View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

THE SE C R E T A R Y OF THE T R E A S U R Y

/=12"

W A S H IN G T O N

,iKM

fy h

y

OCT 6 1965

MEMORANDUM FOR THE PRESIDENT
The attached memorandum "Current Jfonetary Policy Issues" is an
excellent presentation of the issues which face us in the immediate
and short-run future.
These issues, in brief, are:
1)

The Federal Reserve needs to make a decision whether (a) to resist
upward rate pressures for the foreseeable future ~ a month or two
even if this requires providing reserves to support more rapid
expansion in bank credit or (b) to accept higher rate levels,
presumably by raising the discount rate.

2)

The case for some Federal Reserve action is growing but is not
conclusive —
— The Fed argues that if monetary policy is to be of
maximum effectiveness, it must move before the need
for restraint can be fully proved.

3)

The case for the status quo rests on two points:
— The danger of overheating is still tenuous, and
— The margin for tightening policy without undue
restrictive effects is narrow.
Both higher rates and the status quo involve risks. But my con­
clusion is that the risks of tightening are still greater than
the risks of overstaying present policies. I feel there is time
to review this decision when we know more about the budget,
meanwhile watching both the economic indicators and market trends
for early signs of overheating.

As you know, my general position in this matter has been reflected
in my speech to the American Bankers Association in Chicago yesterday —
the pertinent pages of that speech are attached.
On Monday, I spent two and a half hours with Bill Martin in which
I made my own position clear. I read Bill that portion of my speech
which I have attached to this memo. I told him that my own view was
that the time for further tightening was not at hand, although, it was,
of course possible that such action might be required in the future.

r

■-

....... — '

c o p y LELI

W

-

2

-

I thought th a t i t would be b e tte r to w a it u n t i l th e r e was more c le a r cu t evid en ce th a t tig h te n in g would be n e c e ssa r y . I d id not th in k
th e r e was any c a se fo r e a sin g p o lic y .
p r e s c r ip tio n was t o s ta y
"steady in th e boat" fo r th e tim e b e in g .
At C hicago, I made ev id en t in answer to in q u ir ie s th a t I cou ld not
oppose modest and s e l e c t i v e in c r e a se s in i n t e r e s t r a te s charged p a r t i­
c u la r custom ers or a g iv en typ e o f custom er, such a s fin a n c e com panies,
by banks. In my Judgment, i t would be unw ise t o ta k e any o th er p o s it io n .
The c le a r im p lic a tio n o f my remarks was r e s is t a n c e to changes in th e
prime r a te because th a t would mark a more g e n e r a l bank lo a n r a te i n ­
crea se than I c o n sid e r d e sir a b le a t t h i s tim e . I b e lie v e t h i s p o stu re
should be th e one we h o ld in responding t o q u e stio n s th a t may come to us
from ban k ers, bu t I would n o t a d v ise you t o become d ir e c t ly in v o lv e d .

Attachment




r
COPY LSI UBRARY


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102