May 10, 1966 FOMC Minutes

FOMC minutes

Mr. Robertson remarked that no one around the table wanted to disrupt the market; what the majority desired was a gradual but steady reduction in the availability of reserves. It should never be assumed that the Committee would overlook the possibility of disruption in market conditions. That possibility was a reason for the degree of latitude that would be given to the Manager in instruc tions of the type he (Mr. Robertson) proposed. At the same time, he thought that the rate at which reserve availability was being reduced should be speeded up, although it should still be gradual. Mr. Hickman said that he would endorse Mr. Robertson's statemen To summarize his own position briefly, he favored alternative C for the directive, retaining the word "gradual"; he would be very much concerne about any actions that disrupted the money market; he would want attent paid to aggregate reserve availability as well as to net borrowed reserves; and he would not want to see interest rates rise so high that the discount rate would have to be increased immediately. thought Mr. Robertson had made Chairman commented that he The one wanted to disrupt the market. How to achieve the point well--no was a problem that had to be left to the results the Committee desired the Manager. Mr. Daane observed that he would be concerned about a deepening million level, an area which reserves beyond the $350 of net borrowed might be a danger zone. As he had indicated, he would prefe he thought alternative B for the directive.

Mr. Hayes said that he also would prefer alternative B. If the members considered the language calling for "some further gradual reduction in reserve availability" to be too mild, the word "some" might be deleted. Mr. Shepardson commented that while a net borrowed reserve target might be meaningful in a period of transition to a deeper target level, to hold net borrowed reserves at any particular level would mean meeting whatever demands for reserves arose and thus would not necessarily imply restraint. The Committee had been applying some restraint recently, but the movement had been overly gradual relative to the expansion in demands, and for that reason the Committee had failed to accomplish its objectives. Chairman Martin commented that no one could say with assurance how strong the demand for reserves would be in the coming period. Mr. Shepardson agreed. He added, however, that he thought the additional clause of alternative C, calling for a greater reduction in net reserve availability if growth in required reserve did not moderate substantially, was intended to meet that problem. The Committee then turned to the suggestions that had been made regarding revisions in the draft directive language submitted by the staff. After further discussion, it was agreed that the reference to the Treasury financing should be retained and that Mr. Robertson's suggested revision of the phrase relating to the balance of payments in the last sentence of the first paragraph should be adopted.

Thereupon, upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Account in accordance with the following current economic policy directive: The economic and financial developments reviewed at this meeting indicate that the domestic economy is expanding vigorously, with industrial prices continuing to rise and credit demands remaining strong. Our international pay ments continue in deficit. In this situation, it is the Federal Open Market Committee's policy to resist inflationary pressures and to strengthen efforts to restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the money supply. To implement this policy, while taking into account the current Treasury financing, System open market opera tions until the next meeting of the Committee shall be conducted with a view to attaining some further gradual reduction in net reserve availability, and a greater reduction if growth in required reserves does not moderate substantially. It was agreed that the next meeting of the Committee would be on Tuesday, June 7, 1966, at 9:30 a.m. held The meeting then adjourned. Secretary

ATTACHMENT A CONFIDENTIAL (FR) May 9, 1966 Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on May 10, 1966 First paragraph The economic and financial developments reviewed at this meeting indicate that the domestic economy is expanding vigorously, w: h industrial prices continuing to rise 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 inflationary pressures and to help restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the money supply. Second paragraph Alternative A (preserving about the current degree of firmness) To implement this policy, while taking into account the current Treasury financing, System open market operations until the of the Committee shall be conducted with a view to next meeting maintaining firm conditions in the money market and continuing to exert pressure on bank reserve positions. Alternative B (continued gradual firming) To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to attaining some further gradual reduction in reserve availa bility, while taking into account the current Treasury financing. C (degree of firming conditioned by movement in required Alternative reserves) this policy, while taking into account the To implement System open market operations until the current Treasury financing, the Committee shall be conducted with a view to next meeting of gradual reduction in net reserve availa attaining some further if growth in required reserves bility, and a greater reduction not moderate substantially. does