March 7, 1967 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D. C., on Tuesday, March 7, 1967, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Brimmer Mr. Daane Mr. Francis Mr. Maisel Mr. Mitchell Mr. Robertson Mr. Scanlon Mr. Shepardson Mr. Swan Mr. Wayne Messrs. Ellis, Hickman, and Patterson, Alternate Members of the Federal Open Market Committee Messrs. Clay and Irons, Presidents of the Federal Reserve Banks of Kansas City and Dallas, respectively Mr. Holland, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Broida, Assistant Secretary Mr. Molony, Assistant Secretary Mr. Hackley, General Counsel Mr. Brill, Economist Messrs. Baughman, Craven, Garvy, Hersey, Jones, Koch, Partee, and Solomon, Associate Economists Open Market Account Manager, System Mr. Holmes, System Open Market Coombs, Special Manager, Mr. Account Board of Legislative Counsel, Mr. Cardon, Governors to the Board of Governors Mr. Fauver, Assistant Division of Research Mr. Williams, Adviser, Statistics, Board of Governors and
Mr. Reynolds, Adviser, Division of International Finance, Board of Governors Mr. Axilrod, Associate Adviser, Division of Research and Statistics, Board of Governors Miss Eaton, General Assistant, Office of the Secretary, Board of Governors Miss McWhirter, Analyst, Office of the Secretary, Board of Governors Messrs. Hilkert and Strothman, First Vice Presidents of the Federal Reserve Banks of Philadelphia and Minneapolis, respectively Messrs. Eisenmenger, Eastburn, Mann, Taylor, Tow, and Green, Vice Presidents of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Atlanta, Kansas City, and Dallas, respectively Mr. Haymes, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Geng, Manager, Securities Department, Federal Reserve Bank of New York Mr. Kareken, Consultant, Federal Reserve Bank of Minneapolis In the agenda for this meeting, the Secretary reported that of the election by the Federal Reserve advices had been received members of the Federal Open Market Banks of members and alternate beginning March 1, 1967, and that Committee for the term of one year legally qualified to serve that such persons would be it appeared executed their oaths of office. after they had and alternates were as follows: The elected members Federal Reserve Bank of New Hayes, President of the Alfred First Vice President of with William F. Treiber, York, Bank of New York, as alternate; the Federal Reserve of the Federal Reserve Bank of Edward A. Wayne, President H. Ellis, President of the Federal Richmond, with George Reserve Bank of Boston, as alternate;
Charles J. Scanlon, President of the Federal Reserve Bank of Chicago, with W. Braddock Hickman, President of the Federal Reserve Bank of Cleveland, as alternate; Darryl R. Francis, President of the Federal Reserve Bank of St. Louis, with Harold T. Patterson, President of the Federal Reserve Bank of Atlanta, as alternate; Eliot J. Swan, President of the Federal Reserve Bank of San Francisco, with Hugh D. Galusha, Jr., President of the Federal Reserve Bank of Minneapolis, as alternate. Upon motion duly made and seconded, and by unanimous vote, the following officers of the Federal Open Market Com mittee were elected to serve until the election of their successors at the first meeting of the Committee after February 29, 1968, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Chairman Wm. McC. Martin, Jr. Vice Chairman Alfred Hayes Secretary Robert C. Holland Assistant Secretary Merritt Sherman Kenneth Assistant Secretary A. Kenyon Assistant Secretary Arthur L. Broida Assistant Secretary Charles Molony General Counsel Howard H. Hackley Assistant General Counsel David B. Hexter Economist Daniel H. Brill Associate Economists Ernest T. Baughman, J. Howard Craven, Garvy, A. B. Hersey, George Jones, Albert R. Koch, Homer Partee, Benjamin U. J. Charles and Robert Solomon Ratchford, duly made and seconded, Upon motion vote, the Federal Reserve and by unanimous York was selected to execute Bank of New
transactions for the System Open Market Account until the adjournment of the first meeting of the Federal Open Market Committee after February 29, Upon motion duly made and seconded, and by unanimous vote, Alan R. Holmes and Charles A. Coombs were selected to serve at the pleasure of the Federal Open Market Committee as Manager of the System Open Market Account and as Special Manager for foreign currency operations for such Account, respectively, it being understood that their selection was subject to their being satisfactory to the Board of Directors of the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that Messrs. Holmes and Coombs were satisfactory to the Board of Directors of the Federal Reserve Bank of New York for service in the respective capacities indicated. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on February 7, 1967, were approved. was given to the continuing authorizations Consideration then to the customary practice of reviewing of the Committee, according the first meeting in March of every year, and the such matters at set forth hereinafter were taken. actions Upon motion duly made and seconded, and by unanimous vote, the following pro with respect to allocations of cedures in the System Open Market securities Account were approved without change:
1. Securities in the System Open Market Account shall be reallocated on the last business day of each month by means of adjustments proportionate to the adjustments that would have been required to equalize approximately the average reserve ratios of the 12 Federal Reserve Banks based on the most recent available five business days' reserve ratio figures. 2. The Board's staff shall calculate, in the morning of each business day, the reserve ratios of each Bank after allowing for the indicated effects of the settlement of the Interdistrict Settlement Fund for the preceding day. If these calculations should disclose a deficiency in the reserve ratio of any Bank, the Board's staff shall inform the Manager of the System Open Market Account, who shall make a special adjustment as of the previous day to restore of that Bank to the average of all the reserve ratio the Banks. However, such adjustments shall not be point where a deficiency would be made beyond the Bank. Such adjustments shall be created at any other of the Bank or Banks offset against the participation to absorb the additional amount or, at the best able discretion of the Manager, against the participation Federal Reserve Bank of New York. The Board's of the Bank or Banks concerned shall then be staff and the the amounts involved and the Interdistrict notified of be closed after giving effect Settlement Fund shall as of the preceding business day. to the adjustments reallocation the Account shall 3. Until the next basis of the ratios determined be apportioned on the for any adjustments as paragraph 1, after allowing in for in paragraph 2. provided on the sale of securities 4. Profits and losses be allocated on the day of from the Account shall on the basis of each of the securities sold delivery of business on holdings at the opening Bank's current that day. of periodic reports prepared A proposed list for distribution for the Federal Open Market Reserve Bank of New York by the Federal consideration and approval. was presented for Committee
Thereupon, upon motion duly made and seconded, and by unanimous vote, authorization was given for the follow ing distribution: 1. The Members of the Board of Governors. 2. The Presidents of the twelve Federal Reserve Banks. 3. Officers of the Federal Open Market Committee. *4. The Secretary of the Treasury. *5. The Under Secretary of the Treasury for Monetary Affairs and the Deputy Under Secretary for Monetary Affairs. *6. The Assistant to the Secretary of the Treasury working on debt management problems. *7. The Fiscal Assistant Secretary of the Treasury. 8. The Director of the Division of Bank Operations of the Board of Governors. 9. The officer in charge of research at each of the Federal Reserve Banks not represented by its President on the Federal Open Market Committee. 10. The alternate member of the Federal Open Market Committee from the Federal Reserve Bank of New York; the Assistant Vice Presidents of the Federal Reserve Bank of New York working under the Manager of the System Account; the Managers of the Securities Department of the New York Bank; the Vice President of the Foreign Function having supervisory responsibility for operations; the Senior Foreign Exchange Officer of the Foreign Function; the Managers of the Foreign Department; the officer in charge, the Assistant Vice President, and the Adviser of the Research of the New York Bank; and the confiden Department tial files of the New York Bank as the Bank selected to execute transactions for the Federal Open Market Committee. of the Federal Open the approval of a member 11. With Market Committee or any other President of a Reserve Bank, with notice to the Federal any other employee of the Board of Secretary, Governors or a Federal Reserve Bank. * Weekly reports of open market operations only.
The Committee reaffirmed by unanimous vote the authorization, first given on March 1, 1951, for the Chairman to appoint a Federal Reserve Bank to operate the System Open Market Account temporarily in case the Federal Reserve Bank of New York is unable to function. The following resolution to provide for the continued operation of the Federal Open Market Committee during an emergency was reaffirmed by unanimous vote: In the event of war or defense emergency, if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secretary or Acting Secretary of the Board of Governors of the Federal Reserve System) certifies that as a result of the emergency the available number of regular members and regular alternates of the Federal Open Market Committee is less than seven, all powers and functions of the said Committee shall be performed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Committee, subject to the following terms and conditions: Such Interim Committee shall consist of seven members, comprising each regular member and regular alternate of the Federal Open Market Committee then available, together with an additional number, suffi cient to make a total of seven, which shall be made up following order of priority from those available: in the (1) each alternate at large (as defined below); (2) each of a Federal Reserve Bank not then either a President or an alternate; (3) each First Vice regular member a Federal Reserve Bank; provided that (a) President of the groups referred to in clauses (1), within each of shall be in numerical (3) priority of selection (2), and to the numbers of Federal Reserve order according the President and the First Vice President Districts, (b) Federal Reserve Bank shall not serve at the of the same of the Interim Committee, and (c) same time as members a regular member or regular alternate of the whenever
Federal Open Market Committee or a person having a higher priority as indicated in clauses (1), (2), and (3) becomes available he shall become a member of the Interim Committee in the place of the person then on the Interim Committee having the lowest priority. The Interim Committee is hereby authorized to take action by majority vote of those present whenever one or more members thereof are present, provided that an affirm ative vote for the action taken is cast by at least one regular member, regular alternate, or President of a Federal Reserve Bank. The delegation of authority and other procedures set forth above shall be effective only during such period or periods as there are available less than a total of seven regular members and regular alternates of the Federal Open Market Committee. As used herein the term "regular member" refers to a member of the Federal Open Market Committee duly appointed or elected in accordance with existing law; the term "regular alternate" refers to an alternate of the Committee duly elected in accordance with existing law and serving in the absence of the regular member for whom he was elected; and the term "alternate at large" refers to any other duly elected alternate of the Committee at a time when the member in whose absence he was elected to serve is available. The following resolution authorizing certain actions by the Federal Reserve Banks during an emergency was reaffirmed by unanimous vote: The Federal Open Market Committee hereby authorizes Reserve Bank to take any or all of the actions each Federal during war or defense emergency when such set forth below Reserve Bank finds itself unable after reasonable Federal be in communication with the Federal Open efforts to with the Interim Committee acting Market Committee (or Federal Open Market Committee) or when in lieu of the Open Market Committee (or such Interim Com the Federal mittee) is unable to function. deems it necessary in the light (1) Whenever it and the general credit situation of economic conditions then prevailing (after taking into account the possibility
of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obligations. (2) In case any prospective seller of obligations of the United States to a Federal Reserve Bank is unable to tender the actual securities representing such obliga tions because of conditions resulting from the emergency, such Federal Reserve Bank may, in its discretion and subject to such safeguards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank stating in substantial effect that the seller is the owner of the obligations which are the subject of the purchase, that ownership of such obliga tions is thereby transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. (3) Such Federal Reserve Bank may in its discretion purchase special certificates of indebtedness directly from the United States in such amounts as may be needed to cover overdrafts in the general account of the Treasurer of the United States on the books of such Bank or for the temporary accommodation of the Treasury, shall take all steps practicable at the but such Bank time to insure as far as possible that the amount of acquired directly from the United States obligations with the amount of such and held by it, together obligations so acquired and held by all other Federal does not exceed $5 billion at any one Reserve Banks, time. take the actions above set forth shall Authority to only until such time as the Federal Reserve be effective communications with the Bank is able again to establish Committee (or the Interim Committee), Federal Open Market and such Committee is then functioning. By unanimous vote the Committee the authorization, first reaffirmed
given at the meeting on December 16, 1958, providing for System personnel assigned to the Office of Emergency Planning, Special Facilities Branch, on a rotating basis to have access to the resolutions (1) providing for continued operation of the Committee during an emergency and (2) authorizing certain actions by the Federal Reserve Banks during an emergency. There was unanimous agreement that no action should be taken to change the existing procedure, as called for by resolution adopted June 21, 1939, requesting the Board of Governors to cause its examining force to furnish the Secretary of the Federal Open Market Committee a report of each examination of the System Open Market Account. Reference was made to the procedure authorized at the meeting of the Committee on March 2, 1955, and most recently reaffirmed on March 1, 1966, whereby, in addition to members and officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made available to any other employee of the Board of of a Federal Reserve Bank with the approval of a Governors or Committee or another Reserve Bank President, with member of the notice to the Secretary. It was stated that lists of currently authorized persons at the Board and at each Federal Reserve Bank (excluding secretaries and records and duplicating personnel) had recently been confirmed
by the Secretary of the Committee. The current lists were reported to be in the custody of the Secretary, and it was noted that revisions could be sent to the Secretary at any time. It was agreed unanimously that no action should be taken at this time to amend the procedure authorized on March 2, 1955. Chairman Martin then noted that a memorandum from the Account Manager had been distributed under date of February 28, 1967, regarding the continuing authority directive relating to transactions in U.S. Government securities and bankers' accept ances.1/ He invited Mr. Holmes to comment. Mr. Holmes said that three of the recommendations in his memorandum involved keeping as permanent features of the continuing authority directive changes that had been made during the past year, and the fourth involved a minor language clarification. First, with respect to section 1(a) of the directive, on July 26, 1966, the Committee had increased from $1.5 billion to $2.0 billion the limit on the amount that the aggregate Account holdings of Government securities could be increased or decreased during the interval between Committee meetings as a result of open market and he suggested retaining the $2.0 billion figure. activity, 1/ A copy of this memorandum has been placed in the Committee's files.
Secondly, he suggested clarifying the language in section 1(b) describing the two limits specified on aggregate Account holdings of bankers' acceptances, in line with the manner in which that language had always been understood, by adding the phrase "which ever is the lower." The affected clause would then read: "provided that the aggregate amount of bankers' accept ances held at any one time shall not exceed (1) $125 million or (2) 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York, whichever is the lower." Third, Mr. Holmes continued, section 1(c) had been revised on June 28, 1966, to remove the previous 24-month limit on the maturity of Government securities that could be acquired under repurchase agreements at times other than during Treasury financings. That action had been intended as a temporary measure. However, because the ability to buy securities of any maturity under RP's had proved, and was likely to remain, helpful, he recommended continuing it as a permanent feature of the directive. Finally, with respect to section 2 of the directive, he would recommend retaining the limit of $1 billion on special short-term certificates that the Federal Reserve Bank of New York could of indebtedness buy directly from the Treasury, in view of the possibility that the Treasury might have difficulty in managing its cash balances for some time to come. The limit in question had been increased present level from $500 million on November 22, 1966. to its
Thereupon, upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Open Market Account in accordance with the following continuing authority directive relating to transactions in U.S. Government securities and bankers' acceptances: 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent current economic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities in the open market, from or to Government securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices and, for such Account, to exchange matur ing U.S. Government securities with the Treasury or allow them to mature without replacement; provided that the aggregate amount of such securities held in such Account at the close of business on the day of a meeting of the Committee at which action is taken with respect to a current economic policy directive shall not be increased or decreased by more than $2.0 billion during the period commencing with the opening of business on the day follow ing such meeting and ending with the close of business on the day of the next such meeting; (b) To buy or sell prime bankers' acceptances of designated in the Regulation of the Federal Open the kinds Committee in the open market, from or to acceptance Market dealers and foreign accounts maintained at the Federal of New York, on a cash, regular, or deferred Reserve Bank delivery basis, for the account of the Federal Reserve discount rates; provided that Bank of New York at market bankers' acceptances held at any the aggregate amount of not exceed (1) $125 million or (2) 10 per one time shall cent of the total of bankers' acceptances outstanding as recent acceptance survey conducted by shown in the most the Federal Reserve Bank of New York, whichever is the lower.
(c) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the U.S., and prime bankers' acceptances with maturities of 6 months or less at the time of purchase, from nonbank dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days or less, at rates not less than (1) the discount rate of the Federal Reserve Bank of New York at the time such agree ment is entered into, or (2) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower; provided that in the event Government securities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers' acceptances covered by any such agreement are not repurchased by the seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. 2. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York to purchase directly from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommondation of the Treasury; provided that the rate charged on such certificates shall be a rate 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchases, that the total amount of such certificates and provided further held at any one time by the Federal Reserve Banks shall not exceed $1 billion. had been distributed to the members Before this meeting there of the Committee a report from the Special Manager of the System on foreign exchange market conditions and on Open Market Account Open Market Account and Treasury operations in foreign currencies
for the period February 7 through March 1, 1967, and a supplemental report for March 2 through 6, 1967. Copies of these reports have been placed in the files of the Committee. Supplementing the written reports, Mr. Coombs stated that it was indeed a pleasure to report that conditions in the gold and foreign exchange markets had taken a turn for the better during the past month. The Treasury gold stock would be unchanged again this week and, perhaps more importantly, there had been some wel come relief from pressure on the London gold market. While speculative demand for gold remained at high levels, the flow of South African gold to London had been running 30 to 50 per cent above normal and a sale of nearly $30 million of gold by another country on the London market had further improved the supply situation. As a result, the market price had declined to $35.14 this morning, and the Pool took in $47 million in February and a in March. That meant that the Pool further $10 million so far on hand, which was the most comfortable margin now had $96 million How long the present situation would it had had for a long while. of payments developments in South last depended upon balance back into surplus from their present deficit Africa; if they moved gold, and a gap in the supply would develop. they would withhold On the exchange markets, Mr. Coombs continued, sterling suffered a sinking spell during the middle of February, mainly
owing to announcement of some very high Government spending figures for the coming fiscal year, but it recovered strongly at month-end. The consequent inflow of dollars to the Bank of England had enabled the British to clean up early in March the last remaining $100 million due to the Federal Reserve under the swap line, while short-term debt to the U.S. Treasury had also been completely liquidated. As the Committee might recall, Mr. Coombs said, last July such short-term borrowing by the Bank of England rose to a peak of $1.5 billion. It had subsequently been reduced to a residual of $450 million still due to the Bank for International Settlements and the European central banks included in the balance credit package negotiated last July. The British sterling were hoping that March would be another good month, and if so they might succeed in cleaning up completely all of their short-term debt sometime this spring. Mr. Coombs remarked that the French had moved back into surplus during February. There might be some likelihood, small the Bank of France would rebuild its dollar balances however, that to the extent of roughly $200 million before coming to the U.S. for gold. More generally, Mr. Coombs said, he would like to note present, close to the end of the fifth year that the that at
System's swap network had been in existence, there were no draw ings outstanding on either side of the ledger. He hoped it would be possible to maintain that situation for at least a few months. Thereupon, upon motion duly made and seconded, and by unanimous vote, the System open market transactions in foreign currencies during the period February 7 through March 6, 1967, were approved, ratified, and confirmed. Before this meeting there had been distributed to the members of the Committee a report from the Manager of the System Open Market Account covering open market operations in U.S. Government securities and bankers' acceptances for the period February 7 through March 1, 1967, and a supplemental report for March 2 through 6, 1967. Copies of these reports have been placed in the files of the Committee. of the written reports, Mr. Holmes In supplementation commented as follows: As the written reports to the Committee indicate, the interval since the last meeting was characterized interest rates and a money first by a period of rising market atmosphere that was surprisingly taut in light followed by a period of more of reserve availability, market conditions and generally comfortable money interest rates. Shifting market expectations, declining a major role in deter so often the case, played as is characteristices of each subperiod. mining the the last Open Market Committee At about the time of a more cautious note was beginning to develop meeting as many participants began to in the securities markets decline in interest rates that the earlier sharp conclude too far. Given the size of underwriter might have gone
inventories and the steady stream of announcements adding to the calendar of new corporate and municipal issues, some technical market adjustment was inevitable and, indeed, needed if inventories were to be cleaned out to make room for the new issues coming to the market. In addition, however, market participants began to reappraise the future prospects for monetary policy in light of Congressional testimony pointing to the likelihood of a strong economy in the second half of the year. Unfortunately, a firmer money market tone strengthened the belief that further monetary ease was unlikely, and some market participants even felt that the System might already have let monetary conditions begin to tighten in the light of prospective credit demands. Open market operations attempted to head off the tauter money market conditions in line with the policy adopted at the last meeting, but were not notably suc cessful in doing so until just before the Washington's Birthday holiday. This was so despite massive reserve injections, and a rapid rise in aggregate reserve measures. Actual reserve availability consistently fell short of projected levels; in each of the two weeks following the last Committee meeting we went over the weekend anticipating free reserves ranging from $80 to $200 million, only to see the estimates revised sharply downward after new data were received. The money market itself proved hard to judge as the funds rate on several occasions declined in response to open market operations only to snap back again after it was too late for us to supply additional reserves. It is perhaps small consolation, but many money market participants were as puzzled as we about the behavior of the market. After publication of a free reserve figure of over $100 million for the week ending February 22 many of the money market banks were asking themselves why they had been willing to bid up the funds rate in light of the availability of reserves in the banking system. The securities markets, already reassured that the Federal Reserve intended to maintain comfortable money market conditions, were given further psycholog ical impetus on February 24 by heavy Government trust fund purchases of securities, as the Treasury had to forestall a rise in the debt over the ceiling. And the
Board's action on February 28 to reduce required reserves then generated expectations of some moderate further easing of monetary policy. The failure of Congress to act before March 1 on an increase in the temporary debt ceiling to $336 billion left the Treasury with the prospect that the public debt would be $1.5 billion over the ceiling on February 28. In order to avoid this the Treasury redeemed special nonmarketable debt held by the Civil Service Retirement Fund, the Federal Deposit Insurance Corporation, the Home Loan Banks, and the Exchange Stabilization Fund. In order to keep the trust accounts and the Home Loan Banks fully invested, $700-$800 million of marketable issues were purchased, including $233 million of coupon issues bought by the Trading Desk for the Federal Deposit Insurance Corpora tion and Social Security accounts. The details of these operations were spelled out in the written reports, and I would only comment here that they were carried out without causing undue repercussions in either market prices or expectations. This was mainly due to the Treasury's willingness to have us tell the market more about the size and character of the opera tion than normally has been done. The Board's action on February 28 to lower reserve requirements added further to the stronger and encouraged a better flow of funds in market tone markets. The move was generally interpreted the capital as confirming the System's desire for continued monetary ease in light of the current slowdown of economic activity and, to most market participants, it indicated some further ease, designed to see the capital market through its peak pressure in March. It also eased the possibility of market pressure in concern about when the speed-up of corporate tax payments occurs. April The timing of the reserve injection through lower reserve was well designed to coincide with expected requirements needs and so far has not complicated open market reserve operations in the least. After all the gyrations that took place during the between Committee meetings, the three-month interval rate wound up about 20 basis points below Treasury bill the level prevailing at the time of the last meeting. regular weekly auction there was some In yesterday's bidding for new three- and six-month bills at rates as
low as 4.29 per cent, but average issuing rates were established at about 4.34 per cent for both issues, as tenders were cautiously spread over a wider than normal range in the wake of recent rate declines. Yields on most coupon issues maturing within 6 years were down 2 to 6 basis points over the interval, reflecting recent market strength. Longer-term Governments have also fallen about 15 to 20 basis points since February 23, but are about 4 to 6 basis points above their levels at the time of the last Committee meeting. I should also note, parenthetically, that the System was able last Friday to purchase $50 million coupon issues maturing within 5 years without much impact on market rates or market expectations. Prices of corporate and municipal obligations declined quite sharply in response to the heavy demands placed upon those markets by heavy current offerings and a steadily mounting calendar of prospective flota tions. New issues moved slowly in this environment, and upward yield adjustments of 20 to 40 basis points were made on most new issues before any significant demand emerged. Both markets improved fairly sharply in the wake of the change in reserve requirements, with corporate issues recovering about one-third of earlier price declines. A heavy supply of new issues is still scheduled for the month ahead, however, including about $1.1 billion corporates and $750 million municipals, and a sizable backlog of tax exempts remain in dealer inventories. 1 / As the blue book notes, the bank credit proxy and reserve aggregate measures were very strong over the past four weeks. The credit proxy expanded at a 15 per cent annual rate compared with the 9 - 11 per cent rate expected at the time of the last meeting. For March the Board staff anticipates a 6 - 8 per cent average rise in the credit proxy and a 10 - 12 per cent rise from the beginning to the end of the month. Projections at the New York Bank center near the upper end of these ranges. Looking into the period ahead, I would agree wholeheartedly with the blue book statement that 1/ The report, "Money Market and Reserve Relationships," for the Committee by the Board's staff. prepared
"the difficulties in specifying consistent money market relationships are compounded by the uncertain effects of the reserve requirement reductions." And, it should be added, by the uncertainties involved in individual interpretations of current economic and credit developments, by the state of mind of various classes of market participants, and by international developments. I would agree that substantial free reserves may be needed at times to keep the funds rate averaging a little under 4-3/4 per cent, unless country banks put the funds released by the reserve requirement change to work more quickly than normally would be the case. But I expect that persistent free reserves, even of moderate size, will be interpreted as confirming the reserve requirement change as a moderate move towards further ease. Expectations may consequently play a major role in determining the course of interest rate developments, and also the rate of growth of bank credit. I am afraid that we will have to wait and see how these variables interact on a continuing basis. While I am by no means sure that it is possible to predict the relationships among reserves, credit, and interest rates over the next month, I have nothing constructive to add to the thorough discussion in the blue book. Open market operations will undoubtedly have to be flexibly adapted to emerging developments, and I hope that members of the Committee will indicate the priorities they would attach to the different variables with which we are usually concerned. The Treasury is auctioning today $2.7 billion June tax anticipation bills, its last cash financing of the fiscal year. There should be few problems with the issue, and last night the market was anticipating an average issuing rate of about 4.30 per cent, with the 50 per cent tax and loan credit estimated to be worth about 15 basis points to commercial banks. Because the issue had to be postponed until Congress acted on the debt ceiling and since the Treasury lost cash as the result of the switch of trust funds out of special issues into market issues, the Treasury's cash balance is at a low ebb, and some borrowing from the System appears likely over this coming weekend and perhaps before. Additional borrowing from the System may be necessary in early April. While infrequent Treasury borrowing should not be a major cause of concern to
the System, more frequent recourse to Federal Reserve credit could, if it occurs, be a source of trouble in managing the reserve supply. One can only hope that the next round of Congressional action on the debt ceiling, which will have to take place before June 30, will give the Treasury greater flexibility in managing its cash position than it has had in the past several months. I should also note that the Federal National Mortgage Association is expecting to announce tomorrow morning an issue of participation certificates, of which the bulk will mature within 5 years and only a modest amount will be long-term. 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 February 7 through March 6, 1967, 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. made the following statement on economic condi Mr. Partee tions: Last Friday's Wall Street Journal reported optimistically that Government analysts see "silver linings in [the present] economic storm clouds." But must admit to failure on this score. It I, for one, seems to me that virtually all of the economic news available since the last meeting of that has become the Committee is bearish--ranging from moderately to substantially so. And I do not think that recent unfavorable developments can be accommodated within the Administration's economic model described in some detail to you four weeks ago. In my view, if the economy is not now in an actual downturn, it very soon will be.
That is also the implication of the staff GNP projection for the first half contained in the green book.1/ A current dollar GNP expansion of $5 billion per quarter would bring almost no further gain in real output of goods and services, and would be consistent with a decline in industrial production over the period of around 5 per cent. With continued substantial expansion in industrial facilities, the factory utilization rate could drop below 85 per cent by midyear; and unemployment, despite slower growth in the labor force, could show an appreciable rise. In this situation, some dampening in the upward movement of prices and wages certainly would be expected. But existing pressures to obtain higher wage rates are exceptionally strong and, given the unfavorable impact of declining output on productivity, unit labor costs in manufacturing would be likely for some time to show substantial further increases. Under these conditions, a sharp decline in corporate profits would be probable. In turn, lower profits and reduced operating rates could soon take the steam out of business capital spending plans. Thus, in the private sectors, we seem to have all of the ingredients of a full-fledged business recession. It may be that my gloomy prognosis is exaggerated, signs of recessionary tendencies in the economy but the over recent weeks are unmistakable. Of greatest concern is the continuing dramatic weakness in consumer to me demand. Total retail sales were essentially goods June through January; and allowing for flat from there was a decline in physical volume. price increases, appears to have shown a further drop, judging February weekly figures, although unusually bad weather from the undoubtedly was a factor. The most pronounced weakness car sales, which declined sharply further has been in new annual rate in February, but many other to a 7 million also shown declines or little growth. retail lines have autos, the balance of retail trade increased Excluding after mid-1966; dollar volume in January was very little higher than last June. no Personal income has continued to expand rapidly far, on the other hand, so that the rate of personal thus Economic and Financial Conditions," 1/ The report, "Current the Board's staff. Committee by for the prepared
saving appears to have moved sharply upward. Such a sharp adjustment in the savings rate is unusual but not unprecedented; a similar rise occurred in 1956, when new car sales dropped back from the 1955 high. Then, as now, a sizable part of the savings increase was reflected in reduced use of instlament credit. Neverthe less, the 7 per cent savings rate projected for the first half looks high relative to other recent years. Perhaps consumers will spend more freely in the months ahead, although if the environment is one of layoffs and shortened workweeks, one would not expect a buoyant buying psychology. And it should be noted that, even with the expectations of substantial future income gains shown in recent consumer surveys, buying intentions have not been strong. The slackness in retail sales has extended and accentuated the problem of accomplishing needed adjustments in business inventories. Despite a one point drop in industrial production, manufacturers' inventories increased further in January, by about the same high $12 billion annual rate that characterized the last half of 1966. Over the past nine months, such stocks have increased by one-eighth while shipments have shown only modest further growth. Much of the increase in stocks--over 40 per cent--is accounted for by the defense and business equip ment industries, but here too inventories have risen much more sharply in recent months than have order backlogs The remainder of the inventory expansion and shipments. had centered in other durable goods lines until recently, and January there were substantial increases but in December in holdings of nondurable goods. The result of the inventory buildup has been a sharp rise in manufacturing stock-sales ratios, to the highest levels since 1961. As an indication of the dimensions of the problem, restoration of the ratios prevailing during 1965 and early 1966--given continuation of recent levels of shipments--would require an actual cutback in manufacturing inventories--not just reduced accumulation--amounting to $7 billion. In wholesale and retail trade, also, inventories have increased considerably more rapidly than sales over the past year; to restore the relationship between distri butors' stocks and retail sales that prevailed in late 1965 would have required, as of year-end, an inventory liquidation of $2-1/2 billion. It seems unlikely that reductions of these magnitudes are in prospect. Inducements
to hold inventories may well be greater now than before, and any future increases in sales will, of course, reduce the size of needed corrections. But it also seems unlikely that the corrections can be made without major production cutbacks. In sum, I believe that these figures indicate that the potential is there for a much larger and more extended inventory adjustment than is contem plated in most current GNP projections. There are, of course, major prospective supports for the economy that should help keep an inventory adjustment from getting out of hand. State and local expenditures and consumer outlays for services continue to rise at a rapid rate. Residential construction shows every prospect of increasing as the year progresses, though the recent pickup in housing starts probably should be discounted in view of the very large seasonal adjustment factors applied at this time of year. And the recent surveys of business capital spending plans, although showing a leveling off in outlays, hold out some hope that a substantial decline will not develop. We have just learned, on an extremely confidential basis, that results of the latest Government survey indicate a smaller year-to-year increase than do recent private surveys, and with no further gain during the first half from the fourth quarter 1966 rate. The major factor offsetting developing weaknesses in the private economy, however, continues to be the rising Federal outlays for defense, There prospect of some speculation that defense spending may is already in the January budget, although rise more than projected nothing new to offer on this score. But we have I have fiscal implications of estimated the full employment budget projections, taking fourth-quarter existing and a 4 per cent real growth rate as the unemployment This shows a rise in the basis for our calculations. from an annual rate of about full employment deficit of 1966 to an average of $5 billion in fourth quarter first half of this year. If nearly $7 billion in the through, there would be a marked the tax increase goes in the second half. the full employment deficit drop in not approved, and assuming if the tax increase is But benefits only about half increase in social security an increasingly likely prospectsthat proposed--both seem deficit would rise slightly further the full employment $8 billion or a little more. in the second half, to
Continuation of a deficit even of this size probably would not fully counterbalance weaknesses in the private sector--certainly it has not offest the recessionary tendencies of recent months--but it should provide important stimulus once the major impact of the inventory adjustment has been absorbed. Further, the automatic stabilizing features of the tax system will be cushioning any slowing in income flows; past relationships suggest that one-third to one-half of the shortfall in incomes below full employment levels will be compensated for by lower Federal tax accruals. Finally, the cumulative impact money will serve to bolster the economy, of easier through its effect on construction but also not only by tipping the scales in favor of marginal spending decisions in a wide variety of markets. These considerations lend strong support to the view that any downward movement in the economy will be relatively shallow and short-lived. Nevertheless, near-term prospects for the next six months or so are distinctly unfavorable, and it must be recognized--as Mr. Mitchell commented at the last meeting--that there usually more certainty in a short-term forecast is than when we look further ahead. Accordingly, I would a fully accommodative monetary policy for recommend that is easy enough to assure the the present--one ready availability of funds at gradually falling interest rates in all sectors of the credit markets. statement concerning financial Mr. Brill made the following developments: markets over the past The turbulence in financial thoroughly reviewed in the four weeks has been pretty the blue book, and the Manager's report; green book, the temptation, therefore, to indulge in I'll resist post-mortems. By and large, we've gotten additional easier than, the money market condi back to, or a shade of the last meeting, but tions prevailing at the time go in restoring the have some distance to we still of early February. Long-term capital market conditions higher than at that time--some market rates are still prospective volume of private significantly so--and the funds is larger. And public demands for long-term and and bank credit in February while expansion of reserves
was greater than anticipated earlier in the month, banks have used the reserves provided to increase liquidity rather than to encourage expansion of customer loans. As we look to the weeks ahead, the question confronting monetary policy formulation is less one of the appropriate direction of policy than of the extent to which this direction should be pursued. The near-term economic outlook, as Mr. Partee's analysis makes clear, is bleak. Prospects are not only weaker than the sluggish pattern projected in the Administration's model, but even weaker than the staff's own earlier projection. Disquietingly, this let-down in the pace of U.S. expansion comes at a time when several other countries are already in, or seem headed for, economic slowdown. It seems doubtful to me that we can bank on self correcting forces to forestall or curtail a downturn here at home. A resurgence of consumer spending may be a possibility, but--along with Mr. Partee--I wouldn't rate the odds very high in an atmosphere of declining production, reduced workweeks, and rising unemployment. And while the possibility of additional fiscal stimulation probably deserves higher odds, until fiscal talk is translated into specific expenditure and tax programs, such a possibility must remain--as it did most of last year--too weak a reed on which to base current monetary policy decisions. At the moment, then, there doesn't seem much alternative to continuing to press for easier financial conditions. just how much easier, the first task In deciding assess what's been accomplished to date. Clearly is to the turn in policy last fall was timely, but we must indulging in self-congratulation just guard against because bank credit expansion over the past three months at an annual rate of between 11 and 12 has proceeded cent. You will recall that the staff's projection per credit growth rate consistent with the Council of a bank Advisers' model of GNP averaged about 9 per of Economic cent over the whole of 1967. Within that average, it credit expansion would be larger in was expected that half of the year than in the second, since we the first anticipated very large financing demands from business depleted liquidity and to meet heavy tax pay to restore within the first half, we suspected that ments. And
financial flows would be large but would taper off before mid-year. I won't pretend that we had any specific numbers in mind for bank credit expansion on a month-to-month basis, since our analytic tools are still far from competent to project for such short periods the expansion rate required to move back toward a full employment economy. On balance, however, the order of magnitude of bank credit expansion since November does not seem far out of line with our chart show specifications as to what would have to accompany the CEA's model of GNP. But since the economy is moving much more slug gishly than the CEA model, it may well be that what we've accomplished so far in the way of providing bank credit is barely adequate--and possibly inadequateto provide the financial stimulation the economy needs. Certainly it does not seem to have achieved as yet what the economy needs in the way of borrowing terms and conditions to finance a really vigorous housing recovery; the results of the Reserve Banks' survey of mortgage flows indicate some general loosening of fund availability, but no gushing of credit into the housing area such that would suggest an acceleration of housing activity beyond that built into our model. And corporate borrowing costs--at banks and in the capital markets--are still high at a time when business capital spending and capital spending plans are being pared. Overall, then, I'm not so impressed by two-digit bank credit growth numbers as to feel that we've done all we can or all we have to do. In determining how much further we might have to go, let me raise another warning signal--this against the misconstruing the staff's projections of bank danger of credit expansion, as given in the blue book and in our It should be emphasized that weekly perspective tables. these projected rates of bank credit growth are not "full-employment" estimates. Rather, they are crude estimates of the results for bank credit of a short-run interaction between a specified monetary policy and the as projected in the green book. When we real economy project, as we did in the current blue book, that money market conditions would likely accompany unchanged in the credit proxy in March at an annual an increase
rate of 6 to 8 per cent with real expansion in GNP running at a negligible rate, we are not suggesting that this is the appropriate bank credit increase to help restore the economy to a 4 per cent rate of real growth. Nor are we suggesting that the somewhat easier money market conditions called for in alter native B of the directives 1/--conditions we estimate could result in a bank credit expansion rate of at least 10 per cent in March--are sufficient in themselves to stimulate return to target rates of growth in real GNP. We recognize that the appropriate course for the staff would be to specify both the credit conditions and the rate of credit expansion needed to help turn the economy away from an impending recession and put it back on a path toward full employment. The sad fact is that we can't--at least not on a 3 or 4 week basis. It would be silly for us to pretend that our knowledge of the interaction of financial variables with non financial developments is as yet adequate to such an assignment. The best we can do at the moment is to advise the Committee--as we do in the blue book--that maintaining present money market conditions, with long-term rates still undesirably high, would likely be associated with a bank credit expansion of about 6 to 8 per cent, and that pressing toward somewhat easier financial market conditions should be accompanied by a larger bank credit expansion, on the order of 10 per cent or more. But if somewhat easier market conditions do not result in a more vigorous credit expansion, we would construe this greater than expected weakness in the as a signal of economy, calling for even easier market conditions. In choosing among these policy alternatives, let it is not too soon for the Committee me suggest that to index its concern for the softening economic situation, First, I would propose for Committee and to act thereon. a change in the wording of the first consideration substituting, in the of the draft directive, paragraph last sentence of that paragraph, some alternative wording submitted by the staff 1/ Alternative draft directives appended to these minutes consideration are for Committee as Attachment A.
which recognizes sagging economic prospects. Instead of ". . . fostering . . . conditions conducive to non inflationary expansion .. ." we might consider language such as " . . . fostering . . . conditions to combat recessionary tendencies . ." Next, I would recommend adoption of alternative B for the second paragraph, or some variant that left room for prompt action by the Desk to accelerate reserve provision if bank credit expansion appeared to be falling short of projections over the next 4 weeks, but indicated less concern if expansion should exceed the projections. The guide to reserve provision should in the first instance come from the market, and in particular from an objective of achieving money market conditions that permit and encourage a continuing declining trend in long-term rates, even in the face of the prospective volume of public and private capital market financing. A "one-way" proviso such as in alternative B would guard against an arbitrary limitation on the Manager's latitude to take the steps necessary in achieving the desired rate trends. An asymmetrical proviso is not unprecedented; the Committee operated with such a directive--then pointed toward the possibility of greater restraint--on a number of occasions last spring and summer. Finally, after a decent interval--so as not to imply a sense of panic at the Fed--I would suggest the desirability of considering a reduction in the discount rate. Perhaps the next reduction should be only 1/4 of 1 per cent, which would leave financial market partic ipants fully aware of the possibility of more to come if and when needed, rather than suggesting that the Fed had moved to another frozen position. Such a package of System actions seems to me appropriate to the emerging economic situation. Mr. Hickman asked whether Mr. Brill would explain what timing he had in mind in connection with his comments on possible discount rate action. In particular, was he suggesting a change in the discount rate between now and the next meeting of the Committee?
In reply, Mr. Brill said he did not have a specific recom mendation on the timing of a discount rate change in mind. A number of factors would have to be considered: one concerned the way in which developments in short-term markets proceeded; the three-month bill rate recently had dropped below the discount rate, but not by as much as 25 basis points as yet. Another factor was the desirability of avoiding undue rapidity in a sequence of Federal Reserve actions, since that might lead to more widespread concern than desirable about the System's assessment of the economic outlook. Perhaps a change some time around or after the next Committee meeting would be appropriate. Mr. Mitchell noted that the GNP projections in the green that disposable income was rising rapidly in the book suggested and that the personal saving rate would reach the first quarter level of 7 per cent and remain at that level in abnormally high agreed that the kind of economic the second quarter. While he in which an upsurge in consumer described was not one environment spending could be expected, he wondered whether there was not that so high a rate of doubt about the projection significant would be sustained for two quarters. personal saving some stretching of the Mr. Partee agreed that it required rate to remain at 7 per cent for imagination to expect the savings income might well rise less two quarters. Of course, personal
than projected in the second quarter and the savings rate go down on that account. The staff had estimated the income increase at the rather low annual rate of 4 per cent, allowing for no appreci able increase in employment and only the normal rise in wages and salaries, but it was possible that actual income growth could be still weaker. He pointed out, however, that there had been periods in the past in which the savings rate had remained at a high level for some time. In particular, the rate had been stable at a level above 7 per cent from the second quarter of 1953 through the first quarter of 1954--a period leading into and encompassing the early part of the 1954 recession. In 1957 and 1958 also, the savings rate fluctuated around 7 per cent, although it was not as stable then as in 1953 and 1954. There was a sharp rise in the savings rate in 1956 much like that in recent quarters, followed by two years of little change--first because spending was weak and then because income was weak. Mr. Brill added that in his judgment the odds favored a lower savings rate than projected, but it was more likely to result from weaker performance of income than from a rise in spending. Mr. Maisel asked whether the expectation of little further increase in plant and equipment spending might not imply an actual
reduction in the capital spending components of GNP, since producers' durable equipment included autos. Mr. Partee replied that it probably did. He added that the producers' durable equipment item included certain other outlays not included in the plant and equipment figures--such as oil-well drilling--and he did not know whether the expansion expected there was strong enough to offset the automobile decline. In any case, the latest plant and equipment estimates showed no increase from the fourth quarter of 1966. Mr. Swan referred to Mr. Brill's suggested change in the first paragraph of the draft directive, and asked what implications the change might have for the last clause of the affected sentence, relating to the balance of payments. Mr. Brill replied that he thought the Committee still had to recognize that the balance of payments deficit remained a problem. Mr. Hersey then presented the following statement on the balance of payments and related matters: The news on the balance of payments that has devel Committee's last meeting can be quickly oped since the in view of the behavior of summarized. Disappointingly, industrial production, imports were still rising U.S. rapidly than up to the middle through January though less of last year. Gratifyingly, outstanding bank credit to in January. U.S. banks' foreigners declined considerably from the Euro-dollar market have not changed borrowings they still stand at a past few weeks, and so much in the $1 billion below the mid-December peak. level about
None of these bits of news calls for revaluation of the outlook ahead. We are still projecting an absolute decline in imports during coming months as domestic inventory accumulation slows. On the other hand, the January reflow of bank credit and the February stability in use of Euro-dollar money by U.S. banks are by no means inconsistent with the possibility that later we may see outflows of both sorts. The balances owed by U.S. banks to their branches abroad, after dropping by $1 billion from mid-December to the end of January, still stood last week at a level $1-1/2 billion higher than a year ago. Last summer and autumn when these balances were rising rapidly, Euro dollar rates moved up a good deal more than British and German money market rates, under the pull of the bidding by American banks. Then when the American banks let a sizable chunk of the money they had taken from their branches run off, Euro-dollar rates fell sharply, and in fact moved down relative to sterling money rates enough to stimulate a considerable flow of funds into sterling. During February the movement of funds was small and rates were level or rising a bit. Now, with Federal funds easier in our markets than they were two weeks ago, we may see a further return of money from U.S. banks to the Euro-dollar market. I will come back later to the policy implications of this outflow. I should like first to make some comments on recent monetary policy developments in Germany and Britain, the second and third largest economies of the Western world. At this distance it is difficult to judge whether these two economies, after half a year or so of declining industrial production, are already getting in position for an upturn or not. British monetary policy remains cautious. The British Government is planning on a considerable increase in government expenditures, but private investment prospects are so weak that most people predict only a slow recovery this year from the recession Britain has been last summer. The British may reasonably hope having since to keep their import growth slow, and they will try to get in export growth out of hoped-for economic some benefit expansion in the rest of the world. German policy also looks pretty cautious still, though it has eased a great deal since last summer. To the
outsider, this caution looks misplaced, with Germany's export surplus shockingly large by now, while excess pressures on German resources are probably less now than at any time in the last ten years, and prices are virtually stable. Can we learn any policy lesson from British and German caution? If the United States were another middle sized country, instead of having a GNP six times Germany's and more than double the whole Common Market Community's, we ought to be following their examples. A country with as serious a drain on its gold and IMF reserves as we will probably be having this year ought to be moving cautiously in monetary policy, letting other countries take the lead in promoting expansion. We might hope, for example, that a new advance in Germany would add momentum to European expansion in general and in that way foster continuing growth of world trade. But the size and predominance of the United States impose on it a responsi bility to maintain its own economic growth, in a noninflationary way, in the world's interests as well as its own. This being so, what can be said about using monetary policy in one way or another to help ease our balance of payments problem? There are various prescriptions to choose from, all palliatives, not cures. The first prescription is to be as cautious as possible about letting interest rates decline, with the justification that we may thus stave off as long as possible large gold drains or the necessity of drawing on with the IMF. Under present circumstances, our credit line this seems to me wrong advice, not only because this policy might put undue limitations on domestic monetary action, also because it is not the course of true prudence but The main issue involved, given the internationally. and the voluntary programs, is existence of the IET monetary policy should try to postpone what may whether reflow of more of the Euro-dollar well be an inevitable My own view is that the U.S. banks have been using. funds is to let this reflow of Euro-dollars course of wisdom We ought to be taking sooner rather than later. proceed seasonal factors are favorable some of the pressure while while imports are falling off in the first half of the year, be soon, and while we are still many as we hope they will of changing the Federal months away from the necessity The balance of gold reserve requirement. Reserve note
payments is still sick, and Administration policy makers should not have that fact disguised from them. We should be spreading out our reserve losses, not piling up IOU's to the future, lest some day an overwhelming mass of claims be thrown at us all at once and bring a crisis of confidence in the dollar. For such reasons as these a policy of inhibiting declines in U.S. interest rates now ought to be unacceptable as a balance of payments palliative. An alternative prescription for how to live through a time of difficulties in the balance of payments can be written in various ways. The advice might be to avoid so much bank credit expansion that barriers to outflows set up by the voluntary program would break down. Or, with a strongly expansionary monetary policy, the advice might be simply to slow down as soon as signs appear of new inflationary pressures. What advice can be given depends on what monetary policy is adopted. No quick solution of the balance of payments problem is available to this Committee, and its decision today should be based, I submit, solely on appraisal of the current domestic situation and judgments about the strategy and tactics best suited to fostering renewed economic expansion of a noninflationary character. I could not play down immediate balance of payments considerations in this way if a crisis of confidence in the dollar were already blowing up. I would not play them down if the domestic economy were heading toward a new boom, with growing pressures on capacity. But that is not the situation now. 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: When we met four weeks ago I commented on the low "visibility" of the business situation and especially on the apparent sharp contrast between shorter-term and longer-term prospects. Nothing has happened in the interim to diminish the uncertainties, and the contrast in question is, if anything, even sharper. The expansion appears to have slowed somewhat more than had been expected, probably in large part because consumer
spending has been even less buoyant than seemed probable a month ago. The January survey of consumer buying intentions does not suggest an early upsurge in consumer outlays--although it should be added that it also does not point to any further significant weakening. There is, of course, still a risk that the recent weakening might cumulate and bring about a general deterioration in the business climate. Indeed, the fact that inventory accumulation continued strong in January and that inventory-sales ratios rose is one element that I find worrisome. But I think the more likely develop ment is a gradual return to more rapid economic growth later in the year. General business sentiment has not deteriorated. It seems probable that residential construction, which already appears to have turned the corner, will revive strongly. At the same time I believe it likely that fixed investment spending will not turn down but will continue to grow slowly, the uptrend of Government spending will continue, and consumption outlays will regain some of their earlier vigor, helped the sizable current and prospective gains in personal by income. Unemployment has remained close to its recent low point. There may be a tendency for corporations to hold on to their workers in the expectation that output will up again. There is every likelihood that soon be moving we shall be confronted with excessive wage settlements in the coming months, even if productivity gains should somewhat from their recent slow pace. And while recover have subsided with the slackening of price pressures any resurgence of demand pressures in aggregate demand, with a cost push, could provide a climate the fall, coupled conducive to renewed sharp price gains. developments, though not as Balance of payments quarter of 1966, continue to unfavorable as in the fourth cause for serious concern. Excluding special trans give deficit was possibly at a actions, the January liquidity adjusted annual rate of nearly $2 billion, and seasonally a worsening of the February data indicate preliminary remains far below what is deficit. The trade surplus various obligations abroad. needed to take care of our the great risk to our payments should not lose sight of We position that would result from any resurgence of inflationary pressures.
On the credit front, I am impressed by the strong growth in total bank credit of the past three months. It has, of course, been a useful development, coming on top of the stagnation or decline in credit in the September November period. While further growth would be welcome, there could be some risks in a long-continued expansion at the recent rapid pace. Much of the expansion has oc curred in bank investments rather than loans. While the banks have been able to rebuild their liquidity to some extent, I think that most banks hope to progress further in this direction and therefore tend to retain a cautious attitude toward lending. The sluggishness of aggregate bank loans in February as compared with January may be attributable in part to the January tax speed-up program. Most banks in our District seem to feel that underlying loan demand remains quite strong, except in the consumer loan area; and of course current credit demands in the capital markets are at a very high level. Since our last meeting market interest rates have swung rather widely in response to changing expectations. The unwarranted fear that Federal Reserve policy might be tightening was pretty well dissipated about ten days ago, and the reversal was clinched by the announcement of the reduction in reserve requirements for savings and certain time deposits. Not unexpectedly, the latter development was regarded rather widely as a significant move toward easier money; and the effects in the capital markets were quite pronounced. Feeling as I do about the likelihood of an acceleration of economic expansion later in the year, with a probable intensification of inflationary pressures, I would hope that we would not give these market interest rate declines a strong further push through open market operations. I would like to regard requirement reduction as in large part a the reserve substitute for open market purchases that would otherwise have been required--although, as I have already indicated, it has inevitably had important psychological effects. I have no objection to such effects, provided they don't generate excessive expectations of still further easing. For the next four weeks I think we would do well to about the present degree of ease in money market maintain conditions, with a Federal funds rate of 4-1/2 to 5 per a bill rate probably fluctuating somewhat under cent and terms of the reserve figures it is the discount rate. In predict what will be needed; but many of the hard to
reserves released by the requirement reduction may tend to pile up in the form of excess reserves, so that a moderate free reserve figure--say $50 to $150 millionmay be consistent with the money market objectives I have suggested. However, there are enough uncertainties so that the Manager will need at least the usual degree of flexibility. I think he should resolve doubts on the side of ease; but I would like to see the directive include the existing two-way proviso and would not push credit expansion too rapidly--say at anything close to the 15 per cent February rate--even if market interest rates should show signs of moderate firming. The staff's draft directive with alternative A as the second paragraph seems satisfactory. However, I think I could also accept alternative B if "somewhat" were changed to "slightly" and if the proposed one-way proviso were replaced by the two-way proviso of alternative A. I would suggest that the first paragraph include the clause "to combat weakening tendencies in the economy." Use of the term "recessionary tendencies," as Mr. Brill proposes, might be somewhat too alarmist under present circumstances. Mr. Francis commented that economic activity had been on a plateau in recent months. Government outlays, both Federal and local, continued to grow while the private sector recorded some declines. Retail sales, industrial production, and construction were down from their 1966 peaks, and real incomes had been rising at a reduced rate. Although total employment had continued to rise, the declined. The situation of shortages, bottle average workweek had speculative purchases of last summer had been replaced necks, and involuntary buildup of inventories threatening to cause by rapid in production. Demand-pull influence on prices had further cutbacks declined.
With the advantage of hindsight, Mr. Francis said, it appeared that restrictive monetary actions were appropriate from the spring of last year to the fall. Demands for goods and services were in excess of the economy's ability to produce, and there was a pronounced rise in prices. From April to November, member bank reserves, demand deposits, and money declined; interest rates rose on balance, and the growth in the demand for goods and services slowed to a more nearly sustainable rate. In November, Mr. Francis continued, the Committee became concerned that monetary conditions might become too restrictive, especially since monetary action has a lagged effect, and a policy was adopted to relax the monetary restriction. At subsequent meetings policy resolutions moved toward greater ease. It had now been three months or more since the Committee undertook to achieve an easier policy, but it was not yet certain that it had been able to put such a policy into effect. It was true that total bank credit had increased rapidly since November, Mr. Francis said. But bank credit had been a very unreliable measure of Federal Reserve policy during the past year. Bank credit increased rapidly, at a 10 per cent annual rate, last summer from May to August. It then declined in the fall, from August to November, at a 2 per cent rate. But that did not mean that monetary policy was tighter in the fall than in the summer.
The change reflected primarily the inability of commercial banks to hold large certificates of deposit after August when the rates they could pay were below open market rates. Similarly, Mr. Francis observed, the shift of bank credit from declining in the fall to rising in the winter was not, in and of itself, a measure of easier monetary policy in the winter than in the fall. Rather, the shift in December reflected the fact that with lower open market interest rates the banks were again able to attract and hold large certificates of deposit. In view of that evidence, the rate of increase of bank credit recently had not been a useful indicator of monetary policy or of the direction of monetary influence. Interest rates had declined markedly since November, but that might reflect a decline in the demand for loan funds and expectations of lower rates rather than any real influence on the Committee's part. When one deducted the increased reserves required for the reintermediation of the banks and for Treasury deposits, Mr. Francis said, one found that there had been no increase of bank reserves for net credit expansion from the second week of December to the present time. By that measure reserves were now a little higher than they were in last November, about the same as they were late last summer and early fall, and less than they were last April to June. The money supply did rise in the past month, but possibly
the Committee should not give much weight to that upturn of the money stock if it could not see anything to support it in "reserves available for private demand deposits." He noted that the recent increase of money supply reflected in part a decrease in Treasury deposits and he noted that the staff expected no increase of money supply during March. Mr. Francis believed the Committee should make a concerted effort to get the effective bank reserves measure moving ahead somewhat more than was necessary to accommodate the bank reinterme diation. That would be something the Committee had not succeeded in doing in the past two-and-one-half months. To that end, it seemed to him the Committee had to let some of the current reduction of reserve requirements have some real stimulative effect. The Committee's net dealings in Government securities should be such that net reserves might be as much as $300 million, the top figure the staff. A bill rate substantially below the mentioned by be looked on with favor--possibly one as low discount rate should cent, the bottom interest rate mentioned by the staff. as 4.15 per So far as total bank credit was concerned, that was so much a role of the banks that the function of the varying intermediation where it would, keeping its eye on total Committee should let it go time deposits and for Treasury net of those required for reserves, deposits.
Mr. Francis favored alternative B of the staff's draft directives with the change that had been suggested in the first paragraph. Mr. Patterson reported that in the Sixth District the effects of the turn toward an easier monetary policy showed up more in evidence that the availability of funds was improving than that the pace of economic activity was quickening. District member banks were now in a substantial free reserve position and had sharply reduced their reliance on the discount window and borrowing from the Federal funds markets. Their deposits, because of growth in time deposits, had been rising on a seasonally adjusted basis, and that growth had occurred in practically all sub-areas of the District. However, the banks were apparently concentrating on rebuilding their liquidity rather than on building up their loans. The major exception was in construction lending, which picked up sharply in February at the large banks, Mr. Patterson said. Funds were becoming more available to mortgage bankers and other mortgage originators, and the net savings flow into savings had improved markedly. An eventual stimulus and loan associations might result from the successful to public works construction of several municipal issues that had previously been marketing data for the District seemed to postponed. What the latest was that there was a strong chance that the weaknesses indicate
would eventually be overcome if there was no sudden cut-off in the availability of funds. On the national scene, Mr. Patterson continued, interpreting the economic and financial indicators was extremely difficult, as the Committee knew; and, because of special circumstances, the Desk had had a very difficult job. Despite all the complications, however, the final result was an increase in bank credit, something that the Committee had wanted. The bank credit growth that occurred seemed especially appropriate in the light of the further weakening in private demand discussed in the current issue of the green book. The lowered projections of GNP discussed in the current green book certainly implied that conscious or unconscious tightening of policy was inappropriate, Mr. Patterson said. A "wait-and-see" policy, he was afraid, might lead to the kind of unconscious tightening the Committee wanted to avoid. Steps toward further ease seemed to be in order now. How great those steps should be way they should be measured were perplexing problems. and the Treasury financing might preclude action for a short time. However, meeting of the Committee he would like to see that open by the next together with the reduction in reserve require market operations, ments, had supported a bank credit growth in March higher than the 6 to 8 per cent projected in the blue book, and on the order of the rate that had occurred since last November. He average annual
would hope also that there would be no upward movement in the structure of rates. Under those conditions, he favored alternative B for the directive. Mr. Hilkert remarked he was in the same boat with many observers of the economic scene who found the current and prospec tive situation especially difficult to evaluate. That was less true of the Third District economy than of the national economy. Following a year of strong pressure on economic resources, there were increasing signs of slack in the economy of the Third District. Demand for labor had eased, resulting in a greater-than-seasonal increase in unemployment in the majority of the labor market areas. Manufacturing output and employment had dropped from fall peaks, and final demand showed little signs of new strength. Construction contracts awarded, auto registrations, and the net change in con outstanding were considerably below comparable periods sumer credit of the previous year. In studies the Philadelphia Reserve Bank had made of the behavior of the local economy over the 1950's, Mr. Hilkert said, the national economy at some indication of a lag behind there was being given currently to peaks, With all the attention cyclical behavior of that lagging and coincident indicators, recent leading conclusion that the the rather frightening indicator suggested time. Although statistics a recession for some had been in economy
on the national economy did not bear that out, they were not encouraging. The Bank's informal survey a month ago indicated that manufacturers were not cutting back the rate of inventory accumulation substantially because they expected rising sales to take care of excessive stocks. Data for January indicated that manufacturers, in fact, added to inventories at a faster rate than in the fourth quarter. There was now increasing doubt whether the expectation of rising sales would materialize. The results of the survey now appeared in a different light, therefore, and suggested that the longer the adjustment was postponed, the more serious it would become. hand, Mr. Hilkert continued, information about On the other a second key uncertainty--housing--led him to a position of mild optimism. Lenders in the Third District believed that the supply of money for mortgages would increase somewhat within the next had been worked off, so most institutions ninety days. Commitments were in a relatively strong position to expand mortgages if the trend of current savings flows continued. demand picked up and if had improved in the past few weeks, But although lenders' attitudes watch-and-wait attitude still prevailed. a was not best gathered from Because information on demand had extended its inquiries to Mr. Hilkert said, the Bank lenders, Here the response had been more encouraging. realtors and builders.
A number of realtors had indicated that demand was stronger than usual for this time of year. New listings were still low, however, possibly because potential sellers were discouraged by costs to them and recent terms of sale. Realtors believed more listings would come quickly once sellers learned about the demand. Of course, Mr. Hilkert added, the sample was small and it was still very early in the season. But the results suggested that pressures of demand might become strong enough to overcome lenders' caution. Given an ample supply of savings--and the selective nature of the reduction in reserve requirements should help in that respect--the outlook for housing was brighter. Mr. Hilkert thought the heavy flow of new issues in the and municipal markets--despite the problems it had caused corporate in the past few weeks--was also a favorable sign, even though watered reduced volume of private placements. To the extent by the greatly such financing needs could be accommodated easily, the possibilities have serious repercussions on that an inventory adjustment would might be reduced. Again, the reduction in reserve capital spending easing congestion in those markets. requirements should help in market policy for the next In Mr. Hilkert's judgment, open the effects of the reduction should reinforce and sustain four weeks Expectations had been altered substantially in reserve requirements. those changes in expectations. open market policy should confirm and
If that should require fairly liberal net free reserves, he would have no objection. If it should mean permitting another strong increase in bank credit, that would be all to the good. And if, as he would hope, market rates continued to decline, it might later be necessary to make a technical adjustment in the discount rate. Mr. Hilkert favored alternative B of the draft directives. Mr. Hickman recalled that at the Committee's last meeting he had voted for a policy of "no change," shaded toward ease, partly because of the imminence of Treasury financing and partly to give the economy time to catch up with financial developments. He agreed fully with the directive as adopted, and with the intent to resolve doubts on the side of ease. that, Mr. Hickman continued, he had to say that Having said following the meeting departed sharply from market developments was the Committee's intent, although in the last what he thought in the intended direction. In few days the market had again moved reserve requirements demon reaction to the reduction in fact, the strated that the market was waiting for a signal from the System, it had failed to provide. The tighter which up to that point of February upset the developed throughout most money market that reversed the easier tone that the capital market, and largely to foster in preceding months. Committee had sought
There was a growing awareness that the economy was in a precarious situation, Mr. Hickman said. As the green book noted, and as he had been attempting to convey to the Committee for several months, weaknesses and imbalances in the economy were pervasive and deep-seated. Indeed, it was now an open question whether the economy was approaching--or had already past--the upper turning point in the business cycle. At the present juncture it was imperative that the Committee do all that it could promptly to prevent weakening tendencies in the economy from cumulating into a general downward spiral. Heavy inventories, coupled with the unfavorable outlook for consumer takings and business spending, increased the likelihood of sizable inventory adjustments in the adjustments had been minimal--but near term. Thus far, inventory the portents were ominous. say that it was thus clear, to him Mr. Hickman went on to at least, that the Committee had to try to make up for lost time, than it had done to stimulate final demand. Because of and do more monetary policy on output and lags in the effects of distributed that the economy could knew only too well employment, the Committee to achieve anything like the be turned on a dime. If it hoped not by the Council of economic activity envisaged second-half gains in stimulus should have been Advisers, additional monetary Economic now. If the Committee and had to be provided provided in February,
failed to head off weaknesses in the economy, it would be faced with a massive, and perhaps unmanageable, task later on. Thus, Mr. Hickman supported alternative B of the staff's draft directives with the first paragraph modified as proposed by Mr. Brill. That alternative clearly called for greater ease. As for the targets, he would move fairly promptly towards free reserves of between $200 and $300 million, as suggested in the blue book, which presumably would keep the bill rate and Federal funds rate at or below the discount rate most of the time. He would also attempt to nudge long-term bond yields downward, in an effort to enlarge the flow of funds to the mortgage market, although that would be difficult because of the large calendar. If the System had any influence in the area of fiscal policy--which he doubtedhe thought it should press for prompt reinstatement of both the investment tax credit and accelerated depreciation, and should encourage an early announcement that the proposed surtax on cor porate and personal incomes would be dropped until such time as the economy appeared to be overheating. Mr. Brimmer commented that he would like to endorse much of what Mr. Hickman had said. He had followed open market operations month on almost a day-to-day basis and, while he certainly in the past would want to commend the Manager's vigorous efforts to cope with market pressures, he thought that the outcome for much of the period
was opposite to that which the Committee had intended to encourage. At the previous meeting he had joined the majority in voting favorably on the directive after the staff's original draft was modified to indicate an intention of leaning toward ease, and he had hoped that market conditions would become somewhat easier. Now, with the unfortunate outcome, he thought the Committee had to make up the ground that had been lost. Mr. Brimmer agreed completely with Mr. Hersey's remarks on the balance of payments. The payments problem was serious and, if anything, it was likely to get worse. The question facing the Committee was how to mesh appropriately its international and domestic objectives, and he saw nothing in the short run that would suggest a course of action with respect to the balance of payments other than that Mr. Hersey had suggested. It appeared that the voluntary foreign credit restraint program had been making a useful contribution and would continue to do so. There seemed to be little rapid revival of direct investment outflows. The prospect for a foreigners was not indicative of current reflow of bank credit to of the year, and he would be expected over the course what could its program in that area the System's looking at not be averse to outflow of bank credit done to dampen a later to see what might be The outlook for Congressional should prove necessary. if that and strengthening of the interest approval of the proposed extension
equalization tax appeared promising, and he thought that such a strengthening could be counted on for help. He certainly would not like to see the Committee try to head off the reflow of funds from American banks to the Euro-dollar market. That reflow had been expected, and it would be undesirable to hamper domestic policy by an effort to head it off. With respect to the domestic situation, Mr. Brimmer continued, the only question in his mind was when, in retrospect, the National Bureau of Economic Research would date the downturn. They might decide that the turning point occurred late in the first quarter or early in the second. He agreed completely with Mr. Brill that it was time for the Committee to take note of recessionary tendencies, and he would endorse Mr. Brill's proposed paragraph of the directive. He saw nothing language for the first to indicate remaining autonomous strength in the private sector. might, in fact, be lower than Plant and equipment spending Partee had suggested; at this stage of the cycle successive Mr. were likely to be down revisions of capital spending estimates an expansion. The earlier private ward, not upward as during investment in 1967 on the increases in fixed surveys suggesting be discounted. He agreed with order of 6 or 8 per cent should spending, and he did not the staff's expectations for consumer in defense spending to should count on growth think the Committee
compensate for the weakening in the private sector. Personally, he foresaw a plant utilization rate in the low 80's, and an unemployment rate possibly as high as 4.5 per cent. In sum, he felt that expansion was not simply weakening, but that the economy was probably on the verge of a recession if not already in one. As to the discount rate, Mr. Brimmer favored encouraging the Federal Reserve Banks to consider possible action. He agreed with Mr. Brill that the discount rate should be reduced soon and that the problem was primarily one of timing. He favored alter native B of the staff drafts for the directive, with Mr. Brill's suggested change in the first paragraph. commented that he fully agreed that the economy Mr. Maisel of weakness. It was clear that the almost flat was at a point for the first half of the year would trend in real GNP projected and an increase in a decrease in industrial production mean occurred they were almost If such developments unemployment. and production than the to result in lower spending certain the year, and a the second half of had projected for Council meant that monetary policy in unemployment. That further increase to permit long-term more aggressive, particularly should be to fall toward their mortgage rates, interest rates, including levels in previous years.
Mr. Maisel said that he would not engage in additional post-mortems on market developments since the preceding meeting. The main lesson was that the kind of market move that had devel oped three weeks ago should not recur in the coming period; market expectations of easing had to be confirmed. Mr. Maisel thought that reserves should be furnished aggressively. Given the country-wide distribution of the effects of the reduction in reserve requirements, he would assume there was a need for large net free reserves--in the $200-$300 million range. He favored a Federal funds rate fluctuating below the discount rate, and continued declines in the bill rate. He agreed with Mr. Brill that the rate of expansion of bank credit projected under those conditions was not unduly high; in fact, the growth in required reserves projected for the next six weeks was a good deal lower than experienced earlier. He would like to see bank credit continue to rise at a rate at or above the average rate since last November, and he assumed that that might be possible as a result of the increase in free reserves that he favored. Mr. Maisel concluded by saying he thought that a discount rate change should be considered. However, he would hope that a reduction would be delayed until the bill rate had moved lower, so action would confirm rather than lead market developments. that the
That condition might well be fulfilled by the time of the Committee's next meeting. He supported alternative B of the draft directives. Mr. Daane said he hoped the Committee would not undertake to tilt against windmills. He thought that monetary policy at this juncture could not stem a wage-cost push reflecting the inadequacies of fiscal and incomes policies of the previous period. Secondly, he thought the Committee could not stem an inventory adjust ment that reflected the backwash from the earlier overheating of the economy. Whatever one might wish, he did not think that was feasible--certainly not in a short period. Third, he thought that at this juncture the Committee should not try to tilt quixotically against a sick balance of payments; monetary policy alone could not effect a cure, Daane continued, he agreed with Mr. Brill However, Mr. that the Committee certainly should do all that it could do, and at its disposal at this juncture. had to do, with the instruments he saw it, was to sort out the psychological The main problem, as the economic and financial envi and expectational aspects of both to aid in restoring was particularly necessary ronments. It in economic prospects. confidence he had been disturbed that, like others, Mr. Daane said recent period had led developments in the by the fact that market policy had stopped trending observers to conclude that monetary
toward ease. It was important that the market should not again have any doubt about the posture of System policy; it should be made perfectly clear, as it had been in recent days, that the System's posture was one of continuing ease. As Mr. Brill had noted, however, the key question concerned the rate at which the Committee should move toward ease. He (Mr. Daane) thought the Committee also had to guard against the risk of deluding the market and generating expectations that outran the Committee's intentions, as had occurred earlier in the year. On that basis, Mr. Daane said, he would go along with analysis. He was disturbed, however, by the much of Mr. Brill's latter's suggestion that the phrase "to combat recessionary tendencies" be included in the first paragraph of the directive, suggested that monetary policy alone could stop an because it He would prefer instead to inventory recession in its tracks. policy "to foster such money and say that it was the Committee's credit growth, as may contribute conditions, including bank credit and help to prevent any to a continuation of economic expansion economy from cumulating." That weakening tendencies in the objective was one the Committee could accomplish; he did not think it should imply in its directive that it could do something it could not.
Mr. Daane leaned toward alternative B for the second paragraph. However, he suggested a revised formulation reading, "To implement this policy against the background of the current reductions in reserve requirements, System open market operations until the next meeting of the Committee shall be conducted with a view to continuing to ease moderately, but operations shall be modified as necessary to further moderate any apparently signif icant deviations of bank credit from current expectations." He thought that language carried the appropriate sense of continuing to move toward ease but of not generating expectations going beyond what was intended. He would not change the discount rate at this juncture. Mr. Mitchell observed that seldom had previous speakers little with which he disagreed as at Committee meetings said so had today. Accordingly, he had little to add. He endorsed they the staff's analysis and most of the comments that had been made the main objective of monetary policy about it. In his judgment as quickly as possible. bank lending policies now should be to change a good deal in that connection, The System had already accomplished largely met. But their desires had been in that banks' liquidity changed to any significant extent; lending policies had not yet drastically the contribution those policies were changed and until would be very limited. of monetary policy
Mr. Mitchell agreed with Mr. Hickman that the Committee had to act quickly. Developments in the next month or two were already water over the dam, but the Committee could have some effect on events of the summer and fall if it did not back and fill now. He favored a much more aggressive policy, limited only as necessary to avoid the psychological impact that would result from an impression that the Federal Reserve was deeply worried about the economic outlook. He would not want to move so aggressively as to create that impression. With respect to operating targets, Mr. Mitchell agreed with Mr. Francis that the Committee should get the money supply growing, and on some basis other than shifts out of Treasury should grow because reserves were balances; the money supply connection he noted that supplied. In that being aggressively book seemed to indicate the credit proxy chart in the blue the of any significant growth in February. As far as bill absence would let them go to were concerned, he rates and free reserves the desired expansion levels were needed to accomplish whatever low bill rate would be He thought a fairly of the aggregates. he would go along with around 4 per cent--but required--perhaps matter, with a or, for that per cent rate if necessary a 3-1/2 be treated strictly as rate; the bill rate should 4-1/2 per cent a residual.
As to the directive, Mr. Mitchell said, he thought Mr. Daane's objections to Mr. Brill's proposed phrase for the first paragraph could be met by saying it was the Committee's policy to combat "the effects of" recessionary tendencies. He favored alternative B for the second paragraph, but would delete the word "somewhat" before "easier conditions in the money market." In his judgment easier conditions were definitely needed and the qualification was undesir able. Mr. Shepardson said that, like Mr. Mitchell, he agreed essentially with the analyses that had been presented thus far. He agreed particularly with the inference he drew from Mr. Hersey's remarks that a balanced approach was necessary to the problems facing the Committee. In the present situation, Mr. Shepardson continued, it seemed to him that there were grounds for moving toward an easier monetary situation. He had been disturbed for a considerable time over what seemed to be a reluctance to act vigorously against excessive rates of economic expansion. The Committee had tended to move too little and too late, so that it had found itself faced with the kind of severe adjustment that had occurred last summer. Two wrongs did not make a right, and he did not favor moving too slowly when ease was required simply because earlier moves toward firmness had been too slow. In sum, he agreed that there should
be some further easing at this time. He would hope, however, that the Committee would arrive at a point where it would be just as aggressive in restraining economic excesses as some members thought it should be in acting against adjustments in the other direction that in many cases seemed to him to be healthy. Mr. Shepardson liked Mr. Daane's suggestion for the first paragraph of the directive. He agreed with Mr. Hayes that about the same results could be accomplished with either alternative A or B for the second paragraph if the language of B was modified somewhat. He would not be opposed to alternative B if it were tempered as Mr. Daane had suggested. Mr. Wayne said that to conserve time he would omit all reference to District business conditions. In general, he agreed with the analysis of national developments given in the green book. The staff comments this morning were indeed sobering. On the policy for the period ahead, Mr. Wayne favored a distinct but gradual easing of credit conditions. The major orderly and gradual movement. In the problem was to achieve an of the past two months, largely because of turbulent conditions the market had swung too far, first volatile expectational factors in the other. No monetary policy could in one direction and then which necessarily left both bor be effective in such conditions, and lenders uncertain and confused. rowers
Mr. Wayne noted that he had participated in the daily telephone conference call during the past month, and had been impressed by the unreliability of the projections, by the wide fluctuations that had occurred in market conditions, and by the difficulties that the Desk had faced from day to day in trying to carry out the terms of the directive without at the same time engendering further volatile expectations in the market. He had never seen a more difficult period for open market operations, and he thought that the Desk had performed quite well. As Mr. Holmes had noted, Mr. Wayne continued, the Treasury had authorized the Desk to inform the market fully about the character of the massive operations that were carried out in the recent period for the trust accounts. He would suggest that the Committee might give careful thought to the fact that the Desk's explanations had a highly desirable effect on the market's ability to absorb the operations without undesirable repercussions. He was not suggesting that explanations of what was being done should be made to the market each day. He was merely noting an experience large operations, which could have led to undesirably in which in the market, had in fact been handled smoothly sharp movements by fully informing the market; and suggesting that the Committee might give some thought to following such a policy if similar conditions arose in the future.
In resisting the rapid upsurge of rates in February, Mr. Wayne observed, the Desk had found it necessary to supply larger amounts of reserves than might have been anticipated. The banks apparently used all of those additional amounts to increase their investments, partly in an effort to rebuild their liquidity. In addition, borrowing had reached a very low level and banks would not feel the full effect of the reduction in reserve requirements until next week. The Treasury balance also had been reduced to a nominal amount and the Treasury might borrow from the FederaL Reserve within the week. All of those devel opments provided fuel for a further easing of rates, which was desirable. If possible the Committee should avoid the development of expectational factors which might trigger a stampede in either direction. Mr. Wayne said, he favored a definite move To summarize, toward ease but with safeguards to prevent it from getting out of accomplish that, it seemed to him that the Desk should hand. To on interest rates and be prepared to see place primary emphasis in free reserves. The goal should be to hold wide fluctuations rate moderately below the bill rate and the Federal funds the that that would exert downward discount rate with the expectation process, he would hope that the on longer rates. In the pressure be above the 6 to 8 per cent of the bank credit proxy would growth
figure mentioned in the blue book but somewhat below the rates of January and February. Mr. Wayne agreed with Mr. Mitchell that a change in the direction of ease in the credit practices of the commercial banks was badly needed. Some further reduction in the prime rate might be necessary as an overt move to achieve that result. If the easier policy contemplated by alternative B for the second par agraph of the directive as modified by Mr. Daane--which he favoreddid not lead to downward adjustments at commercial banks during this month, a reduction of 1/4 per cent in the discount rate would be appropriate. As of now, he would hope that no change in the discount rate would be required in the next four weeks. Mr. Clay commented that recent evidence concerning the performance of the national economy had not been particularly encouraging. Unseasonably severe weather in important marketing and production areas undoubtedly had taken its toll. Nevertheless, performance had raised considerable recent news on the economy's the economy in the months ahead. question about the strength of less encouraging than they had Certainly the prospects were appeared a month ago. continued with many cross-currents, Mr. Clay The economy the total economy were by no and generalizations for observed, was the the seeming contradictions One of means unambiguous.
continuing strength in employment and the marked shortage of qualified labor despite the slow progress of economic expansion. Adjustments in labor inputs had been made, however, by reducing the length of the workweek. Moreover, total employment tends to lag other activity measures, especially when uncertainty about the future suggests to business firms the advisability of holding together a qualified labor force. In view of the current state of the economy, further monetary action to encourage economic expansion appeared to Mr. Clay to be in order. That judgment was underscored by the probability of further deterioration in business prospects. The recent turnaround in short-term interest rates to lower levels had been encouraging, but action to further ease interest rates, particularly long-term rates, was called for. While the large financing was an important factor stiffening long-term volume of rates, monetary policy action could be a moderating interest force in those financial markets. said, would embrace further easing Such a policy, Mr. Clay a move toward lower levels of interest of money markets and thus also involve a larger rate of increase rates. It presumably would that projected by the staff on the in bank credit in March than policy. Obviously, the implementation basis of current monetary the availability of reserve policy should take into account of
funds resulting from the reductions in reserve requirements on time and savings deposits. Alternative B of the draft economic policy directives was satisfactory to Mr. Clay for the period ahead, essentially in line with the relevant discussion in the blue book. Mr. Scanlon reported that February brought additional evidence in the Seventh District that demand pressures on avail able manpower, materials, and facilities were easing. Development of pessimistic attitudes on the part of businessmen and consumers was spreading. With retail sales about level, total business inventories relatively high and rising rapidly, large user holdings of recently purchased long-lasting goods, and continued upward pressure on costs, he agreed with those who felt the economy could be entering a period of substantial adjustment in rate of growth and the mix of private demand. both the At present, Mr. Scanlon said, the only manufacturing that showed good prospects of activities in the Seventh District farm machinery, electrical generating continued expansion were defense equipment, and color television. and transmission equipment, mix, placing greater emphasis case a shift of product In the latter Recent sharp declines sets, was in process. on the lower-priced in orders for such capital equipment as machine tools, presses, part, the growing view that equipment reflected, in and railroad
the investment tax credit would be restored before the end of the year, perhaps before midyear. Adverse weather conditions, of course, had had a partic ularly severe impact on construction activity, Mr. Scanlon noted. Permits for apartments in the Chicago area in January were the lowest for any January since 1959 and permits for homes were the lowest since January 1945. But experts in the area believed the home building picture was certain to improve rapidly. Mortgage credit terms were easing and rates on new loans were down as much as 50 basis points from last year's highs. Reports of layoffs in various hard and soft goods lines continued, but large increases from last year in new claims for unemployment compensation had been confined largely to the automotive centers. Help-wanted advertising had declined in recent months after a long increase, but remained at a relatively high volume. Reserve positions of major Chicago banks had become more comfortable in the past month borrowing at the discount window. and none of them was currently of the over-all economic of the further weakening In light to continue to provide it appeared wise to Mr. Scanlon outlook, any current desires of at a rapid rate to accommodate reserves other businesses to rebuild liquidity. financial institutions and rate was appropriate for the He believed the current discount thought the System should agreed with those who current period, but
consider a move shortly. He favored alternative B of the draft directives, as amended by Mr. Daane. Mr. Strothman said that he needed to spend little time in commenting on economic developments in the Ninth District, for the pattern had been essentially similar to that of the nation as a whole. Modest differences might be noted in some components, but since those were truly modest and were to some extent evidenced by fragmentary data, he was left on balance with the conclusion that what was good for the United States was good for the Ninth District, and vice versa. The economic outlook of recent weeks, and now, seemed to the Minneapolis Reserve Bank to call for modestly greater monetary ease, Mr. Strothman continued. Consequently, he had welcomed the change in reserve requirements and would hope to see it confirmed an overt move toward greater ease. He to market participants as the reserve requirement change be dismissed was apprehensive lest for supplying seasonal reserve needs. The as simply a device free reserves would seem to of consistently positive maintenance be necessary. would hasten to add that Mr. Strothman said, he However, more sharply on market was to focus somewhat his inclination He would wish to see a rates than on free reserves. interest rates. Although at easing of money market continuing modest
present some emphasis might be placed on the word "modest," he rather expected that, as the near-term future unfolded, short term rates generally would find levels significantly below 4-1/2 per cent, and that in the not too far-term future, a discount rate change might be called for. That, of course, was only a suggestion of the need for serious thought to the possibility of a discount rate change. In offering it he was perhaps swayed by some skepticism that further significant reduction in the world level of interest rates could be achieved without a signal from the United States. Mr. Strothman favored alternative B of the draft directives. Mr. Swan said he would make two brief observations about economic conditions in the Twelfth District. First, the strength in the aggregate employment figures was somewhat paradoxical in light of certain other aspects of the District economy. The contrast was particularly marked in January when a rise in employ ment, seasonally adjusted, brought the sharpest drop in the unemployment rate in some time--from 5 to 4-1/2 per cent. The figure was the lowest in eight months. On the other hand, January adjusted private housing starts, which rose 18 per cent seasonally January, dropped below the low levels in the rest of the country in and December in the Twelfth District. If housing of November
starts were rounding the corner nationally, the Twelfth District was somewhat behind. Mr. Swan went on to say that he would certainly favor some further easing in view of the prospects for the economy that had been discussed this morning and in view of the situation that developed in financial markets in the last month. The reduc tion in reserve requirements had been particularly timely in terms of its influence on market expectations. As had been mentioned, one of the Committee's aims in the period ahead should be to confirm market expectations that that action was not intended simply as an alternative to open market operations as a means of supplying reserves, but rather to add significantly more reserves. At the same time, like Mr. Mitchell he would want to stop short of the point at which observers would believe that the System was overly concerned about the outlook. In any case, he favored free reserves of $200-$250 million and somewhat lower bill rates and the next four weeks. He hoped that a Federal funds rates through would not be found necessary during that discount rate decrease might have a direct effect While a discount rate change period. a preliminary review of the results on bank lending attitudes, survey in the Twelfth District of the recent lending practices had already occurred in such attitudes. indicated that some change
Obviously, Mr. Swan said, he favored alternative B for the second paragraph of the directive. For the last sentence of the first paragraph, he could accept either Mr. Daane's proposed language or Mr. Hayes' suggestion that the term "weakening tend encies" be substituted for the term "recessionary tendencies" in the phrase Mr. Brill had proposed. Mr. Irons observed that economic conditions in the Eleventh District were following the national pattern closely. There had been weakening in various sectors of the District economy, including retail trade, construction, and industrial production. Rising however, were offsetting the weakness in defense expenditures, private spending to some degree. The agricultural situation was not as satisfactory as it had been earlier, partly because of conditions and partly because of price developments. weather District banks were more liquid than some months ago, he thought more time would be required Mr. Irons said. However, to reach a position that they would regard as for the banks recall with concern the extremely adequate; they continued to had found themselves last summer. illiquid position in which they one factor explaining the with liquidity might be Their concern in bank credit. Certainly the composition of the recent rise were relying much less on banks in the Eleventh District larger funds market and from the Reserve borrowings, both in the Federal
Bank. The volume of discounts at the Dallas Bank had been neg ligible recently, with no large banks coming to the window. Only a few small country banks with seasonal needs were borrowing, District banks also were less ready buyers of Federal funds; while they remained net purchasers, the volume was small. Loan demand had been strong recently, but it was not frantic, as had been the case earlier. Mr. Irons said he had found the staff's forthright analysis of the national economy to be quite helpful. As to policy, the reduction in reserve requirements had been interpreted by bankers and others in the Eleventh District as a clear indication of an greater ease. For a while prior to that action overt move toward there had been some feeling of uncertainty as to whether the earlier was being continued, or whether a easing that occurred creeping back. That uncertainty was dispelled firmer policy was the System now should avoid by the Board's move. He thought operations should not be market; its open market confusing the with that overt signal of ease. inconsistent alternative B for the Mr. Irons favored Accordingly, period should be emphasis in the coming directive. He thought of free reserves, and he rates than on the level more on interest rise faster than projected see the credit proxy would prefer to funds rate in the In his judgment, a Federal in the blue book.
neighborhood of 4-1/4 to 4-1/2 per cent, a bill rate of about 4.25 to 4.30 per cent, and free reserves possibly ranging around $200 million would not be an inappropriate alignment. He would not favor immediate action on the discount rate but, depending on conditions, the System might well be giving thought to such a step by the time of the next meeting. Like a previous speaker, he would prefer to act on the discount rate at a time when market rates had fallen further rather than to take an anticipatory action. Mr. Ellis complimented Messrs. Partee, Brill and Hersey on their persuasiveness but added that, as would become obvious from his remarks, he had not fully acquired the sense of gloom that wove through the green book and their discussion. He suspected that resulted partially from looking at a region which did not depend heavily on automobile production and had not been hard hit this winter, and did feel the impact of continuing by heavy storms heavy defense ordering. a recent article in the example, Mr. Ellis continued, For a dire prediction of downturn in the textile press contained Bank's survey of the New England industry. The Boston Reserve suggested that their capital outlays portion of that industry close to 1966 levels, which were 14 per cent above 1965 would hold their 1967 sales to hold at outlays. Reporting firms expected region's textile industry rose 1966 levels. Manhours in the
(seasonally adjusted) in January and the production index held at the December level. In the past three weeks seven regional firms received over $7 million in defense orders and the Defense Department had announced intentions to buy 10.6 million yards of wool cloth this year. He concluded that the forecast for the regional textile industry was not bleak for 1967. On a more general level, Mr. Ellis said, the Reserve Bank's capital expenditures survey of New England manufacturers tended to support the recent McGraw-Hill estimate. With the sample presently not completed, he anticipated the forecast for 1967 would fall in the plus 6 to 10 per cent area. Only one firm in ten looked for sales to drop this year, and the expected increases averaged out to 10 per cent. of $60 million of dividend credits, deposit By virtue balances at the District's 80 mutual savings banks increased by noted. Last year the gain was $52 million in January, Mr. Ellis increased only $8 mil Their real estate loans only $24 million. last year. They were compared with $35 million lion in January, their cash positions before resuming still seeking to rebuild monthly survey of the cash lending. The Reserve Bank's aggressive insurance companies revealed activities of the flow and commitments The January increase in about the same type of improvement. increase for the closing months loans was below the average policy
of 1966 but higher than the normal monthly increases of past years. Total mortgages were staying unchanged but new commit ments on securities had turned up materially--from a very low 1966 level. In evaluating economic trends to be affected by monetary policy, Mr. Ellis emerged with a conviction that the underlying position was still one of continued strength camouflaged by an inventory "situation" and further confused by an automobile "situation." If the full impact of slowed sales and production of autos could be successfully identified and subtracted, he thought one would find the remaining components of the industrial production index would still be expanding. Of course, Mr. Ellis said, there was little point to such an exercise unless there was some reason for anticipating that fact of slowed auto sales and general retail sales the present Here he came to a point on which Mr. Mitchell might be reversed. commented. The green book said that "the estimated had already personal and disposable income have been revised upward levels of quarter." But, pressing further, the appreciably for the first that the first quarter increase in dispos green book emphasized $10.5 billion would be associated with a rise of able income of in consumer spending, with a consequent only about $3.5 billion 7 per cent where it was projected to rise in the savings rate to
hold through the first half. He still found such a projection difficult to accept. It would seem to him more logical to anticipate that the savings rate would return to more traditional levels, that consumers would spend a more traditional portion of a sharply rising income, and that consumer spending would be counted along with rising Government outlays as a strong and rising demand component of GNP. Accordingly, he ended up antic ipating that the first and second quarter GNP gains would exceed the $5 billion now projected by the staff. Mr. Ellis felt that a monetary policy in harmony with that type of economic projection, and recognizing the built-in aspects of cost-push inflation now at work, would seek to provide reserves liberally--but would avoid such rapid credit expansion as to add demand-pull price pressures to those already at work. Viewed in the Committee might properly credit monetary policy retrospect, November with such a stance. Bank credit had been expanding since per cent annual rate and money supply, narrowly defined, at a 10.7 at a 6.2 per cent rate. He had no apologies for the had increased of nonborrowed reserve creation of 21 per cent in February. rate the movement of the Mitchell's observation regarding As to Mr. proxy in February, he noted that a table in the blue bank credit billion in that month. Perhaps there book showed a rise of $3 the chart to which Mr. Mitchell had referred. was an error in
Looking ahead, Mr. Ellis continued, the Committee might anticipate some further stimulation from the recent cut in reserve requirements and the easier posture indicated to the market by a switch last month to a record of net positive free reserves averaging $48 million. There was ample evidence that banks were prepared to utilize the reserves the Committee made available. It would be surprising indeed if the current projec tions for a 6 - 8 per cent gain for March in the bank credit proxy were not substantially exceeded, at least to match the cumulative rate of 10.7 per cent that had been achieved since November 16, 1966. The competition for funds in the market for the next few months was likely to become intense, Mr. Ellis said. The record corporate calendar faced the prospect of competing with Government sales of participation certificates. In that atmosphere an attempt to bolster housing by pushing substantial funds into the mortgage market via commercial banks might well result in leading the Committee to push reserve creation beyond safe limits. Construc tion employment in the latest data was within 4 per cent of the all-time peak reached in March of last year. It was difficult to conceive that the housing industry could be restored to its earlier peak levels without developing severe strain on real resources. In that situation, it would seem wise to avoid casting monetary policy principally with such an objective in mind.
All of that led Mr. Ellis to the conclusion that the Committee need not make substantial further moves of policy at this time. The reserve requirement reduction had spoken for the System for now, and expectations should not be overly stimulated. Either alternative A of the draft directives, or alternative B as modified by Mr. Hayes, would seem appropriate for the next few weeks. Mr. Robertson made the following statement: I can be quite brief this morning, for our choice, as I see it, is fairly clear. I believe we must direct open market policy toward further ease. As a practical matter, we need to do this in order to carry through the easing atmosphere created by our reserve requirement reduction. The credit climate that has developed in the wake of that action seems salutary to me, particu larly after the unfortunate tightening episode of previous weeks. But to preserve and extend this better atmosphere requires that a significant part of the required reserves released be left with the banks to encourage more ample credit availability, rather than being mopped up promptly by offsetting open market opera tions. This is particularly true on this occasion, when a sizable part of the reserve cut accrues to banks that may be slow to put their excess reserves to work. Operationally, this means allowing free reserves increase substantially during the weeks immediately to ahead--and allowing them to increase enough to keep money market conditions on a gradually easing central trend all through the coming tax payment period. aggregates might behave in these How the banking circumstances is more than ordinarily conjectural, as has been suggested in the comments here this already My own view is that we should be more sensitive morning. in bank credit expansion during this period to shortfalls in excess of projections. This is than to overshoots because I think the economy is in the fundamentally of a difficult transition from a period of process
excessive demand pressures to a period of sustainable growth. And I want bank credit to be amply available so that the transition can be accomplished with a minimum of loss in potential output--and preferably, of course, without any. I am basically bullish rather than bearish as to our ability to work out of this adjustment without having to endure a full-fledged recession, but I want to be sure that monetary condi tions are a constructive influence rather than a drag on that adjustment. With these views in mind, I would be in favor of directive alternative B essentially as drafted by the staff, and I would have in mind about the kind of money market and reserve conditions associated with that alternative in the blue book. Given the attitude toward bank credit expansion to which I have already subscribed, I could vote for the one-way proviso clause contained in the staff draft but I would prefer the usual two-way proviso clause with the understanding that deviations on the upside would have to be a good deal larger to be interpreted as "significant" than would deviations on the downside. Mr. Robertson added that he favored Mr. Brill's suggested change in the final sentence of the first paragraph. Unlike Mr. Daane, he thought that saying it was the Committee's policy to "combat" recessionary tendencies did not imply that the Committee thought it could control such tendencies. He would suggest a revision in the latter part of that sentence, however. Rather than indicating that it was the Committee's policy to foster condi conducive to progress toward reasonable balance of payments tions prefer to conclude the sentence with the equilibrium, he would phrase, "while recognizing the need for progress toward reasonable equilibrium in the country's balance of payments."
Mr. Mitchell said he would like to clarify his earlier comment on changes in the bank credit proxy in February. The relatively level trend shown on the blue book chart related to the three weeks ending March 1. Growth in the preceding two weeks was stronger, and, as Mr. Ellis had noted, growth on average from January to February was $3 billion. Mr. Holmes commented that the rapid growth in the proxy in the earlier part of February had occurred at a time when the Desk was combatting a tightening money market. The small sub sequent growth was associated with easing money market conditions. Chairman Martin remarked that the Committee seemed to be in agreement today on the desirability of moving toward easier money market conditions. He concurred in the comment by Mr. Mitchell and others that the Committee did not want to give concerned about the economic the impression that it was extremely outlook. continued, he was quite pleased In general, the Chairman last November. In that of monetary policy since with the course and gradually toward had been moving steadily period the Committee Perhaps the without going overboard. monetary conditions easier in achieving its had not been completely successful Committee situation had been four weeks, but the over the past objectives the minutes of Looking back through corrected quite promptly.
previous meetings, as he had done in preparing for today's meeting, it struck him that this was the first time since 1960 that the economy had experienced some semblance of the February doldrums. The fact that there were doldrums this February did not necessarily suggest that the economy was on the verge of a major collapse. Rather, it might be going through a healthy adjustment. The Chairman agreed with Mr. Daane that monetary policy could not be expected to correct all of the difficulties that resulted from the fact that appropriate fiscal policies had not been pursued in the past. Nevertheless, the Committee had to do everything that it could. Chairman Martin then noted that various suggestions had been made for revising the final sentence in the staff's draft of the first paragraph of the directive. He thought the Committee's intent was perfectly clear; the problem was to arrive at the best form of statement. After discussion, it was agreed that the sentence in question should read, "In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions, including bank credit growth, conducive to combatting the effects of weakening tendencies in the economy, while recognizing the need for progress toward reasonable equilbirium in the country's balance of payments."
The Chairman then noted that most members had indicated a preference for a second paragraph along the lines of alter native B. Although some proposals had been made for revising the language, he would suggest adoption of alternative B as drafted by the staff. Mr. Hayes asked whether there was any disposition to accept Mr. Robertson's proposal that a two-way proviso clause be used, with the understanding that there was more concern about possible downward deviations of bank credit from expectations than about upward deviations. Mr. Daane noted that he also had expressed a preference proviso, in addition to proposing other language for a two-way changes. and Maisel indicated that they preferred Messrs. Mitchell Mr. Maisel added that proviso of the staff's draft. the one-way with the objective of achieving a two-way proviso might interfere further interest rate declines. that the Committee adopt Chairman Martin then proposed with the understanding B for the second paragraph, alternative be called if bank the Committee could special meeting of that a out of hand. He suggested appeared to be getting credit expansion possibility in mind. Manager bear that that the
Thereupon, upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Account in accordance with the follow ing current economic policy directive: The economic and financial developments reviewed at this meeting indicate some decline in industrial production and a marked slowing of expansion in over all economic activity. Lack of growth in retail sales may be retarding adjustment of inventory accumulation from its recent excessive rate. Average commodity prices have changed little recently, but unit labor costs in manufacturing have risen further. Bank credit expansion has been vigorous and, after a period of rising interest rates and congested bond markets, financial conditions have again turned easier. Recent data suggest little improvement in the foreign trade surplus but also little increase in the outflow of U.S. capital. In several important countries abroad, economic activity has been softening for several months and monetary and fiscal policies have eased somewhat. In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions, including bank credit growth, conducive to combatting the effects of weakening tendencies in the economy, while recognizing the need for progress toward reasonable equilibrium in the country's balance of payments. To implement this policy against the background of the current reductions in reserve requirements, System open market operations until the next meeting of the Committee shall be conducted with a view to attaining somewhat easier conditions in the money market, and to attaining still easier conditions if bank credit appears to be expanding significantly less than currently anticipated. Chairman Martin then noted that there had been distributed to the Committee a memorandum from Mr. Hackley dated February 20, 1967, and entitled, "Effect of 'Freedom of Information Act' on
1 / Procedures of the Federal Open Market Committee." The Chairman suggested that the Committee discuss the subject preliminarily today and plan on considering it further at its next meeting. He asked Mr. Hackley to open the discussion. Mr. Hackley noted that at the meeting of the Committee held on November 22, 1966, he had summarized the provisions of the so-called "Freedom of Information Act" and had indicated in general terms how the Act might affect the operations of the Committee when it became effective on July 4, 1967. At that time he had noted that the Department of Justice was preparing a Manual for guidance of Government agencies in modifying their procedures to comply with the Act. The Board's Legal Division had received a draft of the Manual in January and had found it helpful, although not to the extent that had been hoped. After reviewing the draft the Legal Division had offered to and studying the law further, for additions to the Justice Department some suggestions the help clarify the application of the Act to the Manual that would and the Board. procedures of the Committee follow the general suggested that the Committee Mr. Hackley changes in its procedures of aiming for the minimum principle as the letter of the with the spirit as well necessary to comply in the files of has been placed of this memorandum 1/ A copy the Committee.
law, without endangering functions. The draft Manual was helpful in suggesting at a number of points that the new law did not require any disclosures that would impair the effectiveness of an agency's statutory functions. Today, Mr. Hackley continued, he would not attempt to review the more detailed provisions of the law as set forth in his memorandum. Instead, he would concentrate on two main points: the documents of the Committee that were required to be published in the Federal Register, and the other records that would have to be made available to members of the public on request. With respect to the first point, Mr. Hackley said, the new law made no change in the kinds of documents required to be published in the Federal Register--i.e., substantive rules and regulations, rules of organization and procedure, interpretations, and statements of general policy. However, the scope of the was drastically changed as a result of changes in requirement In the past, the Committee's Regulation, its Rules exemptions. its Rules Regarding Information, Submittals, and of Organization, its Rules of Procedure had been published in the Requests, and would continue to be published. Some Federal Register and they probably would be necessary in the Rules of minor revisions Organization and Rules of Procedure, and the Rules Regarding would have to be recast. The new law, like the old, Information
required publication in the Federal Register of "statements of general policy and interpretations of general applicability." Four documents would seem to fall in this category: the contin uing authority directive with respect to domestic operations, the authorization for System foreign currency operations, the foreign currency directive, and the domestic current economic policy directive adopted at each meeting of the Committee. In the past these documents, and any amendments of them, had been set forth in the Board's Annual Report, as required by section 10 of the Federal Reserve Act. They had been exempt from publication in the Federal Register, however, under the provision of the 1946 Administrative Procedures Act that permitted non-publication on the ground that it was justified in the "public interest" or "for good cause found." Those exemptions would not be available under the new law; non-publication in the Federal Register would have to be based on one of nine grounds specified in the new law and listed in his memorandum. There was no question in his mind, Mr. Hackley continued, directives did reflect "statements of that the authorizations and were literally issued for the policy." Even though they general Bank of New York, in his judgment guidance of the Federal Reserve they were among the most important statements of general policy was not whether those by any agency. The question adopted
documents should be published--as he had noted, they were published now--but whether the new requirement that they be published "currently" permitted a time lag. The Justice Department's draft Manual indicated that the word "currently" should be given a reasonable construction, but to clarify the matter further the Board's Legal Division had suggested to the Justice Department that specific language be added to indicate that publication in the Federal Register could be deferred for a reasonable time in cases where immediate publication would impair an agency's functions. In its letter to the Justice Department the staff had suggested that a lag of 60 days might be appropriate--having in mind the current economic policy directive in particular--but it had selected that period rather arbitrarily. Perhaps a longer lag might be required--say, 90 days--either as a general rule or in particular circumstances in order not to defeat the purposes with respect to the current policy directive. With of an action to the continuing authority directive and the authorization respect for foreign currency operations, it might be appro and directive them as soon as possible after for the Committee to publish priate or amendment. While the question was, of course, their adoption of the staff economists seemed for the Committee to decide, some be done by immediate publication of to feel that no harm would those documents.
As to the second point--that certain other Committee records had to be made available to any person on requestMr. Hackley noted that any person whose request was denied could bring a court action in which the burden of proof would be on the Committee to justify that denial under the terms of the law. Most of the Committee's records--including the green book, the blue book, and the written reports of the Manager and Special Manager--clearly would be exempt on the ground that they were inter-agency or intra-agency memoranda or letters that would not be available to a private party in litigation--one of the exemptions in the law. The most important remaining nine specific records were those that had traditionally been described as the Committee's minutes. To the extent that those documents con of discussion prior to action, he thought they stituted a record be considered as inter-agency memoranda and thus exempt; could language for the Justice Department's Manual and he had suggested However, insofar as the minutes consisted that would so indicate. clearly were not exempt. Accordingly, of records of action, they future the documents traditionally he recommended that in the "minutes" be divided into two documents: described as Committee would be identical "memorandum of discussion," one, to be called "minutes"; the second, consisting with what was now called the at the meeting, would of the actions taken simply of a statement
be called "action minutes." The latter document would be similar in form to the kind of "minutes" that he understood most multi member agencies maintained. The action minutes would be made available upon request but, since they would include the current policy directive adopted, only after a reasonable time. It would appear appropriate to refuse access to the action minutes until such time as the directive was published in the Federal Register. While those recommendations might best be described as preliminary, Mr. Hackley said, he thought they would comply with both the letter and the spirit of the law. He had not referred to the possibility of publishing the current policy directive and the reasons for its adoption--perhaps in the form of the present policy record entries--in the Federal Reserve Bulletin because such a procedure would go beyond the requirements of the law, but it was one that the Committee might wish to consider. He thought Committee to decide was what con that the main question for the a "reasonable" time lag for publishing particular documents stituted available; that is, how soon after their or otherwise making them released without endangering the Committee's adoption they could be functions. commented that Mr. Hackley presumably had Mr. Robertson time lag on the ground that in selected 60 days as a reasonable its policy record for the preceding the past the Committee had made
year available to the public early in the new year, roughly 60 days after the December meeting. That point had merit. However, if it lay within the Committee's discretion to determine what time lag was reasonable, it might be desirable to select some longer period at the outset and shorten the period later if that was found feasible. Thus, it might be best to start with a lag of one quarter for all actions and then, perhaps, work down to 60 days. Mr. Maisel thought it might be preferable to stay closer to the present procedure by publishing all of the actions taken during a quarter 60 days after the end of the quarter. In his judgment there would be a great advantage in having the directives become public in groups, four times a year, rather than singly. Mr. Brimmer agreed in general with Mr. Maisel but thought should keep certain other considerations in that the Committee this year, there as illustrated by the experience mind. First, releasing the policy record entries was something to be gained by early enough in the new year closing months of the year for the Economic Report and around the time the for them to be available The schedule adopted Message were being discussed. the Budget Secondly, he had been thinking not preclude such timing. should policy record entries, rather of publishing the complete in terms drew extensively on alone. But the entries than the directives
the economic analyses in the staff reports which, in turn, frequently rested on information that had not yet been publicly released. He hoped the staff would consider the question of how quickly the entries could be released without violating confidentiality. As he had noted, however, he agreed that there were advantages to publishing a well-reasoned spectrum of experience quarterly rather than separate entries for each meeting. Mr. Hackley said he thought the crucial question concerned publication procedure would be most desirable in general not what but what procedure would comply with the requirements of the new law--which, he emphasized, required publication of general policy statements "currently." He was not sure that publication of the directives on a quarterly basis with a 60-day lag Committee's legally defensible. The Committee would have to justify would be access to unpublished directives, and refusal of any request for with the possibility that it might not be possible he was concerned to a court in defense of such a to muster reasons satisfactory schedule. that quarterly publication with a Mr. Robertson noted delay for the first actions lag would result in a five-month 60-day Five months appeared to be a long time for the of a quarter. purpose.
Mr. Hickman suggested that it might be desirable to release the policy record entries individually, with an appro priate lag, and supplement them with quarterly reviews that would provide a longer perspective. Mr. Maisel commented that further analysis of the question was obviously required. To his mind, however, releasing informa tion on Committee actions serially was likely to be confusing. He thought it made more sense to release the information quarterly, and that a schedule such as he had suggested, if fixed and known, probably could be justified. Mr. Daane thought that the question the Committee should answer first was whether, as Mr. Hackley had suggested, the Committee was required by the new law to publish its directives Register. He thought the Committee should make in the Federal records more generally available, and he was quite sympathetic its with Mr. Maisel's suggestion for quarterly publication of the annual publication as at present, keeping policy records rather than points Mr. Brimmer had made. But if the Committee was in mind the statements "currently," he was not required to publish its policy lag of 60 days. The fact that that it could justify a persuaded that had been the minimum lag in the past did not seem, in itself, under the new law for 60 days as to provide a very strong defense opposed to some other interval.
Mr. Hackley said that his view that the Act required publication of the directives in the Federal Register as state ments of general policy was based on the fact that in the past the Committee clearly had regarded them as policy statements, and had included them in its Record of Policy Actions published in the Board's Annual Report under the terms of the Federal Reserve Act. It would be very hard to overthrow the argument that they were policy statements. He thought that a 60-day lag might be justifiable on the grounds that it had been the minimum lag in the past. Moreover, there might be times when a partic ular directive was so sensitive that it would be desirable to withhold it for more than 60 days. But the Committee might be at the outset with regard to lags because of on the defensive the law specifying that policy statements be the language of "currently." As he had indicated, the Legal Division published the Justice Department clarify the point was attempting to have in its Manual. Daane asked whether the President had not indicated Mr. would be an element of signing the new law that there on available consistent terms of making information flexibility in with the national interest. but added that that Mr. Hackley replied affirmatively, statements in the Congressional as well as several statement,
Committee reports on the bill, might be hard to support in view of the literal language of the law. The President could exempt certain matters by Executive Order in the interest--to quote the law--of "national defense or foreign policy." Mr. Daane remarked that the Committee obviously had thought in the past that it was not in the national interest to publish its directives currently. He was not questioning Mr. Hackley's legal judgment, but simply expressing the view that the Committee should give careful consideration to the that if it was agreed that the law required publication point of the directives it might be difficult to justify any partic ular time lag. Mr. Brimmer said that at this stage he was not prepared an exemption by Exec the possibility of obtaining to rule out as Mr. Hackley evidently was. More utive Order as quickly Committee would adopt a he would hope that the generally, the law and then, if it thought consistent with procedure that judgment tested in court. ready to have its necessary, stand would take a cautious hope that the Committee Moreover, he would 60 days was the maximum immediately that approach and not decide it would not be decision was taken Once such a defensible lag. feasible to backtrack.
Mr. Mitchell asked whether the Manager thought a 60-day lag would be detrimental. Mr. Holmes replied that publication of the directives after 60 days could lead to difficulties in that the market was likely to interpret the last published directive as indicating the Committee's current policy. On that basis, a three-month lag would be much better; after such an interval the actions were more likely to be thought of as a matter of history. As long as monetary policy was operating flexibly there might be risks in a 60-day lag. noted that the Committee had faced such risks Mr. Mitchell was published, but of course in the past when its policy record that had occurred only once a year. agreed that there was a real danger that serial Mr. Wayne of the directives might lead the market to believe publication published reflected current policy. that the last directive that the members of the Chairman Martin then suggested matter and plan on discussing to think about the Committee continue at the next meeting. it further noted that at its preceding meeting Chairman Martin then discussion today of had agreed to hold a further the Committee in the Federal Reserve network criteria for increasing membership In accordance with the of reciprocal currency arrangements.
Committee's request, memoranda had been distributed on the four countries under consideration, namely, Denmark, Norway, Mexico, and Venezuela, on February 28, 1967.1/ The Chairman asked Mr. Solomon to open the discussion. Mr. Solomon said that the four papers examined the countries concerned from the point of view of the criteria set forth in the earlier staff memorandum, which the Committee had discussed at its previous meeting. A few additional but related criteria were also applied, including political stability and creditworthiness. It was clear from the papers that only one of the four countries was now eligible on the basis of the criteria used--only Mexico's currency was convertible within the meaning of Article VIII of the Articles of Agreement of the International Monetary Fund. Chairman Martin then invited Mr. Wayne to comment, noting correspondence of his with staff members that copies of some recent had been distributed to the Committee. Mr. Wayne said his letter to Mr. Holland of February 23, about a possible interpretation was prompted by his concern 1967,2/ memoranda have been placed in the Committee's 1/ Copies of these files. 2/ Copies of this letter, and of a letter of comment from February 27, 1967, have been Mr. Solomon to Mr. Wayne dated in the Committee's files. placed
of the earlier staff memorandum--and of some of the Committee's discussion at the preceding meeting--to the effect that the Committee should consider adopting some arithmetic or mechanical criteria for the inclusion of additional countries in the swap network. His contention was that System participation in the swap network had one overriding purpose, which was fairly well spelled out in the record of the Committee's actions in the foreign currency area--namely, to further the interests of the United States by contributing to the protection of the dollar and to the preservation of its role as an international currency. Accordingly, he thought that the System should enter into a swap arrangement with a particular foreign central bank only if doing so would be in the interests of the United States. The Committee, of course, had to exercise judgment in making such determinations, and if the conclusion was that a particular arrangement was in the interests of the United States he would be prepared not only to consider it but to authorize the Special Manager to seek it. If, on the other hand, the addition of a particular country to the network would appear not to have a material effect on the position of the dollar, he would prefer not to add that country improve its international status or even though doing so might relationships. The Committee perhaps contribute to diplomatic inescapable responsibility for determining whether partic had the interests of the United States. ular actions were in the
Mr. Coombs suggested that the Committee first concentrate on two of the countries in question, Denmark and Norway, from whom specific requests for swap arrangements had been received. In his judgment, it was virtually certain that they would achieve Article VIII convertibility by early April. Mr. Wayne had put a direct question that required a direct answer--namely, whether such arrangements would be in the interests of the United States. He personally felt that arrangements with Denmark and Norway definitely would be. First, with respect to the risk of gold sales, the Danes had bought gold in 1960, when the price on the London market broke out, and either country could change its gold ratio. Secondly, the swap network, by and large, had become focused on the Basle group of countries, which gave undue weight to the members of the Common Market. As he had indicated at the preceding meeting, it would be useful to dilute the influence of those countries by adding Denmark and Norway. The staff papers on the two countries-- which he thought were excellent--suggested that they were stable and politically, and that they could be financially, economically, to observe the rules of the game. expected Third, Mr. Coombs said, a network of credit lines with provided a nucleus for rounding up additional foreign central banks a country in case of need. Last September, when an support for round up $400 million of additional help effort was being made to
for the Bank of England, it was found possible to raise only $350 million from the System's swap partners. The sum desired was obtained because the Danes and Norwegians contributed $50 million to the package even though they were not members of the network. Their sense of responsibility and their willingness to help deal with emergencies were evident. Finally, Mr. Coombs said, while avoiding losses of gold was important to the United States, the swap network had the addi tional important purpose of protecting the international role of the dollar. In that connection countries with low gold ratios contribute just as effectively as those with high ratios. could of the swap arrangement to them could help to The availability reinforce their willingness not to buy gold. Chairman Martin commented that Mr. Wayne had pointed up the question clearly. Assuming that Denmark and Norway achieved status, he thought there would be no objection to Article VIII including them in the network under the criterion that Mr. Wayne had mentioned. that he personally was persuaded by the Mr. Wayne said Coombs that the inclusion of Denmark and Norway comments of Mr. be in the interests of the United States, assuming would definitely they met the Article VIII requirement. But to him that did not mean any other country would necessarily fall in the same category. that
Mr. Mitchell remarked that he would like to say a word in support of including the Latin American countries. The U.S. role in international financial affairs was not just a defensive one; the United States should be a positive force for the improvement of world economic conditions. If the swap network was extended only to the countries that foreseeably could help the United States, it would consist of an undesirably selective group. In his judgment, a failure to include Latin American countries, if they were able to qualify under Article VIII, would be a serious mistake. The Committee should recognize now that it would be desirable to include qualified Latin American countries. he would underscore the point that the Mr. Daane said overly sharp focus on the Basle countries in the swap network had been adverse to the U.S. interest in the operations of the in encouraging the concept of a network and to the U.S. interest narrower group of countries in the discussions wider rather than a In his judgment, these factors of international monetary reform. network. Mr. Wayne had made a good point argued for expanding the Committee should not be when he suggested that the in his letter But it should be in admitting new members. discriminatory open and at the same time act in possible to keep the network criteria would manner. Fairly well-developed a nondiscriminatory network in an appropriate way. help the Committee extend the
Mr. Wayne agreed that the Committee should stand ready to extend the swap network and, indeed, should welcome opportunities to do so. His contention was that the Committee had to assume the responsibility for making determinations on a country-by country basis. Mr. Hayes commented that he agreed with most of what had been said. The staff had done the Committee a real service in working on objective criteria, but he shared the view that such criteria could only be aids to judgment. The Committee should not have rigid standards for admitting countries to the network; it should consider each case on its merits. On that basis, and with Mr. Coombs' comments in mind, he would favor proceeding in connection with Denmark and Norway when they complied with the requirements of Article VIII. Among the Latin American countries importance, only Mexico seemed to him to really qualify. of major Some of the statements in the staff memorandum with regard to conditions in Venezuela made him dubious economic and political including that country at present. He about the desirability of did not know whether or not this was the appropriate time to one Latin American country in the network include Mexico. Having some pressure to include others, but would undoubtedly lead to face and resolve that problem at some the Committee would have to point.
Chairman Martin suggested that the Committee authorize negotiations at this time with the central banks of Denmark and Norway looking toward their inclusion in the swap network. He did not think the Committee should turn its back on Mexico and Venezuela, but Mr. Robertson had made a good point at the last meeting when he suggested that it was desirable to proceed cau tiously in enlarging the network. He thought Mr. Wayne had done the Committee a service in raising the questions he had. Mr. Scanlon commented that he assumed that the completion of swap arrangements with Denmark and Norway would be conditional on their attaining Article VIII status, and Chairman Martin agreed. Mr. Coombs raised the question of the size of the swap arrangements with Denmark and Norway that the Committee would Noting that the smallest arrangement in consider appropriate. the present network was $100 million, he suggested that he be authorized to propose that figure in the negotiations. There was general agreement with Mr. Coombs' suggestion. said he would like to make two points before Mr. Solomon First, the staff had tried the present discussion was concluded. some flavor of the political the memoranda to give the Committee in countries in question. But the situations existing in the four on that score should be considered against the staff's remarks in various countries that background of the political situations
were already members of the network; not all countries now in the network had always been free of political instability. Secondly, he thought that before the Committee moved formally on swap arrangements with Denmark and Norway it would be desirable to consult with the U.S. Treasury and possibly also with the Depart ment of State. Mr. Coombs commented that he understood from discussions with Treasury staff members that they would have no objection and, indeed, would be pleased to have the System enter into the arrange ments in question. Mr. Wayne observed that since the System's swap network impinged on both international financial relations and diplomatic relations of the United States, inter-agency consultations would be desirable. Chairman Martin then asked whether there were any objections to proceeding with negotiations with Denmark and Norway on the discussion today, and no objections were raised. basis of the Chairman Martin then noted that the authorization for commitments in Italian lire in the amount of $500 million, forward 1(C)2 of the authorization for System contained in paragraph operations, had last been discussed at the meeting foreign currency November 22, 1966. It had been agreed at that time that held on should be reviewed again after three months. In the matter
preparation for such a discussion today memoranda on the subject from the staffs of the Federal Reserve Bank of New York and the Board, both dated February 27, 1967, had been distributed to the Committee.1/ The Chairman asked Mr. Coombs to comment. Mr. Coombs said that he thought there could be very little question but that the forward operations in Italian lire had been successful. They had relieved pressure on the Bank of Italy to buy gold, and they had had the highly useful effect of channeling dollars back to the Euro-dollar market at a time when U.S. banks were reducing the volume of dollars they provided to that market or were actually pulling dollars back. The Treasury was willing to continue such operations, and the question before the Committee was whether or not the System should continue to participate in them along with the Treasury. At the moment, Mr. Coombs continued, he had no firm view as to the length of time for which the forward commitments would rolled over; that depended on developments in the have to be balance of payments. But as a general rule central banks Italian the duration of such opera particularly concerned about were not that was considered so important for tions. The time factor maintaining discipline in connection with swap drawings simply been placed in the these memoranda have 1/ Copies of Committee's files.
did not enter into this type of operation, since it was directed toward maintaining a desirable degree of ease in a particular money market, the Euro-dollar market. While the Committee became concerned when a swap drawing threatened to remain outstanding for more than six months, he did not think a similar limit should be imposed on these technical forward commitments. In general, he hoped that the System would continue to participate along with the Treasury and the Bank of Italy in this operation. It was useful in bringing the System into direct contact with the Bank of Italy and with the Euro-dollar market, and at the same time preventing a disruptive effect on the gold stock. Mr. Solomon said that the Board's staff did not have any policy recommendations different from those of Mr. Coombs. In its paper it had tried to give the Committee some of the history of the Bank of Italy's swap operations with Italian commercial banks, to review some of the economic effects of those operations, and to outline some of the policy issues as it saw them. The matter was extremely complicated, both in terms of economic effects and policy questions. One fact that came out of the staff's review, Mr. Solomon that the net foreign exchange assets of the Italian continued, was commercial banks against which the forward commitments were held consisted much more of claims against Italian residents than
against foreigners. A second fact the staff thought worth bring ing to the Committee's attention was that the Bank of Italy's swaps with Italian commercial banks had, indeed, kept down their official reserve accruals and reduced the pressure for Italy to buy gold from the United States. But an important element in that situation in 1966 was the fact that U.S. banks had been in the Euro-dollar market, absorbing the dollars which the Italian banks were putting in. If that had not been the case, the dollars might have gone to countries that had a greater propensity than Italy to buy gold. Accordingly, it could not be assumed that the operations in question would minimize U.S. gold losses under all circumstances. The staff also had tried to consider what might happen if the System swap commitments were withdrawn, Mr. Solomon observed, although it was not suggesting such a course. The specific question examined was whether the Bank of Italy would then be inclined to reduce the volume of its swaps with Italian commercial banks. The conclusion was that the Bank of Italy might want to maintain those swaps in any event, to avoid the increase in lira liquidity that commercial banks converted their foreign would result if the back into lire. Finally, it did not, by any means, dollar claims a shift toward deficit in the Italian balance appear certain that of payments or a change in Italian monetary policy would automatically
result in a reduction in the volume of the Bank of Italy's swaps. The relationships here were both complicated and loose. The problem was a complex one, with many conflicting considerations, and he would repeat that the Board's staff was not suggesting a course different from that recommended by Mr. Coombs. Mr. Daane said that one alternative to U.S. forward lira commitments mentioned in the Board staff's memorandum--that of issuing additional Roosa bonds to Italy--had been explored from time to time but had met with complete resistance on the part of the Italians. Thus, he did not think it was a real alternative. Like Mr. Coombs, he thought the forward operations had proved extremely useful. Mr. Hickman asked whether it was not true that funds going into the Euro-dollar market via Italy tended to flow to Britain. If so, that would be a desirable result from the stand point of the United States. Mr. Coombs replied that such funds had tended to flow both to Britain and to the United States. Mr. Hickman then suggested that the Committee reconsider in question every three months and plan on the operations when their results appeared to discontinuing them at any time have become inimical to the interests of the United States.
Mr. Daane commented that the operations in question involved no risk to the System, and Mr. Coombs agreed. The latter added that the Treasury was prepared to take over the System's commitments if the Committee decided to discontinue them. Mr. Mitchell noted that the System's forward lira commit ments had been in existence for over a year, and asked whether that was consistent with the Committee's general policy in the foreign currency area of attempting to deal only with short-run situations. replied that the commitments had run on Mr. Coombs primarily because the Italian balance of payments had continued surplus. As he had mentioned in the discussion last November, in he thought the Committee should review them from time to time. a real distinction between, on the one But he thought there was were extensions of credit and thus hand, swap drawings--which kept to a short term--and, on the other hand, were appropriately sort under discussion, which were undertaken operations of the bank to help deal with condi in concert with a foreign central while at the same time an important money market tions in bank to convert dollars the pressure on that central relieving of the operation was to improve into gold. The purpose international liquidity.
Mr. Mitchell then commented that the difficulty he saw with an ad hoc approach, such as was involved here, was that it could lead to different treatments in the System's relations with each of its counterparts. If a particular operation with a foreign partner was found to serve a useful purpose, it should be undertaken; but once that was done the Committee should offer to enter into the same type of operation with each of its coun terparts. Mr. Coombs replied that he did not think any other central in the sort of arrangement that had been made bank was interested with the Bank of Italy. that in the five years since the System Mr. Hayes remarked foreign currency operations many possibilities had had undertaken banks as efforts were made to been explored with other central devise procedures that suited particular situations. In the case operations of the kind under discussion had been found of Italy, think the Committee had precluded similar useful. He did not but, as Mr. Coombs had noted, evidently operations with others no other country was interested in them. the Committee would not want to Mr. Daane said he thought willing to enter into some partic broadcast the fact that it was was necessary to take into account ular kind of operation. It reserve policies in different countries. the different approaches to
It was often desirable, he thought, to deal with particular problems by means of operations tailored in the manner found most useful to the United States and the other country concerned. It was his personal impression also that other European central banks were not interested in arrangements of the kind the System had made with the Bank of Italy. However, while he felt it would be unwise for the Committee to indicate that it was prepared to enter into such arrangements with any central bank, it should stand ready to consider any specific proposals made. Mr. Brimmer agreed with Mr. Coombs about the usefulness of the forward lira operations. He thought the Committee should reject any suggestion that it would necessarily confine such opera tions to lire; the objective was simply to employ techniques that in particular situations. As long as the Committee were useful was not discriminating against any country, he would not want to useful arrangement simply to achieve uniformity see it dismantle a in the procedures followed with each partner. whether the System was not, in effect, Mr. Mitchell asked a gold guarantee on dollar holdings by giving the Bank of Italy commitments, and Mr. Robertson added that, if it was, the forward was whether it would be prepared to give a the real question If not, Mr. Robertson said, similar guarantee to all countries.
he did not think such a guarantee should be given to Italy. The longer the arrangement was continued the more difficult it would be to disengage from it. Mr. Coombs replied that the System's forward lira commit ments did not involve a gold guarantee which, he agreed, would be undesirable. The type of exchange guarantee involved was identical to that given in drawings under the swap arrangements. In a way, the essence of the System's foreign currency operations was to increase the willingness of foreign central banks to hold dollars without having gold guarantees. Upon motion duly made and seconded, and by unanimous vote, the authorization for System foreign currency operations as amended on September 9, 1966, was reaffirmed: AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY OPERATIONS 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive: A. To purchase and sell the follow ing foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, and with the Bank for International Settlements:
Austrian schillings Belgian francs Canadian dollars Pounds sterling French francs German marks Italian lire Japanese yen Netherlands guilders Swedish kronor Swiss francs B. To hold foreign currencies listed in paragraph A above, up to the following limits: (1) Currencies held spot or purchased forward, up to the amounts necessary to fulfill outstanding forward commitments; (2) Additional currencies held spot or purchased forward, up to the amount necessary for System operations to exert a market influence but not exceeding $150 million equivalent; and (3) Sterling purchased on a covered or guaranteed basis in terms of the dollar, under agree ment with the Bank of England, up to $200 million equivalent. C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign cur rencies, up to the following limits: (1) Commitments to deliver to the Stabilization Fund foreign currencies in which the United States Treasury has outstanding indebtedness, up to $200 million equivalent; (2) Commitments to deliver Italian lire, under special arrangements with the Bank of Italy, up to $500 million equivalent; and (3) Other forward commitments to deliver foreign currencies, up to $275 million equivalent.
D. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circum stances, specifically authorizes a delay. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for System Open Market Account with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of Maximum arrangement period of Foreign bank (millions of arrangement dollars equivalent) (months) Austrian National Bank 100 12 National Bank of Belgium 150 12 Bank of Canada 500 12 Bank of England 1,350 12 Bank of France 100 3 German Federal Bank 400 6 Bank of Italy 600 12 Bank of Japan 450 12 Netherlands Bank 150 3 Bank of Sweden Bank 200 6 Swiss National Bank for International Settlements in Swiss francs 200 6 System drawings System drawings in authorized European currencies other than Swiss francs 3. All transactions in foreign currencies undertaken under paragraph 1(A) above shall be at prevailing market rates and no attempt shall be made to establish rates that appear to be out of line with underlying market forces. Insofar as is practicable, currencies shall be purchased through spot transactions foreign
when rates for those currencies are at or below par and sold through spot transactions when such rates are at or above par, except when transactions at other rates (i) are specifically authorized by the Committee, (ii) are necessary to acquire currencies to meet System commitments, or (iii) are necessary to acquire currencies for the Stabilization Fund, provided that these currencies are resold forward to the Stabilization Fund at the same rate. 4. It shall be the practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administra tion of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested insofar as practicable, considering needs for minimum working balances. Such investments shall be in accordance with Section 14(e) of the Federal Reserve Act. 6. A Subcommittee consisting of the Chairman and the Vice Chairman of the Committee and the Vice Chairman of the Board of Governors (or in the absence of the Chairman or of the Vice Chairman of the Board of the members of the Board designated by the Governors Chairman as alternates, and in the absence of the Vice Committee his alternate) is authorized Chairman of the on behalf of the Committee when it is necessary to act Reserve Bank of New York to engage to enable the Federal before the Committee can in foreign currency operations be consulted. All actions taken by the Subcommittee reported promptly to the paragraph shall be under this Committee. (and in his absence the Vice 7. The Chairman of the Committee, and in the absence of both, the Chairman the Board of Governors) is authorized: Vice Chairman of
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Secretary; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency opera tions, and to consult with the Secretary on such policy matters as may relate to the Secretary's responsibilities; and C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign cur operations to appropriate officials of the Treasury rency Department. 9. All Federal Reserve Banks shall participate operations for System Account in the foreign currency in accordance with paragraph 3 G (1) of the Board of of Procedure with Respect to Foreign Governors' Statement of Federal Reserve Banks dated January 1, Relationships Special Manager of the System Open 10. The for foreign currency operations shall Market Account Committee informed on conditions in foreign keep the and on transactions he has made and exchange markets render such reports as the Committee may specify. shall Upon motion duly made and seconded, and by unanimous vote, the foreign currency directive as adopted on June 7, 1966, was reaffirmed: FOREIGN CURRENCY DIRECTIVE 1. The basic purposes of System operations in foreign currencies are:
A. To help safeguard the value of the dollar in international exchange markets; B. To aid in making the system of international payments more efficient; C. To further monetary cooperation with central banks of other countries having convert ible currencies, with the International Monetary Fund, and with other international payments institutions; D. To help insure that market movements in exchange rates, within the limits stated in the International Monetary Fund Agreement or established by central bank practices, reflect the interaction of underlying economic forces and thus serve as efficient guides to current financial decisions, private and public; and E. To facilitate growth in international liquidity in accordance with the needs of an expanding world economy. 2. Unless otherwise expressly authorized by the Federal Open Market Committee, System operations in foreign currencies shall be undertaken only when necessary: A. To cushion or moderate fluctuations in the flows of international payments, if such fluctuations (1) are deemed to reflect transitional market unsettlement or other temporary forces and therefore are expected to be reversed in the foreseeable future; and (2) are deemed to be disequilibrating otherwise to have potentially destabilizing or U.S. or foreign official reserves effects on or on exchange markets, for example, by occasioning market anxieties, undesirable activity, or excessive leads and speculative in international payments; lags B. To temper and smooth out abrupt changes in spot exchange rates, and to moderate
forward premiums and discounts judged to be disequilibrating. Whenever supply or demand persists in influencing exchange rates in one direction, System transactions should be modified or curtailed unless upon review and reassessment of the situation the Committee directs otherwise; C. To aid in avoiding disorderly conditions in exchange markets. Special factors that might make for exchange market instabilities include (1) responses to short-run increases in interna tional political tension, (2) differences in phasing of international economic activity that give rise to unusually large interest rate differentials between major markets, and (3) market rumors of a character likely to stimulate speculative transactions. Whenever exchange market instability threatens to produce disorderly conditions, System transac tions may be undertaken if the Special Manager reaches a judgment that they may help to reestablish supply and demand balance at a level more consistent with the prevailing flow of underlying payments. In such cases, the Special Manager shall consult as soon as practicable with the Committee or, in an emergency, with the members of the Subcommittee designated for that purpose in paragraph 6 of the Authorization for System foreign currency operations; and D. To adjust System balances within the limits established in the Authorization for currency operations in light of System foreign probable future needs for currencies. System drawings under the swap arrangements appropriate when necessary to obtain foreign currencies are purposes stated in paragraph 2 above. for the 4. Unless otherwise expressly authorized by transactions in forward exchange, either the Committee, spot transactions, may be or in conjunction with outright
undertaken only (i) to prevent forward premiums or discounts from giving rise to disequilibrating move ments of short-term funds; (ii) to minimize speculative disturbances; (iii) to supplement existing market supplies of forward cover, directly or indirectly, as a means of encouraging the retention or accumulation of dollar holdings by private foreign holders; (iv) to allow greater flexibility in covering System or Treasury commitments, including commitments under swap arrangements; (v) to facilitate the use of one cur rency for the settlement of System or Treasury commitments denominated in other currencies; and (vi) to provide cover for System holdings of foreign currencies. Chairman Martin then noted that at a recent meeting the Board had given preliminary consideration to a draft review of System foreign currency operations in 1966 prepared by the Special Manager for inclusion in the Board's 53rd Annual Report. At that time it had been suggested that it would be desirable for the Committee to discuss the policy it would consider appropriate in the future with respect to publication of information regarding currency operations and the understandings that System foreign with other interested parties with respect to might be reached particular operations. To provide publication of information on the Board's staff had been asked to the necessary background, of publication policy in prepare a report on prior discussions the foreign currency area. The staff's memorandum, dated March 2, to the Committee, along with copies of 1967, had been distributed commenting on the reasons for the a letter from Mr. Coombs
omission from the draft text of information concerning a drawing made by the Bank of Canada on its swap line with the System in the fall of 1966, and the reasons for limiting the information given on System operations in sterling during the course of the 1/ year. Mr. Brimmer asked whether the issues that had been raised in the Board's discussion had not already been largely resolved. Mr. Coombs replied affirmatively. He noted that the Bank of England had raised questions regarding certain figures included in an early draft that had been sent to them for comment and, accordingly, he had deleted those figures from the text sent to the Board for review. However, when the sterling situation took a turn for the better in late February the British attitude regarding publication became more relaxed, and the current plan was to include all of the data on sterling that had been questioned earlier. The sterling report would thus be complete. The Bank of Canada still preferred to have information on its 1966 drawing withheld at this time, but that information would be included in the Special Manager's next semi-annual report. Apart from that drawing, the only information that would not be made public concern ing operations through the end of 1966 related to the dollar volume of the System's forward lira commitments. referred to have been placed in 1/ Copies of the documents the Committee's files.
Mr. Robertson commented that, looking toward the future, there was a question of policy in this area that the Committee should resolve, although not necessarily today. While he rec ognized the need for flexibility, he thought the Committee might want to consider presenting a statement along the following lines to each of its partners in the swap network: It is the general policy of the FOMC that all foreign currency operations in which it is involved, whether at its initiative or that of partner central banks, be disclosed within a reasonable period of time. The Committee intends to continue to publish information on Federal Reserve use of these facilities with a time lag of no longer than seven months. In addition, the Committee desires to propose to its the network that they agree to a similar pub partners in lication procedure by us with respect to their use of these facilities, with the understanding that exceptions be made only after discussions between the Governor will of the central bank proposing the exception and the Chairman of the FOMC. on this proposed procedure will be Final decision postponed until after consideration thereof by the partners in the network. he did not question the desirability Mr. Daane commented that however, that presenting full publication. He was concerned, of banks might affect their attitudes a statement to foreign central such inhibit the most in a manner that would toward the swap network use of the network. effective noting the lateness of the hour, suggested Chairman Martin, discussion of publication on continuing the the Committee plan that at its next meeting. to foreign currency operations policy with regard
It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, April 4, 1967, at 9:30 a.m. Thereupon the meeting adjourned. Secretary Secretary
ATTACHMENT A CONFIDENTIAL (FR) Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on March 7, FIRST PARAGRAPH The economic and financial developments reviewed at this meeting indicate some decline in industrial production and a marked slowing of expansion in over-all economic activity. Lack of growth in retail sales may be retarding adjustment of inventory accumula tion from its recent excessive rate. Average commodity prices have changed little recently, but unit labor costs in manufacturing have risen further. Bank credit expansion has been vigorous and, after a period of rising interest rates and congested bond markets, financial conditions have again turned easier. Recent data suggest little improvement in the foreign trade surplus but also little increase in the outflow of U.S. capital. In several important countries abroad, economic activity has been softening for several months and monetary and fiscal policies have eased somewhat. In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions, including bank credit growth, conducive to noninflationary economic expansion and progress toward reasonable equilibrium in the country's balance of payments. SECOND PARAGRAPH Alternative A the background of the To implement this policy against reductions in reserve requirements, System open market opera current tions until the next meeting of the Committee shall be conducted with to maintaining the prevailing easier conditions in the money a view be modified as necessary to moderate any market, but operations shall deviations of bank credit from current apparently significant expectations. Alternative B against the background of the To implement this policy requirements, System open market current reductions in reserve next meeting of the Committee shall be conducted operations until the somewhat easier conditions in the money with a view to attaining still easier conditions if bank credit market, and to attaining to be expanding significantly less than currently anticipated. appears
Also: Record of Policy Actions