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Annua( Report



-'6L +









Reduced System holdings of U.S. Government securi

To continue to moderate money and credit market ad
justments to the December 1965 discount rate in
crease early in the month, and then to offset seasonal

ties, on balance, by about $650 million. Member bank
borrowings averaged about $400 million.

reflow of funds and maintain about the same money
market conditions that had prevailed in early January.

early June

Limited the increase in System holdings of U.S. Gov
ernment securities to about $1.5 billion. Average mem
ber bank borrowings rose to nearly $600 million.

To effect gradual reduction in net reserve availability
and thereby to restrain the growth in the reserve base,
bank credit, and the money supply.

Raised from 4 to 5 per cent the reserve requirements
against time deposits, other than savings deposits,
in excess of $5 million at each member bank, effec
tive July 14 and 21 for reserve city and country mem

To exercise a tempering influence on the issuance of
time certificates of deposit by larger banks and to
apply some additional restraint on the expansion of

ber banks, respectively, thereby increasing required
reserves by about $420 million.

Made shorter-term bank promissory notes and similar
instruments issued after June 26, 1966, subject to reg
ulations governing reserve requirements and payment
of interest on deposits, effective September 1, 1966.

banks' loanable funds, thus reinforcing the opera
tions of other instruments of monetary policy in con
taining inflationary pressures.
To prevent future use of these relatively new instru
ments as a means of circumventing statutory and reg

ulatory requirements applicable to bank deposits.




Early June

Limited the increase in System holdings of U.S. Gov
ernment securities to about $800 million. Average
member bank borrowings rose to $750 million.

To continue to restrain bank credit expansion while

maintaining about the same state of net reserve avail
ability and/or money market conditions and taking

account, at various times, of scheduled financings by
the Treasury, any unusual liquidity pressures, and any
significant deviations of required reserves or bank
credit from current expectations.


Lowered from 5

to 5 per cent the maximum rate pay

able by member banks on new multiple-maturity time
deposits of 90 days or more, and from 51

to 4 per

To help forestall excessive interest rate competition
among financial institutions for consumer-type time

cent the maximum rate payable on such deposits with
maturities of less than 90 days.

Granted temporary authority to the Federal Reserve
Banks to provide emergency credit facilities, under
certain conditions, to nonmember depositary-type in

To assure that funds could be provided to assist in meet
ing unusual withdrawals that might develop at non

member depositary institutions and to safeguard

stitutions, including mutual savings banks and savings

gage and securities markets resulting from such ex

under this authority.

against the possibility of additional pressures on mort

and loan associations. No lending was necessary

ceptional withdrawals.

Raised reserve requirements from 5 to 6 per cent against
time deposits, other than savings deposits, in excess

of $5 million at each member bank, effective Sep
tember 8 and 15 for reserve city and country banks,
respectively, thereby increasing required reserves by

To exert a tempering influence on the issuance of cer

tificates of deposit by the larger banks and to apply
some additional restraint upon the expansion of bank
credit to businesses and other borrowers.

about $450 million.


Requested member banks to moderate their rate of ex
pansion of loans, particularly business loans; indica
ted that bank use of Reserve Bank discount facilities
would be expected to be in a manner consistent with
this objective; and noted the continuing availability
of discount facilities to cushion deposit shrinkages.

To moderate excessive expansion of business loans at
banks and at the same time to avoid additional pres
sure on financial markets resulting from further sub
stantial liquidation by banks of municipal securities
and other investments to obtain loanable funds; also

to reaffirm availability of Federal Reserve credit assist
ance in case of deposit shrinkages.

In exercise of authority given by new temporary legisla
tion, reduced from 5
to 5 per cent the maximum
interest rate payable on any time deposit under
$100,000, other than savings deposits, effective Sep
tember 26.

To limit further escalation of interest rates paid in com
petition for consumer savings, and to help keep the
growth of commercial bank credit to a moderate pace.

late Novem

Increased System holdings of U.S Government securi
ties by nearly $500 million. Average member bank
borrowings declined to $680 million.

To permit somewhat less firm conditions in the money
market in view of the recent lack of growth in bank

Late Novem

Increased System holdings of U.S. Government securi
ties by about $970 million, including about $660 mil

To relax monetary restraint somewhat in the light of


lion in repurchase agreements. Average member bank

both the outlook for slower economic growth and
persisting lack of expansion in bank credit.

borrowings declined to $550 million.


Issued new 1967 guidelines for banks and other finan
cial institutions as part of broader governmental pro
gram of voluntary foreign credit restraint.

To continue, and in some respects to intensify, the vol

Terminated special discount arrangements announced
on September 1 when member banks were asked to

To eliminate discount arrangements that were no longer

curtail their business loan expansion.

untary effort to restrain the outflow of private capital.

needed, since expansion in business loans had been
reduced to a moderate rate and banks were no longer
unloading securities in unreceptive markets to obtain
loanable funds.


or of money market conditions in general, pending a clearer
indication of the consequences of previous policy actions. Some
members in each of these groups thought that the conduct of
open market operations should be conditioned in part by the
strength of demands that might be made on the banking system;
they felt that net reserve availability could be allowed to become
tauter than otherwise if bank credit and money supply growth
proved strong and required reserves consequently expanded
Despite these shadings of opinion, the range of difference in
views on policy for the next 3 weeks was not great; no members
advocated overt firming action at this time, and none favored
relaxation. At the conclusion of the discussion the Committee
agreed to renew the current economic policy directive adopted
at the preceding meeting without change.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Daane, Hickman, Irons, Mai
sel, Mitchell, Robertson, Shepardson, and
Treiber. Votes against this action: None.

April 12, 1966
1. Authority to effect transactions in System Account.

Rapid economic advance continued unabated through the end
of the first quarter, according to reports at this meeting. The
driving forces of the expansion-defense outlays and business
capital expenditures-showed no signs of slackening, and con
sumer spending was being spurred by sharp rises in incomes
and employment. Further large gains in expenditures by Govern
ment, business, and consumers were expected in the second
Industrial production rose considerably further in March; for
the first quarter as a whole it increased at an annual rate of about
13 per cent from the fourth quarter of 1965. Retail sales also


expanded further in March, according to preliminary estimates,
after rising substantially in February. Nonfarm employment con
tinued to grow rapidly, and shortages of experienced workers
were becoming increasingly serious. In March, after six con
secutive months of decline, the unemployment rate rose
slightly-from 3.7 per cent to 3.8 per cent-but the rise was
accounted for mainly by teenagers, a group for which monthly
unemployment changes tend to be volatile.
Average prices of industrial commodities advanced further in
March, but because of a slight decline in prices of farm products
and foods, the total index of wholesale prices was unchanged
from February. Over the first 3 months of the year average
prices of industrial commodities had increased at an annual rate
of about 3 per cent, approximately twice the rate of 1965. The
consumer price index rose in February to a level about 2.5 per
cent above a year earlier. Most of the February rise was account
ed for by foods, but average prices of other commodities and of
services also advanced.
Commercial bank credit, which had changed little in February,
expanded substantially in March. Business loan demands in
particular were strong over the corporate tax and dividend pay
ment dates. Finance companies, which had a substantial volume
of open market paper maturing in the same period, also bor
rowed heavily. Banks liquidated a large volume of securities,
including municipals, to help finance these loan demands. Some
reduction in the rate of growth of bank loans was expected after
the April tax date, but underlying credit demands appeared
likely to remain strong.
The money supply rose sharply in March, in part reflecting a
contraseasonal reduction in Treasury deposits at commercial

banks. Growth in time and savings deposits continued at the
more moderate February rate. Time deposit inflows at city
banks expanded considerably in response to higher offering rates
on both negotiable and nonnegotiable certificates of deposit.
However, some of the funds probably were withdrawn from sav-


ings deposits at these banks, and possibly also from time and
savings deposits at country banks, where growth slackened.
In security markets, the declines in yields on Treasury notes
and bonds and on new corporate and municipal issues that had
begun in early March continued into early April. The month
long rally-in which one-half to two-thirds of the yield advances
following the December increase in the discount rate were erased
-apparently reflected increasing expectations of a Federal tax
increase, a growing belief that earlier yield advances had out
paced economic developments, and some moderation in the flow
of new private offerings. Most recently, however, a general note
of caution appeared to have returned to security markets, and
some yields edged up again. Near the end of April the Treasury
was expected to announce the terms on which it would refund
securities maturing in mid-May, of which about $2.5 billion
were held by the public.
Recent System open market operations had kept bank reserve
positions under pressure. Over the three statement weeks ending
April 6, net borrowed reserves averaged about $230 million and
member bank borrowings about $580 million-in each case
slightly higher than the levels of the previous 3-week period. For
March as a whole, higher member bank borrowing accounted
for all of the increase in total reserves; nonborrowed reserves de
clined for the first time since September. The effective rate on
per cent on most days since the
Federal funds had been 4
preceding meeting of the Committee, and on one day a small
volume of funds traded at a new high rate of 4 7/8 cent. Most
other short-term yields remained at the recent highs established
after the March 10 increase in the prime loan rate of banks, or
they edged up further. The yield on 3-month Treasury bills fluc
tuated but on balance rose somewhat to 4.59 per cent on the day
preceding this meeting.
The Committee agreed that additional stabilization policy
measures would be desirable in light of present and prospective
inflationary pressures. In the course of the discussion note was


taken of the President's recent request that businesses reduce their
planned capital outlays, and also of the possibility that the ad
ministration might recommend an increase in Federal taxes. It
was pointed out, however, that large cutbacks in actual invest
ment expenditures probably could not be expected quickly be
cause of the long lead-times of most capital projects and the
firm commitments already made. As to a tax increase, even if one
were recommended soon-and that issue remained in doubt
some time would be required for congressional consideration, and
additional time probably would elapse before any increase en
acted had substantial effects on aggregate spending.
In the area of monetary policy divergent views were expressed
about the appropriate interpretation of recent banking and capi
tal market developments. Some members felt that the recent high
growth rates in the money supply and bank credit had been unde
sirable in light of the objective of resisting inflationary pressures,
and a similar view was advanced with respect to the declines in
longer-term market interest rates. Of the members who held
these views some thought that, in retrospect, the Committee's
recent policy directives might better have been formulated in
terms calling for greater resistance to such developments, which
they considered to be evidences of a relaxation in monetary
Other members shared the view that monetary relaxation
would be undesirable under present circumstances, but thought
that there had been no relaxation in the pressure the System was
placing on banks nor in the trend toward firmer lending policies
at banks. In their judgment the recent developments had to be
interpreted in light of the fact that there often were marked short
run fluctuations in banking variables and interest rates-in the
latter partly because of the effects of changing expectations.
At the conclusion of the discussion the Committee agreed
that its policy of gradually reducing net reserve availability, initi
ated at the February 8 meeting, should be continued until the next
meeting; and that consideration should be given in the conduct


of open market operations to the trends in aggregate reserves,
with somewhat tauter reserve conditions permitted if the aggre
gates rose sharply. However, it was felt that at this juncture
reserve pressures should not be intensified to the point at which
rising market rates would call into question the viability of the
current discount rate and the maximum rates permitted to be
paid by member banks on time and savings deposits. At the
same time it was agreed that the forthcoming Treasury financing
should be taken into account although, because of the moderate
size and probable routine nature of the financing, it was expected
that the requirements for maintaining an "even keel" in the
money market would be less than usually was the case during
Treasury operations.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that the domestic economy is expanding vigorously, with indus
trial prices continuing to creep up and credit demands remaining strong.
Our international payments continue in deficit. In this situation, it is the
Federal Open Market Committee's policy to resist inflationary pressures
and to help restore reasonable equilibrium in the country's balance of pay
ments, by restricting the growth in the reserve base, bank credit, and the
money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
some further gradual reduction in reserve availability, while taking into
account the forthcoming Treasury financing.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, and Shepardson. Votes against
this action: None.
2. Authority to purchase and sell foreign currencies.

The Committee amended the third paragraph of its continuing
authority directive for System foreign currency operations to
increase, from $100 million to $200 million, the dollar limit


on spot purchases and concurrent forward sales to the U.S.
Stabilization Fund of currencies in which the U.S. Treasury had
outstanding indebtedness. With this amendment, the paragraph
read as follows:
The Federal Reserve Bank of New York is also authorized and directed
to make purchases through spot transactions, including purchases from the
U.S. Stabilization Fund, and concurrent sales through forward trans
actions to the U.S. Stabilization Fund, of any of the foregoing currencies

in which the U.S. Treasury has outstanding indebtedness, in accordance
with the Guidelines and up to a total of $200 million equivalent. Purchases

may be at rates above par, and both purchases and sales are to be made
at the same rates.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, and Shepardson. Votes against

this action: None.
Transactions of the kind authorized by this paragraph, which
involved no risk of loss, were for the purpose of facilitating
payment by the Treasury of maturing bonds denominated in for
eign currencies. The amendment was approved after the Special
Manager of the System Open Market Account reported that a
larger sum than previously authorized probably could be usefully
devoted to this purpose at present.

May 10, 1966
Authority to effect transactions in System Account.
Economic activity continued to expand in April, following a
first quarter in which personal consumption expenditures, busi
ness fixed investment, and Federal outlays all increased substan
tially. For the first quarter, GNP was officially estimated to have
been at a seasonally adjusted annual rate $17 billion higher than