December 13, 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, December 13, 1966, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Brimmer Mr. Clay Mr. Daane Mr. Hickman Mr. Irons Mr. Maisel Mr. Mitchell Mr. Robertson Mr. Shepardson Mr. Wayne, Alternate for Mr. Bopp Messrs. Scanlon 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. Hackley, General Counsel Mr. Brill, Economist Messrs. Eastburn, Green, Koch, Mann, Partee, Tow, and Young, Associate Economists Solomon, Mr. Holmes, Manager, System Open Market Account Mr. Cardon, Legislative Counsel, Board of Governors Fauver, Assistant to the Board of Governors Mr. Williams, Adviser, Division of Research Mr. and Statistics, Board of Governors Hersey and Reynolds, Advisers, Division Messrs. of International Finance, Board of Governors Associate Adviser, Division of Mr. Axilrod, Research and Statistics, Board of Governors Assistant, Office of the Miss Eaton, General Secretary, Board of Governors
Mr. Lewis, First Vice President, Federal Reserve Bank of St. Louis Messrs. Eisenmenger, Link, Ratchford, Brandt, Jones, and Craven, Vice Presidents of the Federal Reserve Banks of Boston, New York, Richmond, Atlanta, St. Louis, and San Francisco, respectively Mr. MacLaury, Assistant Vice President, Federal Reserve Bank of New York Mr. Geng, Manager, Securities Department, Federal Reserve Bank of New York Mr. Stiles, Senior Economist, Federal Reserve Bank of Chicago Mr. Kareken, Consultant, Federal Reserve Bank of Minneapolis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on November 22, 1966, were approved. Before this meeting there had been distributed to the Committee a report from the Special Manager of the members of the Market Account on foreign exchange market conditions System Open Account and Treasury operations in foreign and on Open Market currencies for the period November 22 through December 7, 1966, for December 8 through 12, 1966. Copies and a supplemental report placed in the files of the Committee. of these reports have been the written reports, Mr. MacLaury In comments supplementing remained unchanged this week the Treasury gold stock noted that drop two weeks ago. The Stabilization following a $100 million care of the second Italian gold on hand to take Fund had sufficient without having to show expected this month purchase of $30 million
any further decline in the stock before the end of the year. The London gold market naturally reflected the ups and downs of the Rhodesian crisis, although the fixing price remained in a rel atively narrow range ($35.15-1/2 - 17-1/2). Trading was generally heavy whenever headlines concerning the Rhodesian crisis appeared and the possibility of sanctions against South Africa came to the fore, and on balance the gold pool lost about $12 million during the period. That meant that there was still $25 million in the pool, not counting the $50 million supplement that was also available. That could go quickly, of course, if there should be a blow-up in the discussions of the Rhodesian situation. Events since the last meeting had demonstrated the useful ness of the preparations made to meet year-end pressures, Mr. MacLaury said. Those pressures developed suddenly and with great intensity on November 29 when one-month trading began for over-the-year-end rates for maturities of one month and over dates. Euro-dollar point--from 6-1/2 per cent to 7-1/2 per jumped by a full percentage the Euro-dollar market was the scramble for funds in cent--and demand for funds put spot As anticipated, the sudden hectic. Bank of England had to provide under strain; and the sterling on that day. Under support of the pound $50 million in spot nearly decided to put into the Account Management the circumstances, techniques that previously had operation immediately the various
been agreed upon to deal with such a situation. The Swiss National Bank, which up until that time had been buying dollars spot only, announced that it would meet the temporary demand for Swiss francs by taking in dollars on a covered basis without cost to the banks, i.e., through flat swaps. The dollars taken in were to be redepos ited in the Euro-dollar market, like the dollars previously bought outright. That same day, November 29, the Bank for International Settlements began placing sizable amounts of new money in the Euro dollar market, acquiring the dollars through activation of its swap facility with the Federal Reserve in currencies other than Swiss francs. Finally, in New York, the Federal Reserve began purchasing spot sterling against forward sale for delivery after year-end, acquiring that day a total of $28 million for System and Treasury accounts combined. That three-pronged attack, Mr. MacLaury said, coming as an immediate and coordinated official response to sudden market pressures, did much to relieve the pressures themselves, but it was equally important psychologically as a demonstration that the markets would not be left to fend for themselves over year-end. Including operations prior to November 29, the Swiss National Bank replaced in the Euro-market a total of about $200 had thus far the BIS. In addition, the BIS had drawn million, partly through $200 million under its swap arrangement with the System the full
and placed those new funds in the Euro-market, as well as serving, as it had in the past, as a channel for dollar deposits of central banks other than the Swiss National Bank. With Euro-market pressures pretty well under control, and with the strain on sterling from that source considerably alleviated, it was not necessary for the System to extend its swap purchases of sterling beyond November 30, by which time a total of $36 million had been acquired for the System and the Treasury together. Although sterling had been fairly well insulated from year end pressures by the operations he had just mentioned, Mr. MacLaury continued, it nevertheless felt the impact of the Rhodesian crisis. All things considered, the markets seemed to have taken the day-to day swings in headlines from unwarranted optimism to undue pessimism in better stride than one might have expected. So on that issue on balance had not suffered from far, at least, British reserves or sanctions; the British the shifting prospects for settlement they incurred when the Rhodesian had recouped all of the losses announced. Of course, it proposed settlement was rejection of the reserves might have how much better their impossible to tell was that volatile issue for that problem. But looked had it not been difficult to predict and made it potentially explosive remained sterling reserves. turn out for the month might how
As the Committee knew, Mr. MacLaury said, November turned out better for the British than appeared likely at the time of the previous Committee meeting. In addition to announcing a reserve gain of $64 million they were able to liquidate about $90 million in short-term debt, as well as to liquidate a sizable amount of forward commitments. It was to be hoped that December would turn out as well, and that further repayments of short-term debt could be made. There were two hopeful signs. First, at the meeting in Basle this past weekend the package of credits of $400 million made available to the Bank of England last September, at the time the swap network was increased, had been extended for another three months. (Those credits had been due to expire at the end of this month.) Second, the trade figures announced today were the most encouraging for some time. For the first time in at least the last three years, there was a surplus even on a crude basis; when adjusted to a balance of payments basis the surplus was 80 million pounds. Part of the improvement was due to the postpone ment of imports pending removal of the surcharge on November 30. Nevertheless, exports were up, and that was encouraging. Mr. MacLaury then referred to two other developments, the first of which was the recent sales of marks by the System. During the period the German Federal Bank took in a total of $152 million as repatriation of bank funds came on top of a strengthening German
balance of payments. With marks in demand in New York the Reserve Bank sold a total of $16.7 million equivalent in the New York market, and in addition sold $15 million equivalent to the Federal Bank on one day, December 7, when the latter had picked up $60 million in Frankfurt, All of those sales were financed by drawing down the System's mark balances. Second, the Account had continued to make progress in reducing the swap drawing from the Bank of Italy. Lira purchases of $45 million equivalent in New York during the period had enabled that commitment to be brought down to $25 million from the original $100 million. Mr. MacLaury added that there had been a discussion of multilateral surveillance, insofar as it impinged on the swap net work, at the recent Basle meeting. He did not know the details; however, Mr. Coombs had reported that the discussion went well and that he thought there would be a minimum of interference with the swap network through multilateral surveillance in the future. Specifically, the Netherlands and Belgium agreed to extend their with the System for another three supplementary swap arrangements months. Mr. Coombs had commented on the Mr. Hickman asked whether with respect to their tight money policy and on German attitude a little more balance in their the possibility of their attaining He gathered that the inflow mix of monetary and fiscal policies.
of dollars to Germany reflected both year-end operations and general monetary tightness. Mr. MacLaury replied that the Germans had been taking in dollars fairly steadily for several months due to the sharp up turn in their trade surplus. Each year in the past the German Federal Bank had taken in sizable amounts of dollars in December, as much as $500 million. The repatriation of dollars by German banks was partly for year-end window-dressing purposes, but also because the largest tax payments came due December 15. This year, because of changes in reserve requirements for German banks, it was less clear that there would be a complete reversal of the in flow after the year-end. Thereupon, upon motion duly made and seconded, and by unanimous vote, the System open market transactions in foreign currencies during the period November 22 through December 12, 1966, were approved, ratified, and confirmed. Mr. MacLaury noted that the $500 million swap agreement with the Bank of Canada, having a term of twelve months, would on December 28, 1966, and he recommended renewal. mature there had been any use of Chairman Martin asked whether replied the Bank of Canada swap this year, and Mr. MacLaury that fall for a small amount for a brief period. had drawn on it this Renewal of the $500 million swap agreement with the Bank of Canada for 12 months was approved.
Mr. MacLaury then said that the System's swap agreement with the Swiss National Bank, and the two with the BIS, in the amount of $200 million each, would reach the end of their six month terms on January 20, 1967. He recommended renewal in each instance, adding that there was outstanding a $75 million drawing under the Swiss franc arrangement with the BIS and $15 million under the arrangement with the Swiss National Bank. Renewal of the three swap agreements for further periods of six months each was approved. Mr. MacLaury then reported that there were three outstand ing drawings by the British under the swap agreement with the Bank of England, all with terms of three months, as follows: one in the amount of $100 million maturing December 29, 1966; one in of $50 million maturing December 30, 1966; and one for the amount $100 million maturing January 20, 1967. If the latter two were would be second renewals. It was hoped that the renewed, those on their short-term debt British would be able to make repayments They had already taken in $50 million this month and in January. trade figures. He recommended on market anticipations of good today not able to make full repayment, the that insofar as they were drawings be renewed. position would be if third inquired what the Mr. Mitchell recalled that some and Mr. MacLaury should be requested, renewals
time ago, after a second renewal, a letter was written to the Bank of England expressing the Committee's philosophy on renewal of swap drawings and emphasizing that they were of short-term character. The Bank of England made it clear that they agreed. He did not mean to imply there should be a second letter, but the British were well aware of the System's philosophy on the matter. Renewal of the drawings by the Bank of England, if requested, was noted without objection. Finally, Mr. MacLaury said, a System drawing on the Bank for International Settlements in the amount of $50 million would mature January 13, 1967. At present the Swiss franc was not at its ceiling, as normally might be expected at this time of the year. He hoped it would be even easier after the end of the year and some progress might be made in paying down the drawing. In unable to do so, he would recommend the event that the Account was be rolled over a second time. that the drawing Renewal of the drawing, if necessary, was noted without ob jection. been distributed to the this meeting there had Before of the Committee a report from the Manager of the System members open market operations in U.S. Open Market Account covering acceptances for the period Government securities and bankers' 1966, and a supplemental report November 22 through December 7,
for December 8 through 12, 1966. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Holmes commented as follows: The comfortable money market conditions that have developed since the Committee last met have generally been interpreted by the market as a sign that the Federal Reserve has moved in the direction of less monetary restraint. This interpretation has been strengthened by continued discussion of a possible tax increase and reports of somewhat less exuberant economic growth. Despite seasonal pressures, the change in market expectations has led to a sharp decline in Treasury bill and other short-term rates, and, equally important, to a ready flow of funds in the capital market in an atmosphere of rising prices. Three weeks ago underwriters were looking with trepida tion at the heavy calendar of corporate and municipal issues to be sold. By last Friday the atmosphere had changed to the extent that market soundings by the FNMA with respect to an early sale of participation certificates were received with enthusiasm. Indeed, in the market for Treasury issues prices advanced very sharply, with gains of 1/2 to 1 full point recorded in yesterday's ebullient trading session. In the short-term sector of the market dealers were aggressive bidders for Treasury bills in the auctions and also in the special auction regular weekly $800 million tax anticipation bills, which completed of the Treasury's financing program for calendar 1966. By bill was 5.11 bid and the Friday night the three-month 5.22 bid. The market moved decidedly six-month bill with the average issuing lower in rate again yesterday bills established at about rate on three- and six-month respectively. This cent and 5.13 per cent, 5.05 per and 37 basis points from represented declines of 20 day before the last Committee meeting. the auction held the decline in short-term rates is, of course, The banks in limiting the a major assist to the providing maturing during December. the $5.5 billion CD's run-off of that have changed their have heard of some corporations We
approach to CD's since the beginning of the month. Given the heavy maturity schedule a substantial decline in CD's is inevitable, but it now seems likely that the run-off will be towards the lower end of the $700 million - $1 billion range mentioned in the blue book.1/ Despite the improved atmosphere in the money and capital markets there are a number of hurdles to be crossed before the year-end. Dealer positions in bills are at a high level, and rate stability over the rest of the year depends on the continued availability of financing at reasonable rates, and on continued investor demand for bills. While new corporate and municipal issues have moved out quickly there have undoubtedly been sizable dealer takedowns and some of the buying has been at least semi-speculative in nature. As payments are made for the new issues some pressure may become evident. Tax date pressures are just upon us, and there are still uncertainties about the international flow of funds over the year-end. The fact that the year-end falls on a weekend could also cause a knot in the money market if banks adhere to their traditional reluctance to show substantial borrowings on statement dates. Thus, although the atmosphere is much improved, we can still underlying considerable churning in the money market over expect the rest of the month. As the blue book notes, the decline in market rates and reduced marginal reserve pressure on banks yet, been reflected in any notable impact has not, as on bank credit expansion. December estimates at the New York Bank show less of a decline in the bank credit than anticipated three weeks ago, and our estimates proxy would now be close to the Board staff estimate of within points either side of zero. Banks' two percentage of Euro-dollar deposits have so far held up holdings had feared, reflecting in part the better than some by European central banks and the concerted efforts repercussions of December System to avoid extensive activity. The year-end, however, will window-dressing "Money Market and Reserve Relationships," 1/ The report, for the Committee by the Board's staff. prepared
probably bring certain special and temporary problems. The relatively high cost of Euro-dollars cannot help but influence some major banks to switch their borrow ing to the Federal funds market at rates around 5-1/2 per cent. While bank credit has showed no signs of real strength, banks have been aggressive bidders for new municipal issues, and a better CD outlook could bring about resumed expansion after the regular seasonal pressures have passed. Open market operations have been described in detail in the written reports to the Committee and I will not dwell on them here. In general, we tried to anticipate reserve needs and to head off any tendency for the money market to tighten, rather than offset tightness after it had emerged. This shift of emphasis in the conduct of operations was fully understood by the market. Repurchase agreements proved a particularly useful operational tool in the light of the reserve supply stemming from the Treasury's cash position and of seasonal uncertainties. Given the improved outlook for Treasury bill rates, dealers felt little pressure to cut back bill inventories, and the substantial supply of repurchase accommodation available from the System at the discount rate helped the performance of the bill market over the period. The use of repurchase agreements during this period also provided the opportunity for the Desk to make use for the first time of the new authority to purchase Government agency issues under such agree ments. The System also took advantage, on occasions, of the aggressive bidding in the weekly bill auctions to run off a portion of maturing Treasury bills, thus keeping what at times appeared to be a substantial future reserves through outright bill sales at need to absorb a minimum. The Treasury has done a bit better in maintaining than seemed likely three weeks ago. its cash position there was borrowing of $169 million over As you know, certificate issued at weekend against a special last the discount rate. It now looks as 1/4 per cent below direct borrowing will be necessary, if no further Banks will be at a low although the balance at Reserve 15th and 16th. By the 19th the Treasury ebb through the should begin to work its way back towards more balance
normal levels. All in all, the supply of reserves through the forced decline in the Treasury balance at Reserve Banks did not prove overly disturbing to open market operations, and, from a broader point of view, it was desirable for the Treasury to make use of the special arrangement which had remained dormant since 1958. The debt ceiling remains a continuing though not insurmountable problem to the Treasury, with the latest daily Treasury statement showing debt subject to the ceiling at $329.7 billion compared with the ceiling of $330 billion. It seems clear that an increase in the ceiling will have to be an early item on the new Congressional agenda. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions in Govern ment securities and bankers' acceptances during the period November 22 through December 12, 1966, were approved, ratified, and confirmed. Chairman Martin then called for the staff economic and financial reports, supplementing the written reports that had been distributed prior to the meeting, copies of which have been placed in the files of the Committee. Mr. Brill made the following statement on economic conditions: meetings now, the Committee's staff For several stalled in coming to grips with the economic has been so much of the future course of the outlook, since on the still unknown spending plans of economy rested Government. We have been alert to unfold business and have indicated, since early fall, ing developments that economic expansion, but we've a marked slowing in trends into the future as hesitated to project these long as the possibility existed that capital expenditures
and defense outlays--the two most expansive forces driving GNP this past year--might continue to provide significant upward thrust to the economy in 1967. Now the veil has been partially lifted, and the staff can no longer dodge the critical policy issues involved. First, let's review the major new items of information in terms of their impact on the course of the economy. Business capital spending plans, as revealed in the latest Commerce-SEC survey, indicate a distinct tapering off of the investment boom. It is not only that anticipated expenditures rise so much more slowly through mid-1967 than the pace of these outlays this past year. Perhaps more significant are the indications that actual spending is beginning to fall short of earlier anticipations, a development which in only small degree can be attributed to supply difficulties. In the present situation, such shortfalls must represent a distinct and significant change in the outlook among many business planners. The intent of monetary restraint and of the fiscal actions taken this fall was to cool off the investment boom; these policies seem to have succeeded, perhaps too well. The less ebullient outlook of businessmen seems matched by consumers. The latest Census survey of consumer buying intentions, and recent evidence of sluggish retail sales, suggest little thrust from con sumer expenditures over the near- and intermediate-term especially for durable goods but also for housing. future, Finally, as to Government spending plans, hard not yet available, but one can deduce from numbers are to the press, and from the the range of numbers leaked appropriation for fiscal year size of the supplemental 1967 the President has announced he will request, that the rate of expansion in Government spending may also The green book 1/ number on Federal spending decelerate. quarter of 1967 is but a guess, and we in the first to flag it as such. But it is a guess from which tried not too much dissent is likely to be found among Washington crystal-ball readers. Economic and Financial Conditions," 1/ The report, "Current by the Board's staff. prepared for the Committee
Of course, we all recognize that military spending requirements can depart suddenly and widely from budget projections. Even though valiant efforts are being made to pin down this major element in Government spending with more precision this year, one can still legitimately harbor reservations. But one must also credit budget planners with enough intelligence to learn from mistakes. If, for the moment, one is willing to accept current Government spending plans at face value, one private and comes up with a relatively soggy economic outlook, one in which GNP rises at a slower rate, over the winter and spring, than even the current moderate pace, with capacity use drifting off, hours of work cut back and, possibly, the unemployment rate beginning to creep up. While all GNP projections must be regarded only as point estimates within a probability range, it seems to me that, barring an upward revision in defense spending, deviations around this point are more likely to be on the down side than on the up side. Under the circumstances postulated earlier, for example, we may be relatively optimistic in assuming only a moderate decline in business inventory accumulation in the months ahead, particularly since the October figures sales, and business attitudes towards on inventories, inventories suggest that the recent high rate of accumula tion was in part involuntary. One can easily visualize a much sharper reduction in inventories than was projected green book, with repercussions on output and in the employment that could cumulate. If such an over-all expenditure outlook were the only determinant of economic policy making, the prescription would be fairly simple--forget about tax increases and up for the possible need to stimulate the economy gear year. At the last FOMC meeting, President some time next Ellis asked me whether I thought a tax increase was still needed. After hedging and qualifying in the time-honored fashion of staff economists, I recall admitting that I a rise in taxes would be needed. I'm not sure did think I can give the same answer today; if I did, it certainly would be for different reasons. But it's not crystal clear as to what the right be, since anticipated domestic spending answers should plans cannot, in themselves, provide all of the bases for policy making. There are balance of payments, wage, implications to consider. Short of an actual and price example, it is likely that wage rates and recession, for
wage costs would continue to rise over the next half year, despite further slowing in economic activity. The levelling off in industrial output--which started in early summer and has extended into November, accord ing to preliminary estimates of the production indexhas been accompanied by continued strong advances in employment. This implies a marked drop in the rate of productivity gain, which in turn has been reflected in a significant rise in unit labor costs. While producers may be willing to suffer some further narrowing of profit margins, I suspect that the reaction to continued rise in labor costs will be a tendency to try to pass them on, thus keeping upward pressure on industrial prices. Once the offset from declining food prices ends--a development which some analysts think is about on us already--the broad price measures, at both wholesale and retail, will begin to reflect more of the industrial price creep. Many current and prospective economic symptoms, then, are the classic ones of a cyclical peak--inventory sales ratios rising, business investment tapering off, consumer demand sluggish, capacity use beginning to drift down, and wages and prices continuing to push up. Unfortunately, the Government's freedom of maneuver in dealing with these developing symptoms is limited by two major constraints: a continued serious balance of payments problem, and the heritage of last year's fiscal failure, i.e., a large budgetary deficit that is hobbling the choice of appropriate fiscal and debt management policies. done their share of the job this year, Having policy makers have somewhat more room for monetary assuming that more rigorous capital control maneuver, programs will limit our balance of payments losses to levels. It seems to me, in light of domestic tolerable and prospects, that at least the economic developments in which monetary policy has to move is clear; direction or the lack of them, will merely fiscal decisions, of the monetary move. In the extent and pace condition that appears to be heading a more tranquil economy use, monetary policy can toward less intensive resource and not be diverted by continue to ease, appropriately increases that reflect "last gasp" wage and price an acceleration. If the earlier sins and don't portend budget deficit forces the size of the prospective
Administration to ask for higher taxes, then the monetary easing could be prompt and substantial. If the fiscal decision is not to ask for higher taxes, or if the decision is postponed, then monetary easing could be more gradual and moderate. For it's not as though we're starting from a position of only mild monetary restraint. Interest rates are still historically high, and bank credit has been contracting, on balance, for five months now. These are far too restrictive a set of policy results to be appropriate to the current moderate pace of economic expansion, let alone the prospect of even more moderation in output and incomes. I would recommend, therefore, continuing to press ahead with the policy initiated at the last meeting, with sufficient vigor to achieve easier credit conditions and, through this, some expansion in bank credit. Mr. Daane asked, with reference to Mr. Brill's suggestion that the rate of increase in defense spending might decelerate, whether there was any firm basis for that expectation. Mr. Brill replied that it reflected the best information he could obtain from those associated with the formulation of the budget. The numbers might change; they had been changing over time in recent months, but the changes were in the direction he had indicated. Mr. Daane then asked whether informed judgments were involved or simply guesses, and Chairman Martin observed that what Mr. Brill had reported reflected the most informed judgments available, which he felt might be regarded as fairly accurate at this stage. Mr. Brill that it should be borne in mind that a military operation commented was involved, rather than a civilian-type program. Various develop ments, such as a new anti-ballistic missile program, of course could
cause the figures to be adjusted upward, but the responsible parties had been pressing to get as good a set of figures as possible for the budget, and what he had reported reflected the best current judgments. Mr. Brimmer noted that it should be remembered that certain basic questions of military strategy were still open. On the other hand, it appeared from the press and other sources of information that some basic decisions had been made recently on strategic ques tions that offered a better basis for making judgments about military spending over at least the next six months. He understood that the people in the Department of Commerce who worked on national income statistics had reached the same judgment as Mr. Brill. Mr. Brill then commented on the apparent pace of defense spending thus far in the fourth quarter as it could be read from the Treasury's daily statement, following which Mr. Daane inquired of a repetition of last year's experience--an about the possibility unanticipated upsurge in defense spending. Chairman Martin indicated likely only if major new decisions were that he felt that would be that would change the whole picture. made Mr. Hickman commented that he assumed there was likely to of information in the event of such decisions be enough feed-back policy. In his judgment the to enable the Committee to alter that of last year when the situation probably would be unlike
Committee simply did not know the facts and continued a relatively easy monetary policy too long. If the Committee became aware that the pace of military spending was about to accelerate sharply, it could shift policy. Mr. Daane said that he doubted whether anyone in Washington today could say what size the anti-ballistic missile program might assume. Mr. Partee made the following statement concerning financial developments: Despite the moderate easing in money market conditions achieved on average over the last three weeks, the banking aggregates have not yet shown strengthening tendencies. In fact, the November figures on total member bank deposits are somewhat weaker than was projected just prior to the Committee's last meeting. All of the short fall is accounted for by a significantly weaker private demand deposit performance than had been expected, and this, along with an indicated decline in demand deposits in the current week, has led us to lower our sights for December. Little or no increase in the credit proxy this month now seems likely. November marked the fourth consecutive month in which actual deposit expansion fell appreciably below the projections made around the beginning of the month. Even allowing for some staff bias, which may result from a tendency to project past trends into the future, this is an impressive string of shortfalls. In August, member bank deposits were projected to rise at about a 4 per cent annual rate, but they actually fell 3-1/2 per cent; in September the expectation was for a 3-1/2 per cent rise, but the final result was a fractional decline; in October a 5-1/2 per cent increase was initially projected, but the outcome was a 3-1/2 per cent decrease; and in November the staff started off projecting a 2 per cent decline and then at mid-month lowered the figure to 3 per cent, but the actual drop turned out to be 5-1/2 per cent.
Earlier in this period, these shortfalls were spread among both demand and time deposits, but in both October and November the misses were entirely in the private demand deposit category. As a result, the money stock has moved further downward, on a monthly average basis, and in November was lower than at any time since last February and down nearly 3 per cent, annual rate, from the June peak. The last several weeks have shown some net increase in money stock, and we would expect a sizable rise in the December average--in both cases reflecting mainly outpayments from the Treasury balance--but not by very much more than enough to offset the November decline. Meanwhile, total bank credit, though not quite so weak as the deposit figures in view of increased Euro-dollar liabilities, has also declined on balance over recent months. I have gone into this background in some detail in order to emphasize as strongly as possible my feeling that something important has been going on to affect financial relationships. We have consis tently overestimated the amount of deposit and bank credit expansion that would be associated with a given set of money market conditions in recent months. Moreover, the banking system has failed to respond to the modest easing in conditions that has proceeded irregularly going all the way back to mid-October. Thus, net borrowed reserves were nearly $200 million smaller in November than October, on average, and the whole family of shorter-term bill rates moved somewhat lower. Nevertheless, the decline in member bank deposits was sharper in November than in the earlier months. Obviously, between money market variables and the relationship aggregates has been shifting even faster the banking than allowed for in the increasingly pessimistic staff projections. explanations for this unexpectedly Three possible strong shift suggest themselves. First is the pos demands in the private sectors sibility that credit the economy are diminishing markedly. Certainly of figures of recent months do not the bank lending only has business loan this possibility. Not refute with virtually every expansion declined sharply, showing slower growth than earlier industrial sector
in the year, but other types of bank lending also have tended to level off. Most of this undoubtedly reflects supply constraints rather than reduced demands for funds, which are now being reflected in heavy current and prospective private flotations in the money and capital markets. In the business sector, particularly, further increases in capital outlays and high rates of inventory accumulation, combined with a leveling off--and possibly a decline--in internal funds, should be producing record external financing needs. Nevertheless, it is only reasonable to assume that the slowing of economic expansion generally over recent months is having its financial counterpart in a less intense demand for borrowed funds. A second possibility is that bank credit is being curbed as a result of the attitudes of bankers themselves. By this I mean something more than just that terms, lending standards, and other methods of rationing credit have been tightened, which obviously It may be that the developments of has occurred. recent months--deposit losses, sharply declining September 1 letter, and other Federal liquidity, the Reserve restraining actions--have created so many banks are not pushing so hard uncertainties that available to them. Many banks to use the credit to use any modest easing in may now be inclined their positions to repay short-term indebtedness Fed and others, rather than to make invest to the lending policy. And if the ments or ease up on to expand loans and investments, banks do not push created and new reserves are not deposits are not situation, even a gradually required. In this could fail to produce an easing net reserve target reserves might have policy effect, since expansive market operations in be absorbed through open to from declining as rapidly order to keep borrowings as bankers desired. that the demand for possibility is The third This is clearly the deposits may have declined. where the 4 per cent the time deposit field, case in consumer CD rate, and rate, the 5 per cent savings CD rate remain out the 5-1/2 per cent negotiable with the best yields on competitive instru of touch probably a factor in the ments. And it also is
sluggishness of demand balances, in view of the high yields available on cash substitutes. But the behav ior of deposits is also probably influenced by the very limited availability of bank credit, one effect of which is to force holders to live with cash balances below desired levels. Many businesses may be working their available funds harder than they otherwise would, for example, simply because they are inadequately financed. Support for this view is provided by the exceptionally large decline in liquidity reported by the SEC-FTC survey of corporate manufacturers for the third quarter. Whatever the relative weights assigned to these three possible explanations of weakness in the banking aggregates, the general policy prescription seems clear. If the Committee wishes to foster a resumption of moderate growth in bank credit, some further easing in restraints on the banks is needed. An overt and highly visible move would be most certain to alter the attitudes of "reluctant" bankers. But barring this, a continued easing in money market conditionssome further reduction in short-term including rates--may accomplish the objective of bank credit more gradually. A renewed inflow of CD expansion of size, should serve to funds, especially one credit growth both directly, through stimulate and indirectly, through increased intermediation, improvement in banker expectations. the range of rates available on broadly Given as well as the money market instruments, competitive of liquidity to be shared, I believe reduced pool bill rate at or slightly that it would take a 3-month enough follow-through to below 5 per cent--with rates on other money bring commensurately lower re-establish a reasonable market instruments--to cent CDs. Even so, for 5-1/2 per competitiveness be expected before CD expansion could not much heavy December pressures on January, in view of the positions. A gradual easing in money liquidity weeks would also tend to market rates over coming institutions hold on to help bank and other savings time and savings deposits in their consumer-type January interest-crediting period. the important should help to main improving money market And an tain a receptive tone in the long-term bond markets,
which continue to face a prospectively heavy financing calendar from corporate borrowers and also probably from the Treasury. Mr. Daane asked the Manager when he would expect the seasonal peak in short-term rates. Normally it had been thought that the peak occurred around the 16th or 18th of December, and he wondered whether that was still applicable. Mr. Holmes agreed that that had been the normal pattern. Whether it would prevail this year, he did not know. Mr. Daane then requested clarification of Mr. Partee's views about the role of supply constraints on bank credit expansion. Mr. Partee replied that he thought one would have to say that supply constraints--that is, constraints on the supply of the banking system--had been the major factor reserves available to credit and deposits. But there also in limiting growth in bank some demand effects on both the bank credit and deposit had been The various influences had all been sides of the balance sheet. mixed together. the following statement on the Mr. Hersey then presented payments and related matters: balance of to comment on some This morning I would like have a look of recession abroad that developments to see what implications them, and then try about for Federal Reserve policy these developments have appraising the or--on a different level--for in the United States. economic situation
Unemployment in Britain and Germany has been rising this autumn at a pace, in each country, that seems to have surprised the governments as well as other observers. True, the levels of seasonally adjusted unemployment are still very low: in November still below 2 per cent in Britain and below 1 per cent in Germany, but these lines will be broken through very soon if the rises continue. The industrial production indexes are not available for October and November; in September, industrial activity was clearly falling in both countries. In both countries domestic plans and orders for business capital expenditures began to decline gradually in real terms early in 1965, and the declines have become faster lately. The picture for inventory investment is similar. Residential construction has also been falling off gradually for some time. Monetary policy has made credit and capital market conditions extraordinarily tight, and this is an important key to what is happening. At the moment the world economic situation bears no resemblance to the 1957-58 downturn, which involved a transition from world-wide shortages of materials to ease of supply, on top of the unwinding of the 1955 investment and automobile boom. Japan and Italy now play much larger roles than in earlier years, and both of them, as well as France, are in the early stages of strong new domestic upswings. On the other hand, several other European countries and also Canada have been experiencing a leveling off in industrial production this year. For Britain and Germany, the present situation somewhat resembles the pause during 1961 and 1962, in the second half of a previous four-year cycle, but there are more elements of outright recession now than then. It has taken the British longer this time in their economy; but now that the to get some slack turn has been made some kinds of demand appear to be with some speed. In Germany, the previous shrinking pause involved hardly more than a slowing of rise in industrial production; this time, after slowing for a year and a half, German industrial production, as seasonally adjusted by the OECD, fell 5 per cent in three months from the high reached last spring.
These developments abroad may require some rappraisal of U.S. balance of payments prospects for coming months. The slide-off in German demand is a bearish factor for our exports; if continental European countries as a group now let their economies cool off, or in some cases keep them from heating up, more successfully than it had previously seemed they could, that would tend to dampen our export growth for a time. On the other hand, recession, or a pause, in European economic expansion now might conceivably be just the catalyst needed to cause American manufac turers to review and reject some of their projects for enlargement of operations in Europe. Another whole series of questions relates to the timing of changes in monetary policies in Britain or continental Europe, as compared with the timing of any movement toward lower interest rates in the United States. In thinking about the relevance for Federal Reserve policy of all such questions about the U.S. balance of payments next year, we may well come to the conclusion that the objective of working toward long-run equilibrium in international payments will be served best by policies aimed wholeheartedly at the two-fold domestic objective of sustaining growth and minimizing inflation of prices and costs, without much concern about short-run variations in our balance-of-payments prospects or results, so long as the rise of domestic prices slackens. Two main lines of argument can be advanced to support such a conclusion at the present time. First, even on balance-of-payments grounds, a recession in the United States could have harmful effects if it were to tilt the whole demand-and long-run in the world at large toward recession. supply situation Under present conditions, we can look for some slackening of import expansion as excess demand diminishes. But benefits our balance of payments might get the further from depression of our imports in a U.S. recession might well be cancelled off in the longer run by subsequent unfavorable repercussions on our exports recession abroad. In short, the through a related United States stands the best chance of enlarging its an expanding world economy, and the size of exports in gives us a special responsibility for helping our country to maintain noninflationary growth in the world economy.
Second, the prestige of the dollar stands well enough for the moment, and the Administration's voluntary programs, plus the I.E.T. and the related arrangements with Canada, will give us some protection again next year. Under these conditions, the United States will be doing all we can properly be asked to do towards restoring order in international pay ments if we follow policies that can be seen by everyone to be the right ones for maintaining noninflationary growth. If one consequence of what we do and of what others do is a sharp rise next year in the reserves of Germany or other Common Market countries, so be it. It should then become clearer to the whole world than ever that the chronic and semichronic surplus countries must play a more positive role than they have yet done to restore international equilibrium. With regard to the specific, narrow, question of borrowings from the Euro-dollar market, U.S. banks' it would be far better to let this money flow back to Europe as soon as that tendency develops, rather than try to hang on to it at a cost of keeping than domestic conditions might interest rates higher call for. about the balance of payments These few thoughts policy under current and prospective and monetary judge how to stay on the conditions do not help price and cost inflation on tight-rope: to minimize hand and to maintain growth on the other. the one essential--easier said than done--is The first developments accurately. appraise current domestic to the recent develop our appraisals, perhaps As we make lessons for us. One abroad have some usable ments that a slide-off in activity lesson is the reminder unexpectedly, when suddenly and almost can begin quite policies are being decisions and inventory investment tight money and pressures of very revised under the capital markets. to the policy issue. let me come back In conclusion, reserves are larger that our gold We are fortunate payments position stronger. Britain's, and our basic than up to that our wage inflation, are fortunate also We rapid than Germany's. has been less now at least, to deal, in a some freedom of maneuver Thus we have economy may be danger that the way, with the cautious
moving toward recession--while keeping on the look-out to avoid the opposite danger of a new build-up of inflationary pressures. Mr. Daane asked, if the Committee followed the policy prescription advocated by Messrs. Brill and Partee, what sort of capital outflow might be expected, taking into account the extent of recent borrowing by American banks from the Euro-dollar market and the leeway available for foreign lending by U.S. banks under the new guidelines of the voluntary foreign credit restraint program. Mr. Hersey said he supposed, if there was an easing of rates here, that there would be a tendency for U.S. banks to turn more to the Federal funds market and to repay borrowings in the Euro-dollar market. However, he did not feel he could make a very good judgment on how and when that might happen. He thought the tightness in the Euro-dollar market was due, to a large extent, to the American banks' demands and that if those demands lessened Euro-dollar rates might decline. If at the same time there was an easing of rates in the national money markets in Europe, the Euro come to seem less expensive, and the shift might be dollar might neither rapid nor far-reaching. It was difficult to predict what might happen; the gist of what he had said in his statement was that, given current economic conditions here and abroad, the Committee probably should not place great emphasis on short-run
movements in the balance of payments. As to foreign lending by U.S. banks, a moderate and gradual easing of domestic monetary policy was not likely to lead to a sudden rapid rise. Mr. Brimmer commented that this might be a good point at which to discuss the new 1967 program of voluntary restraints to improve the balance of payments position, which he understood was being announced today. In answer to a question from the Chairman, Mr. Robertson said that the Board's new guidelines for financial institutions had been announced this morning. He suggested that Mr. Brimmer might want to discuss the Commerce Department program. Mr. Brimmer said that the Commerce program would be of the same type as in 1966. For direct investments, essentially area, the 1962-1964 period would still be which was the critical and the two years 1966 and 1967 would be combined used as a base, a quota for the companies partic for the purpose of providing the rate of investment permitted ipating in the program. However, for 1965-1966 was 135 per cent of the within this quota--which be reduced to an average of average during the base period--would That was a substantially more 120 per cent for 1966-1967. as percentages were concerned, than restrictive program, as far ago. The quantitative result expected was anticipated a few weeks of a $2.4 billion should be in the neighborhood under the program
direct investment outflow. Earlier it had been thought the figure would be $2.8 billion, the same as 1966, so the program had been tightened substantially in the last week or so after discussion within the Administration. There seemed to be some $400 or $500 million of direct outflow covered by neither the Commerce Depart ment program nor the nonbank financial institution part of the Federal Reserve program, and the question of how to deal with those flows was still open. Nevertheless, the further tightening of the Commerce Department program would provide an additional barrier to capital outflow, and thus was a favorable development. Chairman Martin then suggested that Mr. Daane give the Committee a summary report on the meeting on international monetary reform held recently in Washington. Mr. Daane said that the meeting, held November 28 and 29, was interesting and significant. It was the first of a series of four joint meetings of the Executive Directors of the International Monetary Fund and the Deputies of the Group of Ten. He thought a of the meeting was that given by the Chairman of the fair sum-up Group of Ten Deputies, who said that the results exceeded the most optimistic expectations. The Chairman of the meeting, Mr. Schweitzer a similar comment. Despite some earlierfears that of the Fund, made simply elicit a Group of Ten view and a Fund the meeting would was not the case. Instead of bloc positions, the view, that
participants presented their individual views in a frank and effective exchange. As he had indicated at the last Committee meeting, Mr. Daane continued, an agenda had been agreed on earlier, and it served as a guide to the discussions. The first item related to the aims of reserve creation, including the need for reserves and its relationship to adjustment policies and the supply of conditional liquidity. That discussion was sparked by Under Secretary of the Treasury Deming. On the basis of the work that the Group of Ten had previously done, he made the case for the need for reserves to provide adequate growth in liquidity. Mr. Deming stressed secular considerations, emphasizing the global need for reserves to be provided over a period of time. He cited past experience in terms of annual increments in reserves required and noted that gold and reserve currencies could not in the future be expected to satisfy fully needs of the magnitudes foreseen. It was implied by Mr. Deming's comments--and clearly recognized by the non-U.S. participants--that the U.S. was moving from its earlier stand in favor of a dual approach involving away of drawing rights and reserve units. a combination added that the French position, stated by Mr. Daane Ministry early in the sessions and Mr. Perouse of the Finance that there was no imminent maintained throughout, was essentially
shortage of reserves and, therefore, that it was more important to focus on "more fundamental problems" than on reserve asset creation. Mr. Perouse listed five such problems, which were: The adjustment process--in discussing which he focused on the deficits in the U.S. balance of payments; the holding of reserve currencies, and whether some restrictions should be placed on the holding of national cur rencies as international reserves; the relationship between conditional and unconditional liquidity; the role of gold, including the price of gold; and the question of stability of international commodity prices and the organization of international commodity markets. Throughout the sessions the French urged that the group should focus on those issues rather than on the matter of reserve asset creation. But no other country, either in or outside the meeting, accepted that diversionary tactic. It was the consensus that a clear need existed to proceed with contingency planning to provide for adequate secular growth of international liquidity. The second agenda item, Mr. Daane said, had to do with the nature and form of deliberately created reserves. The Chairman of the Group of Ten Deputies, Dr. Emminger, tried to make a case for an asset specifically designed for a limited group of countries, on the basis that only a limited group held gold in their reserves and were interested in having a gold-like reserve asset. There fore, he (Dr. Emminger) proposed having a gold-like asset for that
group and a different type of asset for other countries. The representatives of non-Ten countries convincingly presented their views on the need for universality in all aspects of reserve creation. They clearly were not interested in accepting "separate but equal" treatment. They received support around the table for universality, and there was clear adherence to the view that it was desirable, particularly with respect to the distribution of new assets. A major question left open here, however, was the desirabil ity of universality in decision-making. Distribution of deliberately created reserves was the third topic on the agenda, Mr. Daane continued. There was very little disagreement with the view that there should be some form of across-the-board distribution, according to an objective formula such as Fund quotas. The fourth item on the agenda concerned the utilization of including such questions as insuring acceptability new reserve assets, misuse, and the kinds of safeguards needed, Mr. Daane and preventing that what the group was was a fairly clear consensus said. There striving for was an unconditional asset. With respect to safeguards, having a gold transfer ratio position in favor of the Emminger not only by the U.S. asset was clearly rejected, attached to the the meeting Chairman Emminger On the last day of but by the non-Ten. ratio might be the more elegant that while a gold transfer indicated
way of providing a safeguard, one could not always have elegance. Thus, there was evidence of some re-thinking on the part of the Group of Ten--particularly by such people as Messrs. Emminger and Ossola--on how to provide safeguards without a gold link. The fifth topic on the agenda, Mr. Daane said, concerned conditions and circumstances of activation of a contingency plan, but that topic was not discussed. The second joint meeting would be held in London on January 24-25, 1967, and among the items on the agenda probably would be the questions of decision-making and of the holding and use of the reserve asset. Mr. Daane added that the Group of Ten Deputies had a separate session on November 30, largely procedural in nature, at which two working sub-groups were set up looking forward to the agenda in January. One of those, on which he was included as a U.S. representative, was to consider the question of reserve policies. The other sub-group would deal primarily with the holding and use of the reserve asset, but also with the entire range of questions having to do with the construction of the asset. It was not entirely clear to him whether the sub-groups were simply to look back at the record and pull together the relevant considerations or whether they were to do some thinking of their own, looking forward. Mr. Solomon, whose comments were invited by Mr. Daane at this point, noted that after the meeting there were quite a few
releases from Paris, not all official, commenting on some of the same issues that were raised at the meeting by the French represent ative. Two questions were included that had not been discussed specifically at the meeting. One had to do with the price of gold, which the French representative had passed over lightly at the meeting. The French seemed now to be saying through the Paris press that, if and when there were a need for additional liquidity, thought should be given to raising the price of gold, which had not been changed in more than 30 years. The second factor brought in was that there was one major country with an interest in these mattersthe Soviet Union--that was not a member of the IMF. He did not know whether the introduction of those two new considerations would lead or not. On the gold price question, the French were trying anywhere that any need for a price increase lay to be responsible by saying the gold market need in the future, and therefore at some point time, however, they were disturbed now. At the same not become It was clear to everyone who had trying to keep the issue alive. of gold had not been on the agenda been at the meeting that the price of Ten or the Fund, nor separate meetings of the Group at joint or would it be. Dr. Emminger and Mr. Schweitzer Daane added that both Mr. press conference that the price stated categorically at their had meeting or any other agenda for the London was not on the of gold
meetings of their respective groups. The French then asserted that Messrs. Emminger and Schweitzer had no authority to make such a statement, but the fact that they did have full authority was subsequently confirmed. 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: An accurate reading on the economic outlook seems even more difficult at this time than usual because of the abundance of uncertainties and conflicting cross currents. For the moment, demand pressures in the economy continue to moderate at the same time that cost pressures appear to be mounting. Despite the further evidence of a slower rate of expansion in the private sectors of the economy provided in the latest surveys of plant and equipment spending plans and of consumer buying intentions, I am not at all convinced that anything resembling a recession is in prospect for next year. In fact, several elements in the current picture suggest that the pace of the advance may accelerate again early next year. The precipitous housing decline should level off, the drag on produc of the currently much slower rate of inventory tion should diminish, and most of the accumulation to a higher and more normal savings rate adjustment should be completed. With every prospect for a further in defense spending in 1967--in the absence large rise of any definite word to the contrary from the Administration--a strong and even excessive expansion be in the cards. Our economists see a good seems to likelihood that GNP growth may be of roughly the same order of magnitude next year as in 1966. I might add, parenthetically, that it is amazing to me how can look at the same figures and different economists come out with varying conclusions. the current quarter of slower GNP Even during growth the price situation is distinctly unsatisfactory. prices continue to increase and overall Consumer
industrial wholesale prices are likely to resume their rise. Declines in crude material prices seem to be leveling off as prices of finished products remain on the uptrend. I have been struck by the number of individual wholesale price increases announced in the last week or so. Labor costs per unit of output have advanced sharply since July, and with growing wage pressures and a slowdown in productivity growth, the outlook for such costs is disturbing. As we have all recognized, today's general business situation is very different from the nicely balanced growth of the early 1960's. There is no assurance that such a well balanced growth can be re-established within the near future. Rather, we may have to face the fact that somewhat slower than ideal real growth may be required if we are to avoid grossly excessive inflationary pressures. The balance of payments statistics for October, showing a liquidity deficit of $770 million, underlined the continued imbalance in our international accounts. Following the November deficit of perhaps $300 to $400 million, a substantial surplus may be achieved in December, but only as a result of prepayments on military orders and other special transactions. If so, the full year liquidity deficit may be only moderately greater than the $1.3 billion of 1965. However, as we look ahead the chances for avoiding a considerable worsening of the deficit in 1967 do not seem favorable. Some deterioration on capital account seems inevitable. I was glad to hear Mr. Brimmer's report on the direct investment program, but I still feel that some deterio on total capital account is ahead. And military ration outlays abroad will probably rise substantially. I that our trade surplus will improve see no assurance these adverse factors, more particularly enough to offset again and if the business expansion accelerates if costs become built into the appreciably higher labor year. Finally, it goes without saying economy during the a sizable official settle we are likely to incur that with near-balance for 1966. ments deficit in contrast still puzzled by the general I confess that I am and monetary statistics over the weakness of the credit the extent of their few months. In my judgment, past visible development of is not matched by any weakness quite likely that our economy. It still seems the real
seasonal adjustments have given an exaggerated picture of the slowdown by failing to take adequate account of tax-related and anticipatory borrowing in the first seven months of the year. There is no doubt that there has been a significant slowing of bank credit growth, but if we look at the year as a whole the rate of slowdown is reasonable and more or less in line with what we have been trying to achieve right along. One question of particular interest is whether the current slowdown in loan growth is still related primarily to the supply restraints imposed by the banks, or whether there is a slackening of underlying loan demand. Both elements are doubtless present, but most New York bank lending officers believe that their own restraint policies are the major cause. The banks generally view Federal Reserve policy as still restrictive, and they are acutely aware of their liquidity problems. Thus their conservatism in dealing with loan requests is quite understandable. There has not yet been sufficient time for them to react to the easing of their marginal reserve positions in November nor to the decline in short-term rates in recent weeks. Clearly, some modest resumption of bank credit growth, as compared with the apparent cessation of growth in the last few months, now seems very much in order; and I hope that the somewhat easier money market conditions that now prevail will lead to that result. It was suggested that it would be helpful for the Reserve Bank Presidents to comment briefly at this time on the construction and mortgage loan situation in their It was the general feeling of most of the Districts. / senior loan officers surveyed that new commitments for 1/ In a wire dated November 29, 1966, to the Presidents of all Federal Reserve Banks, the Secretary of the Committee stated that some members had indicated it would be helpful to have comments at this meeting concerning the degree to which the construction and mortgage loan situation in the respective Districts was showing signs of change. It was suggested that a small sample of representative bank and nonbank lenders be asked several questions relating to current flows of new commitments for construction and mortgage loans.
such loans are at or near the low point for the year. At best, only a moderate recovery can be expected in the immediate future. Savings and loan associations were the most pessimistic of the four groups of lenders contacted, and mutual savings banks were probably the most optimistic. Life insurance companies are presently willing to commit themselves for permanent mortgage loans, but at a reduced pace and only in the quite distant future--no earlier than late 1967. Commer cial banks report that they have not tightened up on construction lending to any greater degree than on other types of business lending; nevertheless, the cutbacks have in fact been substantial, possibly reflecting the fact that the construction industry has many nonprime borrowers. The commercial banks continue to grant a fair amount of homeowner mortgage loans, but the relatively few large banks that had actively sought to expand their role in this field during the past few years have cut back on their efforts in this direction. Under all the circumstances, I think it is reasonably clear that credit policy should remain unchanged over the next four weeks. The underlying strength of the economy and the unsatisfactory balance of payments position argue effectively against any further easing of policy. On the other hand, while I felt that we were moving a little too overtly toward a policy of greater ease at the last meeting, I would not advocate at this time a return to a posture of greater firmness in view of some further evidence of a slowdown in the rate of economic expansion, the weakness of the credit and liquidity indicators, and the prospect of the usual year-end churning in the money market. As for specific instructions to the Manager, I think we should stress maintenance of current money market conditions, with Treasury bill rates in a 5 to cent range and a Federal funds rate of around 5-1/4 per or less. I would hope that net borrowed 5-1/2 per cent would be consistent with reserves of around $200 million money market conditions. In any event, conditions these take precedence over net in the money market should the Manager should again be given borrowed reserves, and his judgment as to how best considerable leeway to use stable market conditions. to maintain
With respect to the directive, I think that the staff's draft alternative A is entirely satisfactory.1/ I would just like to make one further comment with respect to our longer-term policy considerations and the so-called policy mix. I believe a general tax increase is still highly desirable as a sort of insurance against finding ourselves again facing problems similar to those of last summer if the economy should gain speed next year. On the other hand, I believe we should not encourage any tendency to think that a very major easing of monetary policy might be considered as a sort of "trade off" against a tax rise. I say this because I am convinced that our continuing balance of payments difficulties place a rather strong limitation on how far we can go in easing monetary conditions for domestic purposes. Unfortunately, we find the flexibility of monetary policy curtailed in both directions, insofar as major swings of policy are concerned. This is not to deny, of course, that there is still considerable room within which to exercise an important influence on business and credit developments. Ellis commented that quite clearly the major propellent Mr. driving the New England economy had been and continued to be the stimulus to manufacturing that derived from Federal spending, especially the defense and space programs. A tally of published defense contracts--which showed sharp expansion last spring--plus application of an established lag period of six months or more, that New England manufacturers would continue under suggested Such pressure was showing up in delivery pressure for some time. which registered its twelfth seasonally adjusted employment, proposed by the staff two alternative draft directives 1/ The for consideration by the Committee are appended to these minutes as Attachment A.
increase in October; in manhours of production workers, which increased in October to a new record of plus 7.2 per cent from October last year; and finally in personal income payments, which showed New England exceeding the nation in year-to-year percentage gains. In the construction field, declines in the residential category were just barely offset in the totals by gains in other categories for a 3 per cent year-to-year gain in October. The ten-month total now measured a 20 per cent gain over a year ago--for the U.S. it was 4 per cent. Mr. Ellis remarked that in response to the Reserve Bank's queries concerning present and prospective mortgage flows, both the banks and insurance companies reported that their new commit ments remained very low. After a period of rebuilding their liquidity and gaining assurance about the probable flow of deposits and policy loans, they hoped to resume mortgage lending. A very few banks reported that they did have money and were still granting mortgages, but most reported only extending commitments to long established customers that they felt they must serve. Mr. Ellis stressed (1) the desire of the insurance companies a halt in policy loans before they resumed new commitments; to see of the mutual savings banks to see their loan-deposit (2) the desire limit before they resumed the 85 per cent legal ratios recede from the desire of the commercial banks to new committing; and (3)
rebuild liquidity before turning their loan officers loose. A year ago liquid asset ratios of New England banks matched or exceeded the national average; today they ran 2 percentage points below. While such ratios had declined perhaps 2 percentage points for the national average, they had declined 5 or 6 percentage points for the Boston banks. Looking ahead, Mr. Ellis said, his economic perspective agreed more nearly with that of Mr. Hayes than what he judged the staff to be presenting. In deliberating the proper course of monetary policy for the next four weeks, the Committee had two major kinds of confirmation that it was looking for at its last meeting. On the one hand, it had a further confirmationof slow down in the rate of expansion of the economy to what used to be called "a more sustainable rate of expansion." That was now called "soggy," which he judged meant a qualitative evaluation of of an actual turndown in the economy some a strong possibility time in 1967 unless emerging trends in the private economy were reversed. On the other hand, the Committee had confirmation of a large, and probably still growing, volume of Federal outlays. As availability of information about Federal expected, the delay in outlays traced not to possible shortfalls but rather to how large should be allowed to appear to be. He appreciated Mr. Brill's they room left for monetary policy. measurement of the maneuvering
Failure to accompany the deficiency appropriation request with any request for a tax increase suggested that the maneuvering room for the Committee to lessen monetary pressures in favor of fiscal restraint was narrower than it would be otherwise. The Committee's choice of policy now seemed confined to the question how much monetary restraint remained appropriate given the conditions of private and Government demand emerging in the present fiscal and debt management context. The principal effect of the Committee's policy change to date, Mr. Ellis judged, had been to demonstrate that the Committee was flexibly sensitive to the desirability of less monetary restraint if the economy could accept it without resur gence of the earlier excesses. With the Committee's having demonstrated that awareness, he would be prepared to see it rest on its oars and initiate no further change in policy until the course of fiscal policy became more clear. Mr. Ellis suggested that the two draft directives were not really different alternatives. The blue book projected a failure to expand or little change (plus or minus 2 per cent) in proxy for December. Alternative A provided that the bank credit "somewhat easier conditions shall be sought if bank credit appears to expand." So, if the staff projections were to be failing to ease further. Alternative B correct, the Manager was directed
without equivocation directed the Manager toward "attaining somewhat easier conditions." In effect, therefore, both alter natives called for easing. To provide language that would afford more choice, he suggested that alternative B be left as it was but that alternative A be converted to a "no change" directive by substituting the word "declining" for the words "failing to expand," with the understanding that "declining" would mean something more than the plus or minus 2 per cent projected by the staff. With that change his choice would be alternative A. Mr. Irons commented, with regard to the construction and mortgage loan situation in the Eleventh District, that 41 banks, companies, savings and loan associations, and other lenders insurance 41, 25 indicated that the flow of had been contacted. Of the for the year. Seven of the was at its lowest level commitments 18 of the 25 felt that there 25 expected it to go still lower; the next two or three months. some signs of recovery within might be divided, with 8 taking the remaining group was about evenly The the low point of the year but anticipating position that they were at already experiencing recovery from the low recovery and the other 8 caution with respect to the over-all figures, point. He would the views reflected the situation of the particular however, that the answers of the two largest lender interviewed. For example, The same thing was true of the banks in the District did not jibe.
two largest locally-based insurance companies; and one of the two largest mortgage bankers was optimistic while the other was pessimistic. Moving to District economic conditions, Mr. Irons said that the various elements of the economy seemed to be basically strong but not advancing with the same strength as some time ago. Employ ment continued to rise, inching up to record levels each month. It was estimated that in Dallas the unemployment ratio was slightly over 2 per cent and would go to 1.9, while Houston was already at 1.9, so there was a very tight labor market. The index of production continued to move up. Construction was stronger last month and department store sales were regarded as generally favorable, although it was again a matter of obtaining the expressions of particular department stores. Agricultural conditions were quite good, but rain in the area. Cotton production there was a general need for per cent below a year ago, largely because was going to be about 25 conditions were good, but the of the new cotton program. Livestock on winter wheat in the District. of rain was having its effect lack asked if they could two West Texas banks A couple of months ago, discount accommodation for grazing on winter wheat, obtain six-month demands in the from since. Credit they had not been heard but on whether winter somewhat depending might be affected District meet grazing requirements. sufficient to wheat was
On the financial side, Mr. Irons reported that bank loans in the District had been drifting down a bit. Total deposits were down, but time and savings deposits were up slightly. Borrowings from the Reserve Bank had not been large; over the past four weeks they had declined by some $10 million. Throughout the fall period there had rather surprisingly not been a demand for credit through the discount window from the usual seasonal country bank borrowers. Some small country banks had come in that had never been in before, having been referred by their city correspondents, but generally there had not been the usual demand from country banks. The cautious conclusion of businessmen and bankers in the major District cities was that there had been an easing of monetary policy, Mr. Irons said. They thought the worst of the tight money period was over. But they were still cautious and were worried about the outcome in Vietnam and about the tax situation. On balance, the majority probably would favor an increase in taxes if they were told why it was necessary. In his opinion, the public probably was more ready to move in that direction, if they knew what was needed, particularly in terms of the cost of the Vietnam involvement, than the politicians seemed to suppose. side, Mr. Irons noted that there had been On the national slackening in the growth of the economy, although some further high levels of employment, output, and income were being maintained.
The recent slackening in the pace of business plant and equipment expenditures was of some significance. The strength in that area had been compensating for several weaker sectors such as housing, automobiles, and heavy durables. On the other hand, income and employment continued to rise, there continued to be almost full utilization of plant capacity, and a high volume of trade was expected over the holiday period. In summary, there was some indication of lag in the private economy, but an offsetting trend in the public sector, and the private sector did not appear to be fundamentally weak. One should not rule out the possibility of a general strength. Also, he had some doubt that re-appearance of calmed to the point of being more inflationary pressures had been There were still price pressures less canceled out as a problem. or could be expected over the in the economy, and wage pressures not increased in line with While bank credit had coming months. follow that bank it did not always availability of reserves, the into the market. just from putting reserves credit would expand and bankers that cause businessmen a number of factors There are be taken into lend, and they must to borrow or to decide whether consideration. until the next that credit policy Mr. Irons suggested about the toward maintaining be directed of the Committee meeting over the recent as had prevailed market conditions same money
period. He would avoid further easing, especially any overt move in that direction. He considered alternative A of the draft directives as the more desirable of the two, although he was some what concerned about the proviso clause, which specified that if bank credit appeared to be failing to expand, somewhat easier conditions should be sought. He did not think the problem was as direct and simple as that language implied, especially when a short-term period was involved. This was a period of great uncer tainty in a number of ways, and one would hardly expect the direct relationship to prevail that seemed implied by the proviso clause. Nevertheless, he would accept alternative A. He would expect that within a reasonable margin of error the three-month Treasury bill rate would be around 5.10 per cent, the six-month bill rate around 5.20 - 5.25 per cent, the Federal funds rate around 5-1/2 per cent, and net borrowed reserves around $200 million, possibly less. Mr. Swan reported that October saw a rather broadly based increase in nonagricultural employment in the Twelfth District, despite the possibility of a fractional increase in the unemployment appeared that that trend may have continued in rate, and it November on the basis of the total employment figure for California. However, the projected employment gains in December and January in the aerospace industry were quite modest, in part because of expected shortages and delivery delays for various components,
including engines. There had been a further considerable decline in construction contract awards in October in all categories, and in the first ten months of 1966 there had been a decline of 8 per cent in total awards from the similar period in 1965, compared with a gain of 7 per cent for the U.S. as a whole. Residential contract awards were down 26 per cent compared with a 4 per cent increase in nonresidential awards and a 5 per cent increase in heavy construction awards. Twelfth District weekly reporting banks showed an increase in total credit in the three weeks through the end of November, Mr. Swan said, primarily because of acquisitions of Government securities. Business loans were up a little more than in the U.S. as a whole, reversing the trend during the earlier part of the year, but the increase was substantially less than for those same weeks a year earlier. He gained the impression from some of the they still felt loan demand was strong. In the major banks that business loan area they were not supplying all the potential but at the same time there was some willingness to borrowers, less intense than a few months admit that demands were somewhat ago. end of November, Mr. Swan the three weeks through the In banks showed a large gain continued, the principal weekly reporting and a better and political subdivisions deposits of States in time
picture in the behavior of large CD's than banks in the rest of the country, although that was perhaps related to the State and municipal deposits. Large denomination CD's in total showed a gain of some $66 million, although there was a loss of $2 million in such certificates issued to individuals, partnerships, and corporations. In October the savings and loan institutions in California apparently accounted for more than the total loss of funds for all savings and loan institutions in the country as a whole. That was somewhat surprising, and he had no specific explanation. As to the survey relating to construction and mortgage loans, Mr. Swan reported encountering much the same experience as reported by Mr. Irons in terms of differences between the same types of institutions in the same areas. Over all, respondents indicated that mortgage commitment activity was now at about its lowest point, with some slight improvement expected over the next but not necessarily the next two or three months. several months would still be at a rather low level even with the improve Activity ment anticipated. As to the various types of institutions, with banks and insurance companies seemed to few exceptions commercial headed downward in their commitment volume. The banks be still reduced their lending in the same proportion as the others, had not for a smaller part of the decline thus far. The so they accounted
savings and loans had cut back sharply in the spring and now expected some improvement, with a few expecting to increase their lending substantially, from the present low level, in the next few months. There seemed to be more differences between areas within the District than among types of institutions. The Los Angeles and Salt Lake City areas saw little expectation of early recovery; those were areas where overbuilding had been pronounced in the past. In the northern California area there was some indication of improvement over the next several months. In the Northwest the optimism seemed to be greatest. The decline in Oregon had been more modest than in California. In Seattle it was doubtful whether there was any real decline due to the substan tial increase in demand for housing during most of 1966. It was pointed out by some lenders, Mr. Swan said, that second mortgages taken by sellers had filled part of the gap. Data on loan records that the Reserve Bank had been able to obtain that out. Recorded loans made by for certain areas tended to bear lenders other than financial institutions were up about one-third, from August 1965 to August 1966. in terms of the share of the total, Mr. Swan said he had nothing specific to add to what had picture. There were still uncertainties been said about the national aspects of the over-all picture the situation, although some in picture seemed to be. He would were not as weak as the financial
translate that into a view that any further monetary easing should be quite modest; he would not favor any substantial move in that direction. It seemed to him that the Committee would have a much better perspective when the budget figures were available and when it could see whether the seasonal decline in the early part of next year was orderly. In terms of the directive, Mr. Swan felt somewhat like Mr. Ellis: given the proviso clause, there was not a great choice between the two draft directives. That led him to favor, although not strongly, alternative A as originally written. If alternative A were modified as Mr. Ellis has suggested, however, he (Mr. Swan) would prefer alternative B. Mr. Galusha reported that last week's survey of Ninth District mortgage lenders yielded a rather confused outlook. Mort gage commitments, well below the 1965 total in May, had continued and many of the lenders were inclined to believe that to decline, commitments would not increase again soon. But the situation of the savings and loan associations appeared, when seasonally adjusted, have improved somewhat; and on that count one could reasonably to look for an increase in the level of mortgage commitments fairly soon. Also, mortgage terms appeared to have stabilized, at least in the Twin Cities area.
Mr. Galusha added that he had, surprisingly enough, received a few reports of country banks being on the look again for business loans. The situation of District city banks, as measured by their combined basic reserve position and combined loan-deposit ratio, had eased of late, but not enough to send those banks looking for loans. According to reports, city banks still felt themselves strapped. From what the authors of the green book had to say, particularly about banking developments nationally, it appeared to Mr. Galusha that the Committee should continue the recently trend to easier monetary conditions. With the plant initiated and equipment survey results in, it was possible to be more con fident today than a couple of weeks ago about the economic outlook. being bearish, called for an easing of the And that outlook, banks--an easing which, even allowing for position of commercial There were still some not yet been effected. lags, had apparently to be made, but that fact seemed to important fiscal decisions Committee to pause now. The point, of provide no reason for the rates were increased, the need would be course, was that if tax for a sharply easier monetary environment. was a constraint in the Ninth The September 1 letter discount window, Mr. Galusha on the operation of the District be difficult enough to written withdrawal would said. An obvious
write in the best of circumstances, and in the context of these perilous times might well be impossible. But interment of the letter in other less structured ways could be encouraged. Mr. Galusha added that with the U.S. balance of payments position being what it was, a reinstatement of the investment tax credit would seem to make more sense than a sharply easier monetary environment. But that was looking rather far down the road. The balance of payments problem, however serious it might be, would not seem to preclude some modest easing of monetary restraint now. To be a bit more precise, he personally would have no misgivingsassuming the blue book authors were right--about a level of free reserves close to zero or better. Galusha commented that he shared Mr. Hayes' perplexities Mr. He favored draft alternative B. but not Mr. Hayes' conclusions. written and the fact that it had no proviso He liked the way it was clause. a need to begin looking closely at Mr. Galusha suggested of next year. He had for the second and third quarters prospects in process a substantial slowing up of a feeling that there was in the Ninth District, that domestic Federal programs, at least spring and summer. Cutbacks to show up clearly next would begin in areas like the were particularly important in Federal spending was dependent on Federal so much of the economy Ninth District where
programs and their absorption of labor displaced from other lines of work such as construction. Highway construction, for example, had done a remarkable job of absorbing carpenters no longer engaged in building houses. Mr. Scanlon reported that the past several weeks had witnessed growing uncertainty among Seventh District businessmen and lenders with regard to economic prospects for the coming year. Forecasts by prominent economists had emphasized that the restric tive monetary policy of the past several months made a slowdown in 1967 almost inevitable. The business community was in a mood to make downward adjustments in inventories, capital expenditures, and new hirings. Output cutbacks had occurred in building materials, steel, autos, and household appliances. Forecasts of auto output for next year had been reduced to about 8 million units, Mr. Scanlon noted, compared to 8.6 million in 1966, Steel orders had been very slow in December and output to be off 5 to 10 per cent from the fourth quarter was expected to the first quarter. District orders for machinery and equip ment were at the lowest level in several months in October, with machinery orders down sharply. The outlook for construction construction had not improved. Despite all of that, little easing had been noted in District labor markets except for those heavily New claims for unemployment compensation involved in output of autos.
in October and November were well above last year in the State of Michigan and in some Wisconsin centers, but otherwise labor short ages persisted. Credit developments at Seventh District banks closely paralleled the national picture, Mr. Scanlon said. Although the evidence suggested that some weakening in demand for credit probably had taken place, much of it was undoubtedly attributable to monetary restraint and to continued restrictive loan policies of the major banks. Moreover, low bank liquidity might keep banks reluctant to reverse those loan policies for some time ahead. The large Chicago banks continued to show quite large basic deficit positions although they had managed to cover them with relatively little resort to the discount window. Some gradual attrition in CD's had continued despite the current interest differential over 3-month bills, and there had been no net inflow of funds from certificates in recent weeks. consumer-type With respect to Mr. Holland's wire of November 29, Mr. Scanlon said that inquiries had been made of 21 lenders (12 savings and loan associations, 4 commercial banks, and 5 mortgage and life insurance companies). Three savings and loan respondents indicated that the year's low in new commitment volume had passed and one bank indicated that volume had been on the rise throughout the year. other lenders (9 savings and loan associations, 3 banks, All of the
and the 5 life and mortgage companies), reported commitments now at their low points for the year, with respondents about evenly divided between the wire's categories A and B combined (volume projected as falling further or remaining at the present level) and C (some recovery anticipated in next two or three months). Several of the savings and loans reporting some improve ment in savings inflow since October 1 indicated that they had been holding back on new commitments and expected to continue to do so until the reaction to the year-end dividend payout had been felt, Mr. Scanlon added. Signs of weakness in the demand for mortgage loans were reported by a sizable proportion of the respondents, who cited the sharp decline in used home sales associated with the construction slowdown as responsible factors, persistence of a rate level (with contract rates along with the commonly in the 6-1/2 to 7 per cent range), fees and charges, and credit worthiness/security requirements related more appropriately 1966 than to currently prevailing to the exuberance of early No marked differences turned up among classes of conditions. financed (or areas) in the survey lenders or kinds of property the sample might conceal such although the smallness of responses, differences. while he would prefer Mr. Scanlon said that As to policy, some moderate growth in aggregate to see the figures reflect
monetary and credit measures, he believed that in view of the uncertainty over tax policy and the course of military expend itures and the year-end churning in the markets, a policy of maintaining currently prevailing money market conditions was appropriate for the next four weeks. He favored alternative A of the draft policy directives. Mr. Clay said that information obtained from a survey of 23 financial institutions located in the six largest cities of the Tenth District indicated that mortgage market conditions had eased slightly since mid-summer. In some cities, interest rates on conventional mortgages and discounts on Government-underwritten loans had declined slightly from the high levels prevailing last summer. A moderate improvement in net savings flows was reported by a majority of the savings and loan associations queried, but the availability of mortgage funds at commercial banks appeared to be unchanged or moderately lower and the availability from life insurance companies remained at previous low levels. Mr. Clay also said that the recent improvement on the fully reflected in new commitment side did not appear to be supply a deficiency in demand result extensions. In part, that reflected houses on the market from defaults on ing from unsold new houses, special supply situations. The FHA and VA loans, and various
demand deficiency further reflected reported unwillingness or inability of many buyers to borrow at present rates and terms. Another reason why the increased availability of funds was not fully reflected in new commitments was a cautious approach adopted by the lenders, Mr. Clay continued. Although savings and loan institutions might have funds available, they were concerned about their liquidity positions and were taking steps to reduce their Federal Home Loan Bank borrowings. In some cases they had increased their extensions of loans to purchase existing homes but were not yet willing to make commitments for new construction. In summary, Mr. Clay said, the present flow of new commit ments extended by savings and loan associations appeared to exceed the low established in the preceding months, but, due in part to in demand and to lender caution, new permanent financing deficiency construction had not kept pace with improved fund availability. and in net savings flows continued, an increase in If the improvement as the market adjusted to new conditions. commitments was anticipated banks, Mr. Clay said, the availability of At commercial down moderately from levels in preceding funds was unchanged or side together with condi That development on the supply months. had reduced the level of new tions of demand already mentioned low point of the year. Most extended by banks to the commitments in their commitment extensions were expecting little change banks
during the next few months. The flow of new commitments extended by life insurance companies remained at its low level of the year. Some market participants expressed a weak expectation that life insurance companies would increase their commitments in coming months. In view of recent economic developments, Mr. Clay continued, the decision made at the last Committee meeting to reduce the degree of monetary restraint appeared justified. The shift in policy brought significant response in the money markets. While the reserves and bank credit might have resulting developments in bank been less than hoped for, note must be taken of the advance in reserves as member banks reduced their borrowing from nonborrowed the Federal Reserve Banks. the prevailing uncertainties concerning Government With Mr. Clay thought any further action spending and fiscal policy, the present time should be of moderate toward credit easing at appropriate, however, to proceed proportions. It would appear of relaxing the degree of monetary somewhat further in the process might include a Treasury In the period ahead, targets restraint. Federal funds rate 5 to 5.15 per cent, an effective bill rate of borrowed reserves ranging downward to 5-1/4 per cent, and net of 5 recent levels toward zero. from
Open market operations conducted in accordance with those goals should contribute to member bank reserve expansion, as desired under present circumstances. The most recent weekly data suggested to Mr. Clay that that development might now be in process. Such money market conditions also should substantially reduce or possibly remove the incentive to liquidate CD's for interest rate differentials, although there could be no assurance that substantial CD liquidation would not take place to obtain funds apart from interest rate considerations. Alternative B of the draft economic policy directives appeared to Mr. Clay to be in line with the foregoing policy approach. Such a policy prescription for the period until the next meeting, including the directive choice and the rough targets for implementing policy, should be thought of in comparison with the interval since the last meeting. Mr. Wayne commented that on the basis of results obtained from a small sample (18 lenders), it appeared that most mortgage lenders in the Fifth District felt that the flow of new loan commitments had reached its lowest point. Half of the lenders saw slightly less than half (7) felt that some no recovery in sight, improvement might be expected in the next two or three months, and two respondents felt that the recovery had already begun.
In a personal contact apart from the survey, Mr. Wayne continued, one large mortgage company reported that within the past two weeks it had received several unsolicited calls from financial institutions that had bought mortgages in the past. The callers indicated clearly that they were not buying at present, but wanted to know what offerings were available and intimated that they might be buying before long. The slower rate of advance that had characterized over-all economic activity in the Fifth District for the past two or three months had continued and perhaps deepened slightly, Mr. Wayne said. Over half of the textile and durable goods manufacturers included in the Reserve Bank's latest survey reported declines in new orders and backlogs; on balance, the same trend was noted among manufac turers of other nondurables but the proportion was somewhat less. A larger number of respondents reported shorter work weeks and slight reductions in prices received. Paradoxically, in the face of those reported declines, businessmen's expectations for improve Gains in nonagricultural employment had been ment had increased. reported and the insured unemployment rate continued to be very low. In terms of the national economy, Mr. Wayne agreed with the analysis presented by the staff: the trend toward less vigorous growth seemed to be continuing slowly but steadily. Except for the
slightly higher growth of payroll employment and the drop in the rate of unemployment, the latest data suggested a progressive easing in the private sector. The cutback in automobile sales and output now appeared to have spread to other consumer durable lines and the recent survey of consumer buying intentions provided no basis for expecting any early improvement in automobiles or home appliances. A significant new development was the reporting by several large companies of the laying off of sizable numbers of workers and a considerable reduction of overtime. Steel and lumber producers, other suppliers of building materials, and the furniture industry were feeling the effects of the long decline in residential building. Retail sales continued to move at a rather subdued pace and the irregular but persistent downward trend in the growth rate of instalment credit for the past 16 a more than temporary decline in the demand for months suggested construction industry might be depressed durable goods. The in Federal spending recently announced further by proposed reductions the large cut in the highway program. by the President, especially encouragement from the latest the builders derive much Nor could and consumer plans capital outlays by business surveys of planned certainly receive a signif While the economy would to build homes. over the next six months, it icant stimulus from defense spending
was by no means clear that strength in the Government sector would offset entirely the developing weakness in the private sector. In any event, it seemed to Mr. Wayne that the recent behav ior of aggregate reserves, bank credit, and the money supply was not appropriate to the current business environment. The Committee had moved gradually toward slightly less restraint in its policy, but the money supply and bank credit had shown no significant response. He felt the Committee should seek to encourage moderate in both; to attain that goal, he would favor contin rates of growth the policy of slightly less restraint. uing also suggested that serious consideration be Mr. Wayne of the restrictive implications in given to an orderly withdrawal There was never an ideal time for making the September 1 letter. the wait the more difficult it would such a move, but the longer aware that such action at that position. He was be to abandon to the market more ease than was wanted, this time might suggest that the danger of an undue increase in business but he believed loans had been reduced by the banks' recent experience with CD's, by the much slower growth economic activity, and by the easing in Further, he saw a moral outlays planned for next year. of capital banks. In response to conversations obligation to the member Fifth District banks 1 letter, some spring and the September last policy of curbing carried out an effective had, in good faith,
business loans. In return, they had asked to be advised when the restriction ended so that they would not be at a competitive disadvantage. If their cooperation was to be expected in the future, the System should keep faith with them on that matter. Finally, he would be happy to get back to what he considered more appropriate methods of implementing monetary policy. Mr. Wayne said, in conclusion, that alternative B of the draft directives was appropriate to his view of a proper policy for the next few weeks. Mr. Shepardson said it seemed to him that the action taken at the last meeting of the Committee had resulted in some easing as indicated by some of the rate movements that had occurred and by the prospect of an upturn in the money supply, which he thought was appropriate. Admittedly, credit expansion still lagged in light of the liquidity situation of the banks, but it might be expected that the banks would try to improve their liquidity before credit expansion. Recognizing the undertaking any significant somewhat lesser degree of pressure in the private economy, it to him that there was still a great deal of nevertheless seemed fiscal program might be. uncertainty in what the Government's the weeks prior to the next meeting there was still Therefore, in He thought that in view of the reason for proceeding cautiously. that some growth in the report of the staff rate levels achieved,
the money supply was indicated, and the probability of a lower net borrowed reserve figure this week, it would be appropriate to continue for the coming period in about the status quo. On the directive, Mr. Shepardson agreed with Mr. Ellis that with the proviso clause included there was not much difference between the two draft directives. His preference was for alter native A, either without the proviso clause or with Mr. Ellis' suggested change. Mr. Mitchell said he regarded today's staff analysis as a strong warning against showing too little concern about the danger of slipping into recession. Several people had commented that the performance of the economy was still good. However, the accelera tion of the economy had lost its momentum several months ago. The question now was whether the economy was decelerating, a state not far from that of slipping into a downturn. There was evidence in in the industrial production index, and in the the GNP figures, by Mr. Scanlon, for example. It was necessary to specifics given keep in mind the lags in policy. Members of the Committee were about the recent lag in achieving growth in the now apprehensive bank credit. He did not think the Committee money supply and to take a relaxed position on that score; could afford any longer drastic to achieve the desired it must do something sufficiently growth had already begun, growth. Maybe, as some people suspected,
but from the information the staff had supplied he doubted that the liquidity barrier had yet been pierced. Until that barrier was pierced the desired results would not be obtained. Mr. Mitchell also expressed the view that the housing situation was more serious than some seemed to assume. Recovery in that area was necessary, but the question was how to achieve it. One way would be to put the financial intermediaries back in business and give them confidence that they could compete with rates in the market. Another way would be to make it possible for the larger banks to warehouse some mortgages so that the insur ance companies would come back into the market. Mr. Mitchell said he believed that everyone at this meeting objective, although that fact tended to be obscured shared a common interested in what Mr. Ellis had said about by semantics. He was that the staff's two alternatives did not the directive, and agreed he (Mr. Mitchell) doubted Committee much choice. However, give the offer the Committee any real that the staff could conscientiously considering the nature of their economic alternative to easing, that at the last meeting Mr. Robertson had analysis. He recalled for operations "with a view to encour suggested a directive calling reserves and bank credit, aging moderate expansion in aggregate ease sharply." He conditions do not that money market provided supported that proposal more (Mr. Mitchell) now wished he had
strongly then. He would favor a modified version of alternative B today, calling for operations "with a view to attaining a moderate expansion in the money supply and bank credit." Mr. Daane commented that he wished he could share the staff's seeming sense of certainty as to the economic outlook and its implications for monetary policy, but he could not. As an economist and long-time member of the System's forecasting committee on business developments, he recalled well an occasion at the end of May 1950 when a former member of the staff assured that committee that the one certainty that could be depended upon was that there would be no intensification of the "cold war." Only a few weeks later the Korean conflict began. substantive side, Mr. Daane said he remained skep On the a deceleration of defense spending. He did not doubt tical about figures that would shortly appear in the the credibility of the he impugn the motives of anyone involved in the budget, nor would He simply doubted that a war was presentation of those figures. be surprised to see an actual decelera waged that way, and he would capital spending, he thought that tion. As to the tapering off of financial supply side and also the reflected the situation on the supply side, and that it was in the interest of sustainable physical outlook, he agreed with Mr. Irons expansion. As to the domestic fundamentally weak. While he the private sector was not that
conceded the weight of evidence on the staff side, he would not rule out a resurgence of pressures. Similarly, Mr. Daane said, he was impressed by the thought ful views presented by Mr. Polak of the International Monetary Fund at the conclusion of this year's Article VIII consultation with the U.S. Mr. Polak had said in part that: ". . . if monetary conditions should ease in 1967, whether because of a tax increase and a shift in the policy mix or because of subsiding domestic credit demands, there would be a great need to avoid redundancy of bank reserves, bank credit, and general domestic liquidity thoughout the system. In contrast to the 1961-62 policy, for example, the banks would have to be kept 'snug' enough, as domestic loan demands subsided, to minimize the external leakage. Even so, we find it hard to envisage an easing of credit conditions suffi a revival of home building that would not at the cient to promote same time encourage banks to give up the expensive accommodation from the Euro-dollar market. Also to be borne they have obtained of timing, in that a deterioration in the in mind is a problem with some rapidity whereas any improve capital account could happen during the course of 1967 is likely to ment in the current account from the observations of gradually." One further comment proceed foreign credit restraint relating to the voluntary Mr. Polak, program has, of course, been was as follows: "The bank program,
only on a stand-by basis during the past year, while the banks have accumulated a large leeway under their credit ceilings; it would seem to us important that the program be formulated in such a way that the amount of net credit that the banks could extend during 1967 would be kept small." Carrying his divergence from the staff view to a logical conclusion, Mr. Daane said, he found himself questioning the view he understood to have been stated by Mr. Hersey that the Committee the consequences on the capital account side of the could ignore balance of payments in continuing to push for monetary ease. He questioned such a conclusion, particularly in the light of the formulation of the bank portion of the voluntary restraint program for the coming year. He thought the Fund representative was more in appraising the immediacy of the outflow on the nearly correct Euro-dollar side. On balance, Mr. Daane thought the action taken by the Committee last time had resulted in some significant easing in the the financial variables looked at most, money market, as gauged by bill rates and net borrowed reserves. Therefore, he including course of wisdom was to again conclude that the better would once in the framework of a directive, steady. To carry that out stand but he would couch it in a "no he would choose alternative A, by Mr. Ellis with slightly different change" version as suggested
phraseology. He would say that operations ". .. shall be con ducted with a view to maintaining the currently somewhat easier money market conditions, unless bank credit appears to be declining." That would carry the flavor of validating what the Committee had done, yet leave the Committee in a position of not pushing further toward ease at this juncture. Mr. Maisel said that he agreed fully with the staff analysis today. With reference to Mr. Galusha's comments about cutbacks in domestic nondefense programs, he would add that apparently the Secretary of Defense was cutting back a number of the normal ongoing defense programs to make room for Vietnam requirements. It was not surprising to him, Mr. Maisel continued, that the money and credit figures had not risen as the result of a of monetary policy. It was necessary to take into modest easing that the Committee was operating against record high account interest rate levels. Bill and other interest rates were a good have been expected a year or even six half point above what might of rates was clearly a more important months ago. The actual level was a relative fall from extremely high influence on demand than not fool itself by what had occurred levels. The Committee should It had to move against condi the last two or three months. over rates rather than with unusually high tions as they now prevailed
against the situation as it stood several months ago when rates were more modest. Mr. Maisel suggested that the Committee should be more concerned about the future than about this immediate point in time. It should endeavor to remove the present distortions in the economy and achieve a normal expansion of money and credit. Even if the Committee were not concerned about a downturn in the private sector of the economy, it should make sure that it moved to obtain expansion in money and credit simply to get rid of the existing distortions, which would otherwise become worse. Mr. Maisel thought that housing was heading into the definite danger of an inflationary situation, given the working of supply and demand factors in that particular industry. If at the prevailing low levels, one could housing starts remained rents, prices, and therefore in the cost of expect run-ups in with a wage push resulting from the increase in the living, along cost of living. felt that the Committee would have In summary, Mr. Maisel the last meeting he had handed the to move more vigorously. At of the Committee a note proposing language for the Secretary same lines as Mr. Robertson's subsequent directive along the it, Mr. Mitchell was now recommending suggestion. As he understood B of the draft directives be changed to call for that alternative
operations with a view to attaining a moderate expansion in bank reserves, money, and bank credit. He would support that point of view. In other words, he would support alternative B with a change to that effect in the last line. Mr. Brimmer said he would like to make an additional comment on the balance of payments. He had worked along with Mr. Daane on the formulation of the Government's program and had also tried to keep in touch with balance of payments developments generally. From time to time he had expressed his concern about the slow progress that was being made toward attaining a somewhat more viable equilibrium. As he had mentioned at the last Committee meeting, those working on the Government program were exerting every effort to make certain that the voluntary program was put together in a way that would give the central bank as much flexibility as possible in the management of domestic affairs. They had tried to forestall the possibility that a weak balance of payments program would make it necessary for the central bank to carry an additional burden in domestic policy making. While he did not have any indication of the extent to which the voluntary program would be workable next year, especially the Commerce Depart ment program, he was convinced that it would be quite helpful. The pressure that had been brought to keep the direct investment out flow to less than $2.5 billion should prove helpful.
With respect to the Federal Reserve program, Mr. Brimmer shared Mr. Daane's concern that the leeway permitted to accumulate 20 per cent of the quota each quarter was a point of danger. At the same time he saw no reason why the situation could not be corrected by tightening the program further if necessary. So he shared Mr. Hersey's conclusion that it was not necessary to panic at the prospect of a short-run outflow and a return of the funds that had come in through overseas branches of U.S. banks. The Committee ought to shape its policy to the needs of the domestic economy and rely on the voluntary foreign credit restraint program to the fullest extent possible. In view of the announcement today of the voluntary programs for 1967, Mr. Brimmer suggested a modification in the first paragraph of the draft directive to say that "The balance remains a serious problem and the voluntary programs of payments and extended through 1967." He thought have been strengthened Committee to take note that the program it appropriate for the that one element of uncertainty in decisions had been made and policy making had thereby been removed. to the domestic situation, Mr. Brimmer shared With respect staff and many others around the table. the views advanced by the like Mr. Hayes, was impressed by the fact that different He, sometimes reached different conclusions from the same economists
figures. At the same time he was also impressed at this time by the overwhelming proportion of economists who had come to the same conclusion as the staff had. With respect to policy making, Mr. Brimmer said he would like to focus both on the period immediately ahead and on the longer run. It was his understanding that there might well be some additional debt management operations, perhaps before the end of the year, involving participation certificates. There were rumors to that effect in the market, with some feeling for the possible configuration. Those operations might exert some upward pressure on interest rates. If the amount to be offered was of the magnitude that had been suggested, the to the public about the possible need for some Committee ought to be concerned the same policy stance. in the short run to maintain further easing he thought that further easing was absolutely For the longer run the banks had been sluggish was not surprising that necessary. It thus far; over the of monetary policy responding to the easing in about liquidity preferences. had learned something years economists to make the banks feel not overlook the need The Committee should to provide some head It also was necessary a little more liquid. in their CD's. to achieve an increase room for banks look should be to say that another went on Mr. Brimmer in terms of agreeing 1 letter, not only taken at the September
that there was no longer a need for it but in terms of taking an overt step to rescind it. The letter was made necessary by conditions prevailing in the late summer and early fall, but those conditions had passed. It was sent out as a signal that the System wanted some restraint on the expansion of business loans, and he thought it desirable now to have an explicit state ment that the letter was no longer in effect. Mr. Wayne had made the point that the banks felt they needed some indication of System attitude, and he (Mr. Brimmer) hoped an appropriate letter could be gotten out. Mr. Hayes had mentioned the policy mix for the longer run, Mr. Brimmer noted. He (Mr. Brimmer) hoped that monetary policy would play an active part in that mix. If conditions required it, and he thought they did, there should be a shift toward greater ease. Monetary policy had the advantage of being flexible. It and he thought now was the time to get on should also be timely, he favored the approach of with further easing. Accordingly, and would subscribe to alternative B of the draft directives, change in its wording. Mr. Mitchell's proposed Mr. Brimmer observed that the Manager had In concluding, maneuver under a directive that was executed a rather difficult not abundantly clear.
Mr. Hickman commented that the flow of business and finan cial news in recent weeks showed clearly that the policy shift at the Committee's last meeting was appropriate. Nevertheless, the latest data indicated to him that the Committee should push further in the direction of ease. Whether one looked backward or forward, monthly data on the monetary variables showed a nearly uniform series of minus signs. The bank credit proxy, total reserves, required reserves, and the money supply had been moving downward, indicating that the supply of credit was declining relative to the less intensive demands of recent months. In that environment, it seemed to him an inescapable conclusion that net borrowed reserves had been too deep, and the money market too tight, to support expansion. He therefore recommended that the continued economic Committee aim for a zero, or even a positive, level of net free as needed to get back on the high road of balanced money reserves, and credit growth. in the Fourth District had a wider Since economic activity amplitude of cyclical variation than that of the U.S. as a whole, be timely to review briefly business Mr. Hickman thought it might region. Evidence had accumulated financial conditions in that and triangle that heavy industry in the Cleveland-Cincinnati-Pittsburgh That was of economic slackening. to feel the impact was beginning meeting last week, where at the joint directors' revealed clearly
important cases were cited of a slowing in new orders, resulting in reduced backlogs and less pressure on resources and capacity. The Cleveland Bank's monthly survey of manufacturers in the Fourth District, plus a number of regional series collected by the research staff, also reflected the more moderate tempo of local business activity, Mr. Hickman said. Manufacturing activity in major areas, as measured by industrial consumption of electric power, had either turned downward or had slackened its growth. Production and new orders in steel declined in November to the lowest levels since August. Insured unemployment in November increased slightly in 9 out of 14 major District labor markets, and declined in only 3 markets (in one market the decline was caused by a strike settlement). Department store sales seemed to have leveled off, after an almost uninterrupted period of steady growth since late 1962. The decline in construction contracts thus far this year had been more severe than in the nation. The in bank credit at the weekly reporting banks seasonal expansion one-fourth as large as in the comparable in November was only about period a year ago. on to say that early returns from a Mr. Hickman went and anticipated borrowing by a confidential survey of recent corporations showed that about sample of large midwestern business had unused commitments at banks, three-fourths of the respondents
which most planned to draw upon next year. Respondents indicated that credit needs would be large in the second quarter of 1967, but that the purpose of the borrowing would be largely to meet taxes, rather than for asset expansion. With reference to the recent mortgage survey, Mr. Hickman said that the responses from 23 financial institutions were not reassuring. Only one-third of the lenders reported a recovery in commitments or anticipated a pickup in the near future. Although a general increase in availability of funds had occurred recently, demand for real estate and construction loans had fallen off, partly because of the cool reception given borrowers by lenders earlier this year. Respondents indicated that new commitments would be allocated largely to the residential mortgage market. Mr. Hickman favored whatever net credit availability was needed to produce pluses in the major monetary variables. The staff's alternative directive B was satisfactory to him, as it stood or as amended by Messrs. Mitchell and Maisel. He thought the September 1 letter should be rescinded. reported that while business activity in Mr. Patterson District was still at a high level, data that had become the Sixth last Committee meeting indicated additional available since the November auto sales in the District signs of a slowing down. With the District was sharing in the recently off sharply from a year ago,
announced auto layoffs. Even the agricultural sector was begin ning to lose some of its glow, now that cotton had been reduced in output and prices for livestock and other products were lower. In Florida, the price of oranges had dropped from $2.86 to 83 cents a box. Residential construction volume was also turning in a progressively deteriorating performance, although total construc tion volume was still slightly ahead of last year and was outpacing the national average. That the softness in autos, construction, and agriculture was becoming one of swelling proportions was further suggested by the most recent reports from head office and branch directors, who seemed to be less optimistic than in several years. On the other hand, Mr. Patterson continued, the nine commercial banks, five mortgage bankers, and handful of savings and loan associations contacted on the question of mortgage lending seemed to be slightly more cheerful than they had been over the past several months. Savings flows for October and November were better than many had expected earlier, although not good enough to improve commitments in most local lending markets. The majority of lenders indicated that flows of new commitments were at their low for the year. Most of them thought the bottom had been reached and fairly early recovery might be in sight. While commercial the savings and loan people did bankers were the least optimistic, without clarification of the expect an early turn in the market not
new Home Loan Bank program. A minority of mortgage bankers, on the other hand, said that their flows of new money had already shown some recovery; and about one-third of all respondents antic ipated some recovery in the next two or three months. Many indicated that, with the exception of large commercial properties, money had become more readily available, but that cost remained high. In single family residential housing, most new originations by mortgage bankers were being sold to FNMA. A number of mortgage bankers were retaining one-year options to repurchase them, and some permanent investors had indicated their willingness to absorb or share that cost in order to insure the availability of mortgages. Commitments for large commercial projects were being restricted in some District markets because the permanent investors wanted to defer takeouts for as long as two years. Commercial banks were unable or unwilling to carry them for that length of time. It seemed quite clear to Mr. Patterson that the picture bank lending had not changed in the of insignificant growth in past several months after allowing for seasonal changes. Loans largest banks increased less this November than in comparable at the he had talked recently said Many bankers with whom past periods. demand was still very high, but an increasing that their loan to say that it was not as strong number of them were also beginning growth had slowed. The possibly because inventory as it had been,
bankers were, however, of one mind in complaining that their deposit growth had ceased--a fact borne out by statistics. They still worried about whether they would be able to satisfy the loan demand of their good customers and in many cases were trying to find ways to repay their indebtedness to the Reserve Bank and to reduce their dependence on the Federal funds market. Under those conditions, it would probably be difficult for them to buy municipals on a large scale, even if the Committee were to let up further in its policy of restraint. Sixth District banks also would be slow to benefit from the effects of lower bill rates vis a-vis CD rates, since even the largest ones were not too active in the CD market and were less sensitive to changes in short-term rates than banks in many other sections of the country. Turning to the national scene, it seemed clear to Mr. Patterson that with the further slowing down that had occurred, his own position at the last meeting, and that of the Committee, had been eminently correct. He believed the thrust of that new policy should be continued, the Treasury financing calendar permit ting, although the uncertainty of fiscal policy and balance of demanded that the Committee not let up on payments considerations monetary restraint to an extreme degree. On the other hand, it must be remembered that the delayed effects of the restrictive leaving their imprint. Therefore, the Committee policy were still
should not be under any illusion that slightly lower rates and a reversal in money supply statistics would be likely to have a significant impact on future financial flows unless it continued to lift its policy targets. He would like to see a return to the moderate expansion rate in money and credit experienced in the first half of 1966. He was neutral as to whether the Committee tried to accomplish that by couching its instructions in terms of money market conditions or aggregate reserves, but he preferred alternative B of the draft directives. Mr. Lewis reported that most lenders surveyed in the Eighth District indicated that new commitments for construction and mort gage loans were at low points for the year. They foresaw no early recovery. A few expected further reductions in the near future. Savings and loan associations in St. Louis reported a net inflow that of a year ago. However, they were of funds approximating new commitments because the Federal Home Loan Bank was making few last summer. There were indica requiring payoff of borrowingsof companies would like to pick up more tions that some insurance rates but were prevented from doing mortgages at higher interest resulting from a marked reduction so because of lower cash inflows prepayments of old loans. in made were for commercial, industrial, Most of the commitments continued. Few funds were units, Mr. Lewis and multi-dwelling
flowing into the single-unit residential market. Several lenders indicated a marked reduction in the number of loan applications, but they felt that if they made known that they had funds available for mortgages, applicants would readily come forth. That was particularly true for insurance companies and savings and loan associations. Total demand for goods and services was continuing to rise, Mr. Lewis observed, but less vigorously than in late 1965 and early 1966. The contraction in bank reserves and money beginning last spring probably had contributed to the slowing in private demand, despite the stimulative budget situation. The mix of fiscal and monetary policy, although leading to a desirable slowing in the growth of expenditures, had fostered high interest rates. While probably beneficial for balance of payments purposes, such rates appeared to be causing hardship on the housing market and private investment, and as a result might be hampering economic growth. As to the future, it appeared to Mr. Lewis that total public policy--fiscal and monetary--might not need to be so restric tive in coming months as it had been since spring. If the policy mix should include a less stimulative budget in the future than since mid-1965, monetary actions could be relaxed, and interest rates would become less of a drag on economic growth. Even if the stimulative, a case might be made, although fiscal stance remained
with less confidence, that some relaxation of monetary restraint was in order. Total demand had slowed and the Committee would not want to overkill the inflationary pressures. For the next month, Mr. Lewis said, he would like to see still easier conditions in the money market with a view to obtain ing a moderate growth in bank reserves, bank credit, and money. He preferred alternative B for the directive. Mr. Robertson made the following statement: Developments that have emerged since the last meeting of this Committee seem to me to have confirmed the wisdom of the judgment we reached at that time to begin a modest but overt easing of monetary policy. Almost every statistic that has since become available is indicative of a little more slackening in final demand pressures. On the financial side, our slight easing to date has brought down a few interest rates, and improved bank liquidity positions a bit, but it has not yet been able to halt the persisting decline in bank credit. Meanwhile, we still await a clear declaration of the future fiscal intentions of the Administration. The budget figures revealed to date support a further but slower rise in expenditures, but no official position is yet definite regarding a tax increase. In these circumstances, I think our best policy is to continue what I have been calling in previous a "tentative but gradual and progressive kind meetings monetary pressures". What I would like of let-up of in the weeks ahead, is at least a full us to achieve, tendencies for the money market to firm offset of any seasonal pressures between now and under the expected thereafter enough further easing of bank year-end; and liquidity positions to encourage the gradual resumption of orderly, moderate growth in bank credit and money. the "blue book" and the staff directive I read that there is a good chance notes as saying, in effect,
of achieving these objectives by continuing virtually unchanged our current directive to the Manager; that is, by adopting the draft alternative B. This, I take it, might involve net borrowed reserves around zero and a three-month bill rate and Federal funds rate around 5 per cent before the Committee meets again. I am prepared to accept that kind of prescription for now, recognizing that the many end-of-year uncer tainties make any elaborate specification of targets a matter of guesswork. However, recent developments do suggest to me that it was not amiss at the last meeting to explore ways of giving more weight to the performance of the monetary aggregates. This could be accomplished in the directive by using the traditional form of the proviso clause, if we continue to direct the Manager to vary the degree of ease or tightness in the money market according to the degree of weakness or strength in bank credit and aggregate reserves. Thus, in that light, it would not bother me if the three-month bill rate or the Federal funds rate fell somewhat below 5 per cent in the month ahead if bank credit were showing no tendency to expand in, at least, the -to-4 per cent range. Mr. Robertson added that he still felt that the suggestion for the language of the directive that he had made at the last meeting was a good one. However, he thought there was probably more sentiment today for alternative B as drafted by the staff. Consequently, he would opt for alternative B, with the understand ing that the objective was substantially the same as the objective contemplated by the language he had suggested. Chairman Martin remarked that he read alternativesA and B in about the same way as Mr. Ellis: there did not seem to be too much difference between them. However, he continued to feel, as he had before today's discussion, that alternative B was preferable. Like Mr. Galusha, he found the way it was written appealing.
The Chairman went on to say that while he did not pretend to know exactly what the leads and lags were, he did not think that the Committee, in moving either toward restraint or ease, could force the statistics in a brief period. It seemed to him the Committee had made the right decision at the last meeting. He questioned, however, whether it would be desirable now to move to net free reserves; it seemed preferable to move more gradually. In his opinion the Desk had performed well over the past few weeks. There had been a general understanding, without news releases, of what the Committee was trying to do, and that was salutary. With the year end approaching, and with all the cross currents involved, he thought the Committee would be running a real risk if any substantial amount of net free reserves appeared. That might be taken to indicate that the Committee had become panic-stricken, and the move would become self-defeating in terms of what the Committee was trying to do. There was always that risk when policy was being changed. As things stood, the Committee had started a move three weeks ago and the statistics so indicated. gradual The Chairman went on to say that he did not happen to be He thought the economy was still strong, and he was glad bearish. gotten out of the posture it was in until that monetary policy had the private sector of the pace of the expansion in recently. The to turn down as long ago as September economy clearly was tending
and October, and it was not good for the System to be in a position of forcing restraint in those circumstances. Chairman Martin noted that there were probably going to be some tests of public psychology and business sentiment when the Government's general budgetary posture became fully understood. The figures might be rather startling to a lot of people who had not yet achieved the degree of sophistication necessary to accept deficit financing with complacency. The Government, Chairman Martin continued, had made a lot of progress in the use of its tools of policy and its methods of should not force the issues unnecessarily. Per operation, but it sonally, he hoped the President would recommend a tax increase, partly because he thought the budgetary situation would call for because he saw a psychological advantage and, in a one and partly having people share in the cost of the sense, a moral advantage in another. He thought the country ought Vietnam effort in one way or you go" principle for a lot of things. to follow a "pay as Martin expressed the view that the Committee should Chairman unduly concerned. The damp in the boat and not appear keep steady in the excessive pace of economic growth ening that had occurred think monetary policy should to be desired, but he did not was much it, inflationary tendencies had claim the full credit. As he saw a foothold at a certain stage, and they in turn produced gotten
counter tendencies. The Chairman also referred to the gold situa tion, saying it was of more concern to him than the balance of payments statistics per se. Chairman Martin repeated that he liked alternative B of the draft directives as written. While he would not object strongly to the changes that had been suggested, he did not think one could expect to achieve precise results, particularly in a four-week period. It was perfectly normal, as had been pointed out, that when banks became worried about their liquidity positions they would not go out looking for loans at the first opportunity. In fact, he did not believe that that would be desirable under present conditions. The September 1 letter concerned him a little, the Chairman continued. His personal preference, however, would be to take no and simply let the Presidents talk to people in their overt action Districts on an individual basis. Issuance of a state respective attention than seemed warranted and might ment would attract more believe that the System was calling upon lead a lot of people to to seek business loans. He would just banks to send their men out the Presidents could rest for the moment, although let the matter with people who came to them with questions. talk said that in the Fifth District certain banks Mr. Wayne They would like to in good faith exercised self-restraint. had in effect. He would 1 letter was no longer know when the September much for the word to get around. not have to say
Chairman Martin repeated that his preference would be to talk with such parties individually rather than to issue a state ment saying the September 1 letter was no longer in effect. There was no reason a Reserve Bank President could not talk to people about general credit conditions, but the issuance of a statement might be read by the press and others as a blanket invitation to the banks to go out and seek business loans. Mr. Brimmer expressed reservations about such a procedure. The September 1 letter was a policy statement reflecting a System wide credit control program. It announced to the public an explicit objective of System policy. Therefore, it would not seem sufficient for the President of a Reserve Bank to talk quietly to each banker who called upon him about the matter. In his judgment, that was not the way System policy should be made or changed. He appreciated of letter-drafting and the problem of timing, but the difficulties when a public policy matter was involved an announcement ought to be made. Chairman Martin said that he had some question about the wisdom of such a move. The letter of September 1 had been widely misconstrued, and its public withdrawal might likewise be widely misconstrued. Mr. Swan remarked that he saw no difficulty in discussing the credit situation with bankers. However, the moment a President
began to talk with one or two bankers in terms of the September letter, that was going to become known and other banks were going to be critical of the System for not having advised them directly. While there were not very many banks deeply involved, some smaller banks who perhaps had taken the matter seriously might not get the word promptly. He would not hesitate to discuss the general change in credit conditions, but he would hesitate to talk about the September 1 letter without being sure that all interested banks would have the same message at approximately the same time. Mr. Daane said he subscribed to the view that a formal rescinding of the letter at this time might lead to more repercus sions than desirable. Mr. Hayes also agreed on the inadvisability of sending out another letter at this time. A considerable amount of confusion had resulted from the issuance of the original letter, he was not sure that it was an entirely wise and in retrospect that the need for the letter no longer move. While he recognized it formally might lead to the same confusion existed, rescinding the issuance of the original letter. and uncertainty that accompanied to see the System get speaking, he would be reluctant More broadly must issue letters to the member position of feeling that it into a He thought the System had advertising its policy decisions. banks past in letting its actions speak been on sounder ground in the for themselves.
Mr. Hayes also said that by a formal withdrawal of the September 1 letter the System could hardly fail to highlight whatever policy change had been made. He felt that that would make the change more overt than a majority of the Committee members desired. He could appreciate that it would be useful to get across the idea that the System was taking the attitude that the need for the letter had faded away. But he hoped a formal withdrawal of the letter could be deferred until the idea gradually got across that the letter was no longer operative. It might be useful for the Chairman, in answering questions from the press or in making a speech, to include a comment that the program described in the September 1 letter was designed to meet conditions as of that date, that those conditions had changed in many respects, and that the letter had outlived its usefulness. Gradually that would the letter could then be rescinded formally at some sink in, and later date. subscribed to that view. He noted that there Mr. Galusha many ways in which a Reserve Bank President could communicate were having a public gathering or making a general announce ideas without ment. The only question he had was whether the way was now clear seemed appropriate, that a reduction to indicate, in whatever manner loans was no longer considered essential. If that of business point of view was expressed in conversation with individual bankers,
the word would soon get around. If the question came up, as it had the other day from the head of one of the larger District banks, and if the Presidents were free to handle the situation in whatever way appeared necessary, the September letter would grad ually die. It could be disposed of formally at a later date. But the issuance of a withdrawal letter at this time could cause many problems. Mr. Wayne said that although he shared Mr. Brimmer's views about the advantages of a public statement, he also recognized the danger of creating an erroneous impression at this time. The question was one of responsibility to the banks that had cooperated. The September 1 letter was essentially a System statement indicating that under the circumstances as they prevailed at that time the Federal Reserve thought the banks ought to display a high degree of statesmanship. All he would have to say in conversation was that the banks had done a good job, and the word would get around. Mr. Robertson commented that the System, in issuing the from the normal use of monetary September 1 letter, had deviated that was unique, and the operation policy instruments in a manner was going to terminate the operationhad succeeded. If the System question was how to go about it. and he thought it should--the only letter could be misconstrued, he would If it was true that another approach should be uniform for favor that procedure, but the not
all banks. If the operation was to be terminated, he would let each President do what he thought necessary, either through conversation or written communication as he believed best, so long as equal treatment was assured for all banks. Mr. Maisel also spoke in favor of a uniform approach. He agreed that the timing could be delayed and was not concerned with the form of statement. He did feel, however, that the policy should be terminated by an official and public action of the System. Mr. Wayne then suggested that everyone think about the problem, with a view to further discussion at the next Committee meeting, and there was general agreement with that suggestion. Returning to the question of the directive, Chairman Martin suggested that the Secretary poll the Committee on alternative B in the form drafted by the staff. Question was raised whether the vote should be taken instead on alternative B as it would read with the change suggested by Messrs. Mitchell and Maisel, and upon request read the language reflecting that suggestion. Mr. Clay the Secretary that he would prefer to have the vote taken on alternative commented by the staff because in his opinion there was a virtue B as written along the line of the policy instituted at the preced in continuing ing meeting. Martin observed that the problem seemed to get Chairman into semantics to a certain degree. As he had said many times,
words meant different things to different people. He happened to prefer alternative B as written by the staff because he found it easier to understand. It specified operations with a view to attaining somewhat easier conditions in the money market. He doubted whether bank credit would resume a rapid rate of expan sion at this stage, but if it should the directive also made provision for that contingency. He again proposed voting on alternative B as prepared by the staff. That procedure, he felt, should afford a fair opportunity for expression of opinion because those members who opposed the staff draft no doubt would also oppose the suggested revision of it. Thereupon, upon motion duly made and seconded, and with Messrs. Hayes, Daane, Irons, and Shepardson dissenting, 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 over-all domestic economic activity is continuing to expand, with rising defense expenditures but with additional evidences of moderating tendencies in the private economy. While there has been some slowing in the pace of advance of most broad price measures, upward price pressures persist for many finished goods and services. Bank credit and money have shown no net expansion in recent months. Although demands on bond markets have increased, upward pressures on long-term rates have moderated. The balance of payments interest remains a serious problem. In this situation, it is the
Committee's policy to foster money Federal Open Market and credit conditions conducive to noninflationary and progress toward reasonable equili economic expansion brium in the country's balance of payments. To implement this policy, System open market opera next meeting of the Committee shall be tions until the conducted with a view to attaining somewhat easier conditions in the money market, unless bank credit appears to be resuming a rapid rate of expansion. the next meeting of the Committee would be held It was agreed on Tuesday, January 10, 1967, at 9:30 a.m. Thereupon the meeting adjourned. Secretary
ATTACHMENT A CONFIDENTIAL (FR) December 12, Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on December 13, 1966 FIRST PARAGRAPH The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is contin uing to expand, with rising defense expenditures but with additional evidences of moderating tendencies in the private economy. While there has been some slowing in the pace of advance of most broad price measures, upward price pressures persist for many finished goods and services. Bank credit and money have shown no net expansion in recent months. Although demands on bond markets have increased, upward pressures on long-term interest rates have moderated. The balance of payments remains a serious problem. In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions conducive to noninflationary economic expansion and progress toward reasonable equilibrium in the country's balance of payments. SECOND PARAGRAPH Alternative A To implement this policy, and taking into account the widely fluctuating seasonal pressures at this time of year, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining about the currently prevailing money market conditions; provided, however, that somewhat easier conditions shall be sought if bank credit appears to be failing to expand. Alternative B To implement this policy, System open market operations until the Committee shall be conducted with a view to the next meeting of easier conditions in the money market, unless bank attaining somewhat credit appears to be resuming a rapid rate of expansion.
Also: Record of Policy Actions