June 7, 1966 FOMC Minutes

FOMC minutes

Mr. Maisel noted that even if the law was changed the Committee would still have to revise its Regulation and its continuing authority directive before the Account Management would be authorized to operate in agency issues. In the process of formulating those revisions the Committee would have an opportunity to carefully consider the various kinds of operating problems. Mr. Brimmer commented that the matter of agency issues had been under discussion for some time and he asked if Mr. Holmes had given thought to possible procedures. Mr. Holmes replied that it probably would be desirable for the System to have standing authority to buy agency issues, and that it was hard to justify having some issues eligible and some not. If the agency market continued to develop it was quite possible that transactions in agency issues would prove workable as long as it was understood that they would be kept moderate in size and that they would be supplemental to operations in Treasury securities. A study might show that it would be easier to arrange repurchase agreements against such securities than to deal in them on an outright basis. The use of RP's would give some support to underwriters carrying enlarged positions, and from a technical it would be much easier to relate RP's to reserve standpoint objectives than would be the case with outright transactions.

Mr. Wayne said he understood that the System could not engage in repurchase agreements involving particular types of securities unless it had the authority to buy such securities outright. The alternatives would appear to be engaging in RP's against agency issues or operating through the discount window, and of the two he would prefer the former. Accordingly, he did not think the System should oppose the legislation in question. Chairman Martin remarked that he had considerable trepidation about the proposal because the System dealt in high-powered money. He would expect pressures for the System to operate in a wide range of agency issues regardless of possible consequences for the money markets. He doubted that that would be a wise course to follow if it could be avoided. In any case, the question had to be thought through carefully. Swan commented that the suggestion that the legislative Mr. issues rather than the specific should cover all agency authority open the major question of Federal Home Loan Banks left issues of done if those Banks exhausted their the moment, as to what might be to borrow directly from the Treasury. $1 billion authority another alternative was noted in response that Mr. Maisel to deposit funds in had legal authority available; the Treasury the Home Loan Banks.

Mr. Brimmer suggested that it would be helpful if the Manager prepared a memorandum on the general subject of operations for the Committee's use. It was agreed that such in agency issues a memorandum would be desirable. the next meeting of the Committee would be It was agreed June 28, 1966, at 9:30 a.m. held on Tuesday, Thereupon the meeting adjourned. Secretary

ATTACHMENT A CONFIDENTIAL (FR) June 6, 1966 Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on June 7, 1966. First paragraph The economic and financial developments reviewed at this meeting indicate that the domestic economy is continuing to expand, with industrial prices rising further and credit demands remaining strong. Our foreign trade surplus has declined and the deficit in our international payments has increased. 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. Second paragraph Alternative A (preserving current firmness, with possible qualification To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining net reserve availability and related money market conditions in about their recent ranges (; provided, however, that if required reserves expand sharply more than seasonally expected, operations shall be conducted with a view to attaining some further gradual reduction in net reserve availability and firming of money market conditions). Alternative B (continued firming, with degree conditioned by movement in required reserves) policy, System open market operations To implement this meeting of the Committee shall be conducted with a until the next view to attaining some further gradual reduction in net reserve of money market conditions, and availability and attendant firming restraint if required reserves expand to attaining somewhat greater sharply more than seasonally expected.