming more widespread, additional over are being generated. The high rate of pressures inventory accumulation in the fourth quarter of 1965 a danger sign, and this accumulation is probably was continuing. We can hardly view with equanimity the 3.6 per cent rise in the wholesale price index over the past year, or the 5.8 per cent annual rate of increase in the three months through the end of January. While the rate of increase in industrial wholesale prices has been less, it does show signs of acceleration. The entire price picture is disturbing. Balance of payments statitstics during most recent weeks have made better reading than for some time past. Nevertheless, the outlook for the year as a whole is decidedly cloudy. On the one hand export prospects appear to be reasonably good, as long as supply bottlenecks and price pressures do not undermine our competitive position. But much higher imports, military outlays, and tourist expenditures are also in the offing. In the capital area, new foreign security issues have been running at a high level; fortunately, banks have kept well below their lending limits under at least in part the voluntary restraint program, because of heavy domestic credit demands. The rise in levels has decreased the spread U.S. interest rate foreign rates, with beneficial between domestic and dollars. Balances held on private holdings of effects U.S. banks in their head offices by overseas branches of $1,776 million on February 19, reached a record total of since the year end. up $450 million
As for credit developments, the growth in bank credit and in a number of related liquidity indicators appears to be moderating in February, after an exceptionally rapid advance in January. While loan demand continues very strong, it is possible that the banks are now coming under sufficient liquidity pressure to have tightened loan policies to the point at which the actual rate of bank credit growth is responding. Loan-deposit ratios since late 1965 have not been advancing as fast as before, and bankers may now feel that they are close to some limit which it would be unsafe to exceed. Also, many bankers report that their holdings of U.S. Government securities are about as low as they would like to see them go, given their liquidity requirements and their needs for collateral on public deposits. Liquidation of municipals is inhibited by reluctance to incur significant capital losses. Finally, the banks are finding it very hard indeed to attract additional CD money, in spite of an advance in CD rates that has moved much faster than in the periods following earlier changes in Regulation Q. Apparently this difficulty in attracting time deposits may be attributed to the rapid growth of the economy, with the implied need for transactions balances, plus the rise in capital outlays relative to corporate cash flows and liquidity. In any event, a special survey (made at the Board's request) of lending policies and bank resources at selected Second District banks showed virtually all banks embarked upon some sort of program to restrain loans in the face of above average-to-unusually strong demand; and this restraint has been stepped up in some banks in the last few weeks. Yet we cannot be sure that the current degree of monetary policy restraint will an adequate slowdown in bank credit growth. produce Several large New York banks have indicated that they should be raised to assist in believe the prime rate their rationing process; but for the time being they fears of political reactions. are restrained by with inflation a real and It seems to me that, Government program is present danger, a coordinated of the dollar for to preserve the integrity needed reasons. This would as well as international domestic the wages and cost front holding the line on involve of fiscal and monetary policy. and a close coordination as to to be much uncertainty there seems Unfortunately
whether, and how soon, fiscal policy will play a significantly restraining role; but since it is clearly undesirable to place too much of the burden on monetary restraint alone, we are probably justified in moving rather cautiously in the hope that the Administration will decide on more restrictive tax and spending policies. Certainly the important role assigned to the sale of assets in the 1966 and 1967 fiscal-year Federal budgets is placing a much greater strain on interest rates than the size of the deficits alone would suggest. A second reason for our moving slowly is to give a little more time to evaluate the effect of previous policy moves on the rate of bank credit expansion and to try to sort out exaggerated expectations from the prospective balance of demand and supply factors. Under these conditions, it would seem to me unwise to contemplate a further rise in the discount rate or in Regulation Q ceilings at this juncture, and by the same token we should avoid for the time being such a sharp increase in open market pressures as to make a higher discount rate virtually inevitable. The time may perhaps be approaching when strong overt moves will be needed in the areas of both fiscal policy and general monetary policy. We should not rule out the possibility--particularly if fiscal policy moves are not forthcoming--that a supplemental voluntary domestic credit restraint program may be required. However, there are many undesirable features in the last-named type of approach, and it should not, I believe, be adopted until other more normal measures have been fully utilized. For the near term, I should think the Manager should be instructed to continue the policy agreed upon at our last meeting, i.e., to seek a gradual reduction in reserve availability. To me this might point to net borrowed reserves centering in the $150 to $200 million can be accomplished without too rapid range, if this additional rate adjustments. Actually, it seems likely that the market has already discounted such a move, and thus it would not in itself necessarily lead to upward pressures on the Treasury bill ratesignificant although there will be seasonal pressures on short rates in the weeks ahead. The proposed policy on reserves could push the Federal funds rate up more frequently per cent, but this would not be a cause for to 4-3/4 concern.
Since I am really advocating continuation of the gradual reduction in reserve availability which was sought at the last meeting but not completely achieved to date, only a modest change in the wording of the directive is required, and the staff's proposed alternative B seems quite appropriate.1/ Mr. Ellis observed that one of the embarrassments of prosperity was the danger of having to forego the benefits and privileges of special programs designed to assist distressed areas. New England was just about to be designated as eligible for a Regional Action Planning Commission, under the terms of the Economic Development Act. Such designation had been threatened, however, by the disturbing prevalence of prosperity. New England unemployment (seasonally adjusted) fell to 3.6 per cent in January compared to the 4 per cent national average. Declines occured in all six States, reaching a low of 2.1 per cent in New Hampshire. Apparently the designation was based more on long-term data, however, so New England was to have the advantage of being classified along with Appalachia, the Ozarks, and upper Michigan in qualifying for the program. Extensive Federal funds were to to support economic development research and planning be available area, and regional levels. at the community, The leading indicators covering New England business Mr. Ellis reported. suggested continued expansion, prospects by the staff are appended draft directives suggested 1/ Alternative to these minutes as Attachment A.
Initial returns from the Boston Reserve Bank's capital expen ditures survey were very bullish. Construction contract awards during the most recent three months averaged 4 per cent ahead of last year. Purchasing agents continued to report a two-to-one preponderance of upward trends in new orders to manufacturers. District banks reported a continued high level of loan demand, in excess of normal seasonal patterns, Mr. Ellis continued. For the first time some of the banks reported that they were rejecting acquisition loans and many reported that they were taking a posture of being less-eager lenders. Their attitude toward continued active participation in the home mortgage market was viewed as an important factor in determining whether mortgage rates would rise further in New England. A sharp inflow of time and savings deposits in the past year and currently had encouraged the weekly reporting member banks to increase their real estate lending in the month by 17 per cent. At reporting Boston mutual savings banks withdrawals exceeded new deposits during January, but interest credited resulted in a new deposit increase. Withdrawals in January exceeded last year's experience by one-third. As a consequence, virtually out of State from the large mutuals. Only no money was flowing five of the ten largest Boston mutuals had raised their rates 6, and only two of those five paid as much as since December 4-1/2 per cent on special savings.
1 / Mr. Ellis thought that both the green book and chart presentation documented the prevalent consensus that the major threat to a sustained prosperous economy was the strengthening of inflationary pressures. To the expanding demands from government, business, and consumers, must now be added the incremental effects of inventory demands. It was necessary to anticipate that decisions by all of those consuming groups would be increasingly affected by changed price expectations. To the extent that the wage guidelines were exceeded, those demand pressures would be supplemented in their inflationary impact by wage-cost pressures. Despite the widespread recognition of strengthening inflationary pressures, Mr. Ellis said, there did not seem to be a matching determination to reverse the thrust of fiscal policy. Present programs seemed to call mainly for a lessened expan sionary posture. At the same time, there was a general consensus that monetary policy must and would do its part in fighting people feared the System would act inflation. But, while some and bring the economy to a halt and downturn, others too abruptly Quite obviously the search had to feared it would be too timid. be for a "middle course." The report, "Current Economic and Financial Conditions," 1/ by the Board's staff. prepared for the Committee
In Mr. Ellis' judgment, the Committee had launched a middle course at its previous meeting by deciding to moderate growth in the reserve base, bank credit, and the money supply by seeking a gradual reduction in reserve availability. The results had appeared tentatively in slightly higher money rates, member bank borrowings, and net borrowed reserves but, as the Manager had reported, the move was still in process. With the Committee having embarked on that policy course, the critical question became one of how to define and execute a gradual movement. One way was to consider a longer time interval and time the increments of action accordingly. For example, the Committee might take, as a June 1 target, a net borrowed reserve position averaging $300 million, plus or minus to be achieved by lifting the target $50 million $50 million, for three months. Depending on conditions and per month action could be expected to yield a higher expectations, that and interest rates. Such a development level of borrowings rate increase of 1/4 per might then be confirmed by a discount rely on gradual and an intention to cent, thereby reaffirming sensitive stage in the economy's incremental moves at this evolution. as his objective, Mr. Ellis Taking such a course of action with exclusion of directive quite appropriate, found the present operations should continue to Treasury financing; the reference
to be conducted "with a view toward a gradual reduction in reserve availability." He would classify alternative B of the staff drafts as calling for no change in a policy which was in process of firming. Mr. Irons reported that conditions in the Eleventh District reflected the same sort of expansion and inflationary pressures in almost all areas that were seen in the national economy. Employment continued to rise and labor shortages were becoming increasingly apparent; the problem was immediate, and future. The unemployment rate was about at the not in the minimum, ranging between 3 and 3.5 per cent. District production continued to expand, with nondurable industrial manufactures up and durables showing relatively little change, and with a rise in minerals output reflecting increased production of petroleum. Sales of new automobiles were strong, store sales, which were up 9 per cent from a as were department conditions were particularly favorable year ago. Agricultural at this time. figures continued that District financial Mr. Irons found demands and the relatively the strength of credit to reflect banks had been very large of banks. District illiquid position weeks, with net the past four funds during users of Federal in one recent week. almost $1 billion running up to purchases
Bankers were trying to be restrictive in their loan policies, especially on loans that did not relate to the production of goods. But they still found loan demand extremely strong. Mr. Irons commented that the national economic situation had been covered adequately in the chart presentation and there was no need to review it in detail again. Briefly, it was evident that aggregate demands had become excessive; increases in defense spending, business fixed investment, inventories, State and local government spending, and consumer outlays were all putting pressure on markets for goods and on financial markets. The most desirable means of cutting back aggregate demands at present, in Mr. Irons' judgment, would be a positive, strong fiscal policy move in the form of a tax increase of some type. He was not sure that monetary and credit action could bring about the desired results without the assistance of fiscal policy. Nevertheless, in the absence of fiscal action it was up to the Committee to do what it could. with the comments made earlier that the Mr. Irons agreed moving toward the objective decided upon at the Desk was still previous meeting, and he favored continuing the policy adopted borrowed reserves might be then. In the coming period net the $150-$200 million range, with an deepened gradually to
attempt made to avoid any operations that might stimulate sharp, appreciable further increases in interest rates. He would very much hope that short-term rates would not increase so much relative to the discount rate that the System would be almost compelled to raise the discount rate again. With a gradual movement of net borrowed reserves to that range the bill rate might go to 4.70 per cent or a few points higher, and the rate on Federal funds might frequently be at 4-3/4 per cent. He hoped rates would not move beyond those levels. He also hoped that fiscal policy actions that would have a more direct effect on the demand situation would be taken. He did not consider the present to be a time for dramatic monetary policy action; there uncertainties in the picture. Nor would he want were too many monetary policy recommendation that involved projections to make a for several months into the future. The existing uncertainties on appropriate monetary policy should suggested that judgments basis for the time being. be made on a short-run for residential construction Swan reported that except Mr. continued to District economy of the Twelfth the various sectors trends were, if anything, strength. January employment reflect States than in the in the Pacific Coast somewhat stronger rate declining three whole, with the unemployment country as a There was another to 5.1 per cent. point of a percentage tenths
substantial addition to aerospace employment in the month, although it was a little less than the December gain. Estimates of future labor requirements by major firms in the District indicated further significant employment increases ahead if the firms were able to find the workers. The District banking picture was much the same as elsewhere in the country, Mr. Swan said. In the three weeks ending February 16, the increase in loans at weekly reporting banks was more than offset by reductions in securities holdings. Commercial and industrial loans expanded, but by less than in the comparable year. Savings deposits continue to decline, as period of last they had fairly consistently thus far in 1966. However, other time deposits increased further. District banks continued to be funds on a rather substantial scale. net buyers of Federal With respect to policy for the next three weeks, Mr. Swan with Messrs. Hayes and Irons as said he was in complete agreement a very gradual further implementation of to the desirability of previous meeting, and he favored a net the decision made at the in the $150-$200 million area. borrowed reserve target somewhere out, to maintain some reasonable rates As Mr. Brill had pointed nonborrowed reserves, it probably would of increase in total and to move slowly to a somewhat lesser degree of reserve be necessary encouraged by the reduction in the growth availability. He was
rates of aggregate reserves in February, even though so far it was only a one-month development and he did not know the nature of the lags involved. Finally, he agreed that this was not the time for an overt or major action, either in terms of reserve availability or a change in the discount rate. Mr. Galusha commented that recent economic statistics for the Ninth District paralled those of the nation. It was important to note that every indication was for the continuation of livestock prices at present high levels. Numbers of cattle had remained relatively constant, which would assure continued price pressures. The present national economic outlook appeared to require tightening of monetary conditions, Mr. Galusha some slight continued. Possibly, further increases in interest rates and further credit terms could be achieved without a change in the firming of reserves. If so, fine; but, if not, then level of net borrowed He would, however, stress some modest change should be effected. not seem to be the time for a the word "modest." Now did change in monetary policy. dramatic, well-publicized had several reasons for that belief. First, Mr. Galusha intelligence was not monotonously the current flow of economic Quite obviously, too much should not and overwhelmingly bullish. and auto sales figures, nor of the be made of the latest retail
latest survey of consumer buying intentions. But perhaps those bits of information should give the Committee slight pause, modestly corroborated as they were by the reappearance for the first time in months of precautionary statements, however discreetly expressed, by a few business leaders. Secondly, there had been a good deal of concern expressed about the condition of financial markets. Although he did not fully understand the bases of that concern he was willing to defer to those with greater experience in the ways of financial markets and to regard the concern as another reason for the wisdom of making haste slowly. To a comparative newcomer, the market appeared to be still beset by a number of disruptive forces which seemed unpredictable both in timing and scope. The present would appear to be one of those times when the Committee had to be reactive rather than active. Mr. Galusha's final reason for wanting to avoid a dramatic change in policy at the present time was also, in his the most important. It was simply that such a change opinion, reduce chances for a tax increase later this year. could sharply Yet it was very much in the interest of world economy, the U.S., the Federal Reserve itself, that aggregate demand be and, indeed, curbed to the extent necessary not by further monetary restraint but by an increase in tax rates. It was not reasonable to assume
that whatever the near-term future brought there would be no new Administration tax bill, or that a tax increase could not be got through Congress. The Committee could, he thought, be more confident than was possible a few weeks ago that a tax bill, if needed, would be forthcoming. Mr. Galusha felt he could not be as specific as Mr. Ellis had been regarding the appropriate course of action over the next few months. Perhaps the Committee should be giving some thought as to how it should act if, a few weeks hence, the future promised a GNP level for 1966 of, say, $735 billion and contained tax increase. It might be useful to insufficient hint of a speculate whether, with such an outlook, a gradual tightening of monetary conditions--the use of open market operations to push interest rates up gradually--would be best. It might be better obvious political risks and follow a at that time to run certain course, possibly increasing discount rates again more dramatic ahead of the market or increasing reserve requirements. Actually, opportunity both to near future might present an excellent the requirements, which cried for alter the structure of reserve his District, and to tighten monetary conditions in attention in a dramatic way. however, the issue of whether to move Perhaps fortunately, or dramatically was for the future, Mr. Galusha said. gradually
At the moment, it would seem, prudence dictated a decidedly gradual tightening of monetary conditions. Accordingly, he favored alternative B of the staff's draft directives. Mr. Scanlon observed that businessmen and bankers in the Seventh District were convinced that manpower and productive facilities were being utilized at practical capacity. Demand for most types of goods, especially durables, was strengthening further. Demand for steel from all user categories continued to were the highest relative to current sales rise. Auto inventories since early 1961, and there had been more than seasonal weakness in used car prices; nevertheless, confidence was high among industry leaders that output and sales of both cars and trucks would equal or exceed last year's records. Recent evidence suggested that loan demand had continued to be basically very strong in most parts of the District and was expected to remain so. As to policy, Mr. Scanlon would like to see the Manager continue the policy adopted at the Committee's last meeting but not yet completed. He would favor alternative B of the draft directives. However, he would change the word "emergence" to in the first-paragraph reference to inflationary "strengthening" pressures, thus making the phrase read, "to resist the strengthening of inflationary pressures."
Mr. Clay commented that the basic question before the Committee was the ability of the national economy to meet the demands being made upon it without creating a serious price inflation problem. While the price record of this business upswing generally had been very good, particularly when weighed against the economic growth achieved, the present situation was a much more precarious one. With military expenditures imposed upon civilian spending, the pace of expansion was very rapid at a time when the room for growth had become more limited. In addition, expectational factors appeared to have become of considerable importance in accelerating demands for goods, such as in business inventory accumulation. Upward price movement had somewhat more than earlier. In the tighter situation increased now prevailing in the economy, further price pressures appeared highly probable. circumstances, Mr. Clay said, monetary policy Under those toward restraining the growth in should make me its contribution services that was output of goods and demand to the aggregate problem. On the creating a price inflation attainable without policy should provide also meant that monetary other hand, that to finance the national economy's reserves in sufficient volume lead to that result of action would Just what program growth. the need for further determinable. Accepting was not so readily
restraint, the proper course at this time would appear to be a reduction in the degree of reserve availability, approached cautiously so as not to create avoidable disturbances in the money and capital markets. Although tightening of reserve availability would put upward pressure on interest rates, Mr. Clay felt this should not be the aim of further monetary restraint. Particularly, it would seem desirable to avoid such upward pressure on interest rates as would call for another increase in the Federal Reserve discount rate at this time--granting that the pursuit of that policy might lead to a discount rate change later. Carrying out justifiably the program in that way would provide further opportunity for evaluating the economy's performance as well as additional knowledge of the course of fiscal policy. Clay's opinion the net borrowed reserve target In Mr. set at $200 million, with recognition that the Manager might be find it feasible to attain that goal within the might not already mentioned. The money and capital markets constraints to further upward movement in yields. continued very sensitive open market operations would be increased by The impact of such of business firms and commercial banks at the reduced liquidity this stage of the business upswing. Moreover, the mid-March seasonal pressures would need to be taken into account. It
also remained to be seen what would be the effect of further reductions in reserve availability upon market expectations. The draft economic policy directive, with alternative B as its second paragraph, appeared satisfactory to Mr. Clay. Mr. Wayne said that the productive facilities of principal Fifth District industries apparently were being utilized about as fully as the availability of labor and materials would permit. The resulting pressures were reflected in reports of price and wage increases, which were reaching the Richmond Bank with increasing frequency. Furthermore, unfilled orders, which had been unusually large for many months, continued to rise. Upward pressures were particularly strong in textiles, where recent trade reports had attributed maintenance of a considerable measure to "industrial statesmanship." In the Reserve of price stability Bank's latest survey, business optimism appeared to be rising again from an already high level, and manufacturers on balance increases in orders, employment, wages, and reported further prices. A spokesman for an aluminum company which had headquar ters in the District and recently announced a substantial program of expansion, said that the national supply might increase by some six per cent this year but not until the second half. Meanwhile, orders were already at new highs, requiring temporary use of form of nonprice rationing. Among the District's weekly some mild
reporting banks, business loans rose more than seasonally in the four weeks ended February 16 and were considerably stronger than in the nation as a whole. On the national front, Mr. Wayne was in general agreement with the analysis of the staff as presented in the green book and in the chart show this morning. In the present situation, it seemed to Mr. Wayne that it would be appropriate to continue the policy the Committee adopted at its last meeting of a gradual reduction in the level of reserve availability. Reserve projections for the next few weeks indicated that that could be accomplished by reducing the rate at which reserves were supplied without the necessity of any actual absorption of reserves. He would be reluctant to try to project policy beyond the next three weeks. Alternative B of the draft directives represented, as he saw it, a continuation of the policy objective adopted at the Committee's last meeting and was acceptable to him. Mr. Robertson then made the following statement: Both the reports of current developments and the staff's projection of the future convey the picture of a business expansion under more and more upward pressure. Investment in inventories and fixed capital is moving up at what appears to be an unsustainable rate, price increases are becoming more pervasive, and our vulnerability to a substantial degree of price inflation is mounting.
This picture could be altered sharply, of course, for example by a major de-escalation of the war in Vietnam and a change in public psychology. But this eventuality seems too uncertain to count on. Consequently, we need appropriate stabilization policies to deal with the more likely alternative of growing rather than declining pressures upon prices and resources from this source. To be explicit, absent any new stage of fiscal restraint, monetary conditions will probably have to be tightened further. Just how far and how fast monetary firming might appropriately proceed at this stage can be a matter of debate. The evidence reported for this meeting suggests that a good bit of monetary tightening is already well under way. And I suspect some people will soon be raising questions as to how much more pressure the banks and the money and capital markets can stand without starting to become disorganized. Nonetheless, I would not want to hang our policy on market rates and terms alone--or even primarily. Given these circumstances, and considering the tax and dividend date strains lying just ahead, I think it would be wise to continue, slowly and cautiously, the tightening of reserve availability. This I gradual would like to see accomplished by slowly deepening the net borrowed reserve target, thereby forcing banks to borrow somewhat more at the discount window or to expansion of credit. A change in the curtail the rate is not called for at this time. discount policy intent clear, let me say that I To make my net borrowed reserves averaging would like to see same time, I would like $150 million. At the around net borrowed reserves be permitted again to suggest that on either side of to as much as $100 million to range up upon the accompanying strength $150 million, depending This would mean dropping of bank deposit expansion. reserves turn out to million, if required toward $250 than expected, or, alternatively, be much stronger $50 million net as little as back down toward moving are less than if credit demands borrowed reserves expected. B for the he favored alternative added that Mr. Robertson in proposing a Mr. Scanlon's objective He agreed with directive.
rephrasing of the reference to inflationary pressures in the first paragraph. He thought, however, that the objective might be better attained simply by deleting the words "the emergence of"; the phrase would then read, "to resist inflationary pressures." Mr. Shepardson said that both the staff presentation and the comments around the table thus far seemed to be in agreement on the high level of activity and the pressures existing in the economy at present. The uncertainties with respect to developments in Vietnam also had been noted; but in his judgment the probability of any immediate easing in that situation was smaller than that of further escalation. He shared the view that fiscal action would be a desirable means of attempting to curb some of the excess demands that seemed to be developing, But he was skeptical that fiscal action would be taken soon and he was concerned about how far conditions might get out of hand before such action was taken. Mr. Shepardson did not think this was the time for a drastic change in monetary policy and he agreed that there should be a continuing gradual reduction in reserve availability. He was concerned, however, about the interpretation of the word "gradual." It seemed to him that too often a decision in favor of a gradual approach was implemented in an overly gradual manner and the System found itself arriving "too late with too little."
He did not advocate eliminating the word from the directive but he would like to see continued movement toward the objective agreed upon. Net borrowed reserves of $200 million appeared to be an appropriate target, and he hoped it would be reached in the period before the next meeting. Mr. Shepardson said that alternative B of the draft directives was acceptable to him, and he agreed with Mr. Robertson's suggestion with respect to the first paragraph. Mr. Mitchell thought the staff's policy analysis was correct except in one respect--he believed too much emphasis was placed on interest rates and not enough on availability. In the present situation, he thought, the Committee should have less implicit and explicit concern with the rate structure and more concern with availability. Mr. Mitchell went on to say that several members had expressed the view today that fiscal policy could do a better job policy in curbing excess demands at present. He than monetary but he also agreed that it was not useful agreed with that view; confine itself to making that for the Committee simply to Committee was to decide what it statement. The problem for the possible way by which the could not do. He saw no could and could relieve the anxieties in the capital markets. Committee could do something about, But there were problems the Committee
and it should focus its attention on them. In particular, it seemed to him that the banking system was not doing all that it could to restrain the exuberance of its customers. That was because bankers were not sure just how far the Committee would go in permitting them to accommodate loan demands. In some way the Committee should make it clear that it was not going to make it possible for banks to meet all of the demands placed on them. It was in this sense that he considered it important to focus on availability. Although the Manager had reported that on one occasion he had had to sidetrack reserve objectives, Mr. Mitchell said, for most of the recent period the Desk had been able to work toward reduced reserve availability. But open market operations were not the System's only tool; the Reserve Banks also could make a contribution through the manner in which they administered discount windows. They might be a little firmer in defining their continuous borrowing, and they could make it clear to banks adjustments had to be made in their borrowing continuously that asset positions. As to the directive, Mr. Mitchell thought the first was adequate, and that the Committee might paragraph probably dispense with the second paragraph entirely.
Mr. Daane said he had little to add to the discussion. He shared the hope several members had expressed that the Administration would move on the fiscal front, calling for a tax increase of some type with a view to curbing aggregate demand. That curbing seemed to him clearly required by current cir cumstances, and he feared that too great a burden would be placed on monetary policy to achieve it. In his judgment an attempt by the Committee to implement such a monetary policy--and he would not shirk the responsibility if the need arose--would result in interest rate levels well beyond those projected by the staff. While continuing to hope for fiscal action, Mr. Daane course others had suggested of remarked, he would favor the the gradual reduction of reserve availability trying to achieve meeting. His own target for net decided on at the previous borrowed reserves would be in the neighborhood of $200 million. would like to emphasize one point--he hoped the Committee But he too much precision in moving to would not ask for nor expect visit to the Desk he had been a target. During a recent such the Manager faced impressed with the difficulties particularly factors as widely divergent targets because of such in meeting reserve projections. Mr. Mitchell had to agreed with much of what Mr. Daane play. He was Reserve Banks might the role the say about
disturbed by the seeming unwillingness of commercial bankers to own initiative in curbing their customers' demands. act on their highlighted a few weeks ago at the Board's meeting with That was the Federal Advisory Council, when several members had indicated that banks would welcome advice from the supervisory agencies on the subject. Although he was not sure how it might best be done, he would be sympathetic to any steps the System could take to help stiffen the attitude of bankers and lead them to exercise more prudence and restraint. Mr. Daane favored alternative B of the draft directives, and would accept Mr. Robertson's proposed amendment to the first paragraph. Mr. Maisel thought there was little disagreement on the present situation or need for monetary constraint. He, therefore, would discuss only the proposed directive which, particularly in light of prior discussion around the table, seemed to him unusually unclear. the changes in reserves, bank credit, and In comparing for the past three months, one found very sharp the money supply were high in December, moderate in differences. Rates of growth in February. Because of the sharp differences January, and small Mr. Maisel found a good deal of difficulty among those months, the proposed directive. Depending upon which in interpreting
period was used, the directive could be interpreted in very different ways. Since to be useful one must designate the comparison period, he would suggest that the changes so far this year be used as the proper base. In accordance with his previous suggestions, Mr. Maisel believed that for the period ahead the Committee should attempt to set its goals in terms of the basic underlying monetary variables rather than in terms of interest rates or net borrowed reserves. With that in mind, he would suggest replacing the words "moderating the growth" near the end of the first paragraph with the words "by maintaining reduced growth." That suggestion was based on the assumption that the preliminary reported growth rates of 3.6 per cent for nonborrowed reserves and 6.7 per cent correct. Similarly, he suggested that for bank credit were second paragraph, which he supported, be alternative A of the revised to read "maintaining the present rate of growth in reserve availability," rather than "maintaining the present degree of reserve availability"; it was unclear to him whether "degree" applied to an existing total or an existing the word Around the table today it had appeared as if rate of change. could be interpreted as a maintenance of existing the directives amounts of reserves, a cut in reserves, or a cut in the rate of growth. His point clearly applied equally to alternative B; it
was not clear there either whether "reduction in availability" meant in amount or rate of growth in reserves. As he had also indicated previously, Mr. Maisel was concerned that the Committee attempt to communicate more information to the public to avoid speculation on Committee action. Thus, he would support the idea that free reserves be allowed to vary more, depending upon what was happening in the reserve base and in required reserves. Under that policy in the latest period the Committee might not have been as concerned with reacting to unforeseen changes in required reserves. He also thought that it would be proper to indicate to the market to moderate credit expansion for the next that in attempting quarter or half year, the Committee would be less concerned than in the past by changes in the amount of discounting or by deviations between the discount and money market rates. He especially felt that the System should make it clear that movements in the prime rate were a function of the commercial would be most unfortunate if discount rate policy banks. It were used primarily to set prices for banks. The System should that it did not plan to use the discount try to make it clear rate for that purpose. Mr. Maisel added that because he thought the Committee should be concerned with the rate of growth in total reserves
he did not agree with Messrs. Mitchell and Daane; he felt that borrowings at the discount window should be offset through sales in the open market. If borrowings of reserves rose, holdings of nonborrowed reserves should fall. The Committee should set its goals in terms of a cut in the growth of total reserves to a rate between that experienced in January and February. Mr. Hickman observed that business activity continued to speed ahead. Evidence mounted that the type of policy prescribed by the Committee at the previous meeting was appropriate for the next three weeks. It was now known that inventory accumulation had been proceeding at a faster pace and in larger amounts than originally Mr. Hickman noted. The buildup of business estimated, in the fourth quarter, when steel inventories were inventories reduced, was apparently associated with widespread being shortages and further price increases. anticipations of future continuing and a further large expansion Those conditions were of inventories was expected. and backlogs still rising, particularly With new orders remained under serious goods, the industrial sector in durable companies that reported said. The steel pressure, Mr. Hickman Bank indicated that unadjusted to the Cleveland Reserve regularly weak month, were the same orders in February, a seasonally new
as in January, which in turn represented the highest level since last March. He had also been informed by one of the Bank's directors, on a confidential basis, that lead times of suppliers to the machine tool industry were more critical than at any time since the Korean War. Reflecting pressures in the industrial sector, Mr. Hickman continued, prices of industrial commodities were still moving up. Spot prices of raw materials had risen sharply since the Committee's previous meeting. Farm and food prices had also climbed sharply, but the Cleveland Reserve Bank's analysts believed that wholesale prices of foodstuffs probably were now at or near their peak. Higher food prices at retail were still indicated, which would inflate the consumer price index, wage demands, and price expectations in general. With newspapers and other periodicals full of accounts of rising prices, the country was faced with the type of inflationary psychology that characterized the mid-1950's; that in turn would make it all the more difficult to hold back prices and wages. Mr. Hickman said that the latest data on the financial that System policy was finally beginning to bite. front suggested The Manager was to be complimented on his contributions to that In February, increases in nonborrwed reserves, bank result.
credit, and the money supply appeared to have been considerably smaller than in the preceding two months. The rise in long-term bond yields had taken some of the steam out of the stock market, which in turn should help to restrain capital spending. Mr. Hickman went on to say that the Committee thus appeared to be in a fairly good position to take whatever further steps might be needed to help control the excessive pace of economic activity. It would, of course, be helpful if fiscal policy complemented monetary policy in the period ahead. Lacking such help, he believed the Committee should move very gradually and cautiously towards further monetary restraint. He would underscore the words "cautiously" and "gradually" partly because monetary policy was already beginning to bite, and also because more time would be needed to formulate appropriate fiscal policy. therefore recommended that the Committee move Mr. Hickman and cautiously towards a deeper level of net borrowed gradually reserves over the next three weeks, say a range of $175 to $200 in the behavior of If credit demands, as reflected million. out to be as strong or stronger than required reserves, turned proposal to allow net he would favor Mr. Robertson's recently, deeper. Conversely, if credit borrowed reserves to go even be satisfied with slightly shallower demands slackened, he would
net borrowed reserves. For the reasons indicated, he would prefer alternative B of the draft directives. With regard to Mr. Mitchell's suggestion, Mr. Hickman said that the Cleveland Reserve Bank administered its discount window in a firm fashion at all times. He thought the figures would support the statement that it was clear to banks in the Fourth District that they were expected to repay their borrowings as soon as possible. Mr. Bopp remarked that a decision as to whether to take further restrictive action today hinged primarily on an assessment, first, of the strength of inflationary pressures and, second, whether steps already taken were sufficient to contain them. While industrial prices had not increased much more rapidly recently, they were still rising, and pressures for further increases--possibly much faster increases--were clearly present. One new bit of information bearing on the problem was the Wharton School's index of capacity utilization, just released. The index showed that the rate of industrial utilization was now at 94.2 per cent of capacity, higher than at any time in the past fifteen years with the exception of the Korean War period. One of the most disturbing evidences of pressure, Mr. Bopp said, was the rapid buildup of new and unfilled orders and of inventories. As a straw in the wind, a discussion with
executives of several large industrial firms in the Philadelphia area revealed that at least part of the spurt in orders and inventories was motivated by anticipations of price increases, lengthening delivery schedules, and scarcities. Pressures from those sources did not pervade all industry groups; where they existed, they were not regarded as being exceptionally severe. At this point, Mr. Bopp continued, like everyone else he felt far from complacent about prices and saw many signs of possibly serious price pressures in the near future. But he would not now recommend drastic steps to meet that possibility. A second question was the extent to which restraint had already been effective, Mr. Bopp said. The Philadelphia Reserve Bank's survey of loan and deposit experience of commercial banks in the Third District produced results that were difficult to evaluate. On the one hand, the tone of replies that banks felt tight and expected stronger pressures was clearly To a certain extent, the data bore them out; in the future. ratios were high and cash assets were at a low ebb. loan-deposit was some reason to believe banks might On the other hand, there The seasonal slack in tight as they might indicate. not be so had been slightly more pronounced this year than loan demand and the banks had been selling Federal funds. Moreover, last of securities to meet loan demand, there had been little selling
and the Philadelphia banks had not been so aggressive in the CD market as banks in other areas. The degree to which banks had instituted policies of vigorous credit rationing was questionable. On balance, it seemed to him that while the banks were girding for an expected squeeze, it had not yet appeared to any pronounced degree compared to other periods of restraint or to the situation confronting banks in the New York City area. The short time interval which had elapsed since the February 15 refunding provided scant evidence of the effect of action already taken, Mr. Bopp observed, and thus afforded little in the way of guidance to determine whether additional policy moves should be made at this time. Given the current sensitive condition of financial markets, any sudden and substantial move toward more restraint now would likely reflect itself quickly in substantial upward movements in rates. He would, therefore, continue the more moderate and gradual course adopted at the last meeting of the Committee. Mr. Bopp said he had serious qualms about a directive expressed in terms of a single variable, particularly one over which the Manager had no direct and immediate control. Nevertheless, in the light of many discussions of the problem, alternative B of the draft directives reflected his general judgment of appropriate policy for the immediate future, with the deletion of "the emergence of" from the first paragraph.
Mr. Patterson thought that the Committee, having altered its policy only three weeks ago, wanted to be sure that economic and financial conditions had really changed before deciding on a different course of action. Certainly, no developments in the Sixth District indicated a dramatic change. The vigorous pace of consumer spending in the Southeast appeared to have carried over into 1966, and the banks had contributed to that expansion through further increases in consumer and other loans. Many banks in the District were not yet under much restraint, Mr. Patterson said. Only 194 out of 521 member banks found it necessary to liquidate Government securities this past year to keep up with their lending. Most of the banks surveyed by the Atlanta Reserve Bank recently confirmed that they still had some leeway in unpledged securities to accommodate future loan demands. How much room commercial banks had in meeting prospective demands was something monetary policy should take into account, By the same token, the Committee could Mr. Patterson continued. not overlook the fact that the demand for credit from other than channels had been very heavy and was likely to commercial bank further. Therefore, it was not surprising that rise even interest rates had continued to increase. Even higher rates if savings slowed down significantly, and that were in prospect
would have the further effect of aggravating the inflationary pressures present in the economy. In that atmosphere, Mr. Patterson thought, the policy shift formulated at the previous meeting was sound. That course of action had not been in effect long enough to be responsible for the recent slowing down in reserves and deposits. But those developments were certainly consistent with the direction of our operations. He would not think that a policy change every or four weeks was advisable. Thus, unless the Committee three felt the change of three weeks ago was in error, it should continue such a policy. At the last meeting, Mr. Patterson noted, he had suggested that the Committee carry out a probing operation aimed at getting of reserves. That still struck him as an a tighter control a program would not make the objective today. Such appropriate popular either with those who saw no need Committee especially for restraint or with those eager to apply the brakes in earnest. in allowing credit to expand at the fastest sustainable Thus, might be walking something of a tightrope. rate, the Committee perhaps the best it could hope for Yet, that type of action was the months to come. He believed that net and one to be tested in somewhere between $150 and $200 million over the borrowed reserves next three weeks would probably come close to meeting that objective. He favored alternative B of the draft directives.
Mr. Francis commented that aggregate demand for goods and services had been rising rapidly. As one indication of total demand, retail sales had risen at a 13 per cent annual rate since October compared with a 4-1/2 per cent trend rate from 1953 to 1965. Both employment and output had gone up at an advanced rate. Yet, production had not been able to keep pace with the huge demand, and prices had increased. In contrast to the 1958 to 1964 period in which there was little net change, wholesale prices had risen at a 4.7 per cent annual rate since September, double the rate during the previous year. The Government's fiscal actions appeared to Mr. Francis to be expansionary. The "high employment budget" apparently would show a deficit in the current six-month period as against a small surplus in the last half of 1965. More important, the Government was stimulating the private sector by increasing orders for military goods. Those orders did not all sharply its budget, but the economy got the show up as outlays in the current began production. Then, too, Government stimulus as industry to become more liquid, despite some lengthening debt had continued refunding. With the 4-1/4 average maturity in the February of rate limitation on bonds, the average maturity per cent interest in the near future. to continue to shorten the debt was likely of
With private demand rising with such great momentum and with the Government acting in so stimulative a way, Mr. Francis said, the Committee needed to do all it reasonably could to restrict total demand to reasonable proportions. It was desirable that potential borrowers not get all the credit they wanted. If, in a time of excessive total demand, potential borrowers received all the credit they wanted, that would contribute further to excessive demand, resulting in further acceleration in price rises. As for policy, it seemed desirable to Mr. Francis to keep the growth rates of total reserves and money to very modest proportions. The less expansionary developments regarding Federal Reserve holdings of Government securities, total reserves, since late December seemed to him to be quite and money satisfactory. He would like to see those trends continued in the near future. If such actions should motivate banks to reduce their excess reserves or to increase their borrowings from Reserve Banks, Federal Reserve holdings of Governments should be correspondingly less in order to control total reserves, credit, and money. Mr. Francis said he would not be concerned if, in the face of such policy, interest rates continued to rise. High rates probably the most efficient method of rationing appropriately were
the available credit supplies among the competing demands and would tend to reduce the rate of expansion in aggregate demand. He would not raise the discount rate at this time, since he believed that for the time being the Committee could accomplish what was necessary through open market operations. He favored alternative B of the draft directives. Chairman Martin commented that there was a high degree of agreement on policy today, although the Committee still had a problem with respect to its choice of target variables--a problem that Mr. Maisel had pointed up very well. The Chairman also was sympathetic with Mr. Mitchell's remarks. As to policy, he thought the Committee was moving in the right direction and he, too, favored the gradual approach. Chairman Martin then noted that recently he and Secretary of the Treasury Fowler had discussed the possibility of having the three Federal bank supervisory agencies issue a joint statement calling for restraint in extensions of credit. He personally was somewhat dubious about the proposal; it seemed that it amounted to a program of voluntary domestic credit to him detailed guidelines, and was likely to lead to restraint without difficulties. However, the Chairman continued, there was an alternative that he would like to raise for consideration, in possibility
which all Reserve Bank Presidents would hold informal discussions with individual bankers in their Districts, as some were already doing. It could be pointed out in those discussions that restraint on credit extensions was required at present, that it was not desirable to meet all demands for credit, and that the System did not intend to supply the reserves that would be needed to do so. It would be important to avoid any suggestion that the discount windows were to be closed. At the same time, it was incumbent on the Reserve Banks to do a good job in administering their discount windows, and if there were any instances in which insufficiently rigorous standards were being applied they should be corrected. The Chairman said he recognized the difficulties of such an approach and the problems that would arise in implementing it, but he thought it would be preferable to a formal statement by the supervisory agencies. There was no better organization than the System, with its twelve regional Banks, for pointing out the nature of the current problem to commercial banks. In the ensuing discussion a number of members expressed agreement with the Chairman's view that a joint statement on the subject of credit restraint by the supervisory agencies would be undesirable. Among the objections seen to such a statement were that it would be a misuse of supervisory authority,
and that it might be interpreted as implying a lack of willingness to employ the usual tools of stabilization policy--both fiscal and monetary--in curbing excessive demands. A number of problems likely to arise in the suggested informal discussions with bankers also were noted. Among these were the difficulties of setting priorities among various kinds of bank credit, and the possibility that individual bankers would ask the Reserve Banks to establish a system of priorities for them to follow. Several members expressed the view that it would be undesirable for the Reserve Bank Presidents to indicate priorities; such judgments, they thought, should be made by the bankers themselves. Some members thought the best course might be for the System to confine itself to the question of the volume of reserves to be supplied, but others indicated aggregate that the bankers would find conversations of the type suggested useful in subsequent discussions with their loan officers and with customers. The diversity in attitudes of individual bankers and the consequent need for varying the approach taken noted, as was the desirability of talking both with with them was borrowers at the discount window and bankers that were frequent were not. Also touched on was the desirability with those that that the System was attempting to of avoiding any implication over interest rate changes as a device for promote rationing
allocating bank credit, by remaining neutral on the subject of interest rates. At the conclusion of the discussion Chairman Martin commented that he thought it was fair to say that a number of members of the Committee were opposed to the suggested joint statement by the supervisory agencies, and that there was considerable sympathy with the thought that the System should do could through conversations with bankers. It was what it important that these conversations be informal and held on an individual basis, and that they not be viewed as an alternative to the usual instruments of monetary policy. He was not particularly concerned about the possibility that the press would exaggerate their implications; there already had been press stories to the effect that some Reserve Bank Presidents had been discussing the problems of credit restraint with bankers, and keeping in continual touch with bankers on such problems was part of the System's job. Returning to the subject of today's policy decision, Chairman Martin noted that the majority of the Committee appeared to favor alternative B of the draft directives, and that several Robertson's suggested deletion of the words had agreed with Mr. "the emergence of" from the reference to inflationary pressures in the first paragraph. Mr. Maisel, however, had expressed a preference for a different formulation.
Mr. Maisel commented that he could accept alternative B. He hoped, however, that the Desk would interpret the language calling for a "gradual reduction in reserve availability" as meaning a gradual reduction in the rate of growth of aggregate reserves. Mr. Hayes said he thought the language of the first and second paragraphs of the directive taken together made that point quite clear. Thereupon, upon motion duly made and seconded, and by unan imous 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 that the domestic economy is expanding vigorously, with prices continuing to creep up and credit demands remaining strong. Our international payments continue in deficit. In this situation, it is the Federal Open Market Committee's policy to resist pressures and to help restore reasonable inflationary equilibrium in the country's balance of payments, by moderating the growth in the reserve base, bank credit, and the money supply. To implement this policy, System open market until the next meeting of the Committee shall operations with a view to attaining some further be conducted gradual reduction in reserve availability.
It was agreed that the next meeting of the Committee would be held on Tuesday, March 22, 1966, at 9:30 a.m. Thereupon the meeting adjourned. Secretary
ATTACHMENT A CONFIDENTIAL (FR) February 28, 1966 Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on March 1, 1966 First Paragraph The economic and financial developments reviewed at this meeting indicate that the domestic economy is expanding vigorously, with prices continuing to creep up and credit demands remaining payments continue in deficit. In this strong. Our international the Federal Open Market Committee's policy to situation, it is resist the emergence of inflationary pressures and to help restore equilibrium in the country's balance of payments, by reasonable moderating the growth in the reserve base, bank credit, and the money supply. Second Paragraph A (No change in policy): Alternative this policy, System open market operations To implement shall be conducted with the next meeting of the Committee until degree of reserve availability. a view to maintaining the present Alternative B (Moderate firming): System open market operations To implement this policy, shall be conducted with meeting of the Committee until the next reduction in reserve some further gradual a view to attaining availability.
Also: Record of Policy Actions