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FIFTY SECOND

Annuaf Report
OF THE
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

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COVERING OPERATIONS FOR THE YEAR

1965

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DIGEST OF PRINCIPAL FEDERAL

Period

Action

RESERVE

I
POLICY ACTIONS IN 1965

Purpose

January

Reduced System holdings of U.S. Government secu
rities by about $500 million. Member bank borrow
ings averaged $300 million.

To absorb seasonal reflow of bank reserves while maintaining about
the same firmness in the money market as had prevailed in earlier
weeks.

February

Introduced a program, at the request of the President
and in cooperation with the Treasury, under which
financial institutions were asked to limit voluntarily
their expansion of foreign loans and investments.

To reduce the outflow of private capital and thus improve the U.S.
balance of payments and strengthen the international position of
the dollar.

FebruaryMarch

Limited the increase in System holdings of U.S. Gov
ernment securities to about $1.0 billion, nearly one
fifth of which were securities maturing in over 1
year. Member bank borrowings rose to an average
of nearly $500 million in late March.

To move toward firmer conditions in the money market, while off
setting a $600 million gold outflow, and to encourage more mod
erate growth in the reserve base, bank credit, and the money
supply--in an effort to reinforce the voluntary foreign credit
restraint program and avoid the emergence of inflationary
pressures.

April

Limited the increase in System holdings of U.S. Gov
ernment securities to about $2.4 billion, nearly one
third of which were securities maturing in over 1
year. Member bank borrowings averaged $500
million.

To offset a drain on bank reserves from market factors-as outflows
of $2.5 billion in currency and $700 million in gold were only
partly offset by reserves supplied from other technical factors
while attempting to maintain firm conditions in the money market
in a period of rising credit demands and shifting expectations
and at the same time accommodating no more than moderate
growth in bank reserves, bank credit, and money.

Early
December

(1) Raised the discount rate from 4 to 4
per cent
and (2) raised maximum interest rates payable by
member banks on time deposits (other than savings
deposits) from 4 to 5 2 per cent for maturities
of 30-89 days and from 4
to 5
per cent for
longer maturities.

(1) To moderate additional bank reliance on short-term borrowings
from the Federal Reserve to meet intensifying loan demand and
(2) to enable banks to attract and retain time deposits of busi
nesses and individuals and thus to assure an adequate flow of funds.

December

Increased System holdings of U.S. Government secu
rities by about $1.1 billion, one-fifth of which repre
sented securities acquired under repurchase agree
ments. Member bank borrowings averaged about
$450 million.

To moderate adjustments in money and credit markets following
the December discount rate increase and to offset part of the
seasonal drain on bank reserves.

November

L

ANNUAL REPORT OF BOARD OF GOVERNORS

Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized and
directed to operate in any or all of the foregoing currencies in accordance
with the Guidelines and up to a combined total of $275 million equiva
lent, by means of:
(a) purchases through forward transactions, for
the purpose of allowing greater flexibility in
covering commitments under reciprocal cur
rency agreements;
(b) purchases and sales through forward as well as
spot transactions, for the purpose of utilizing
its holdings of one currency for the settlement
of commitments denominated in other cur
rencies;
(c) purchases through spot transactions and con
current sales through forward transactions, for
the purpose of restraining short-term outflows
of funds induced by arbitrage considerations;
and
(d) sales through forward transactions, for the pur
pose of influencing interest arbitrage flows of
funds and of minimizing speculative disturb
ances.
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 $100 million equivalent. Pur
chases may be at rates above par, and both purchases and sales are to
be made at the same rates.
The Federal Reserve Bank of New York is also authorized and

directed to make purchases of sterling on a covered or guaranteed basis
in terms of the dollar up to a total of $50 million equivalent.

FEDERAL RESERVE SYSTEM

Votes for this action: Messrs. Martin, Balderston,
Daane, Galusha, Maisel, Mitchell, Robertson,
Scanlon, Shepardson, Bopp, Irons, and Treiber.
Votes against this action: None.

August 31, 1965
Authority to effect transactions in System Account.

Reports at this meeting confirmed earlier estimates that
industrial production and retail sales had reached new highs in
July. Production gains in both June and July were larger than
in most earlier months of the year as a result of further advances
in output of business equipment and of materials, including
steel; consumer goods output continued to show little change
at a level about 5 per cent above a year earlier. Manufacturers'
inventories rose considerably in July, following three quarters
in which total business inventories had increased at a more
rapid rate than earlier in the current business expansion. The
unemployment rate, which had declined to 4.5 per cent in
July, remained at that level in August.
Business sentiment recently had become more buoyant, as
activity continued to expand faster than had been expected and
as prospects for further advances were enhanced by expected
rises in military outlays in connection with the Viet Nam
hostilities. To date, however, developments in Viet Nam did
not appear to have given any sharp, direct stimulus to con
sumer or business spending, and the timing and amount of
expected increases in military expenditures remained highly

uncertain.
Additional major uncertainties were associated with the
situation in the steel industry.

Labor negotiations were still

in process at the time of this meeting, and the interim agreement,
originally scheduled to expire on September 1, had been
extended 8 days at the request of the President. It was not

clear whether a settlement would be arrived at without a strike,
nor what the terms of the settlement would be. Also in doubt
were the probable dimensions and timing of the reduction in

ANNUAL REPORT OF BOARD OF GOVERNORS

steel inventories expected to follow the conclusion of a labor
agreement; it was possible that the amount of liquidation, while
still substantial, would be less than anticipated earlier, par
ticularly if it appeared that military needs for steel would rise
rapidly or if the terms of the labor agreement made future
increases in steel prices more likely.
Average wholesale prices of industrial commodities, which
were stable in July, appeared to have edged up in August, but
changes continued selective, without any general response to
developments in Viet Nam. The total wholesale price index
was estimated to have declined slightly in August as a result of
some reductions for foods, which had accounted for most of
the rise in the index earlier in the year. The consumer price
index rose slightly further in July, despite declines for some
products resulting from reductions in excise taxes.
The demand for business loans at banks continued strong
and commercial bank credit, which had declined in July, was
expanding again in August. Growth of time deposits accelerated
from the high July rate, but growth in the money supply
moderated further. Average net borrowed reserves of member
banks continued to show little change.
The latest information on U.S. international payments
indicated that a deficit occurred in August and, contrary to
earlier reports, that payments probably were in deficit in July
also. Gold outflows continued, but at a lower rate than in the
first half of the year. In foreign exchange markets, there had
been some improvement recently in attitudes with respect to the
outlook for sterling, but the situation remained delicate.
Conditions in domestic money markets generally were steady
in recent weeks, although yields on 3-month Treasury bills rose
several basis points. Bond markets weakened considerably.
Treasury bond yields advanced to their highest levels since the
spring of 1964, and yields on new issues of high-grade corporate
bonds broke through their June peaks to levels not reached
since the summer of 1961. To some extent, the rise in corporate

FEDERAL RESERVE SYSTEM

bond yields stemmed from unseasonally large recent and prospec
tive flotations; and the rise in yields on Treasury bonds reflected
the growing attractiveness of corporate yields for institutional
investors. Also, dealer holdings of longer-term issues were
still sizable, despite recent reductions as a result of official
purchases. To a major extent, however, the yield advances
reflected a shift in investor expectations regarding the economic
outlook and the future course of interest rates. A variety of
factors contributed to this shift, including the unexpectedly
strong performance of the economy, developments in Viet Nam,
uncertainties regarding the probable terms of the steel wage
settlement, continued nervousness about the prospects for ster
ling, and the possibility that a firmer monetary policy might
be required for domestic or balance of payments reasons.
The Committee decided that no change should be made in
policy at this time, partly because of the various existing uncer
tainties. Cited in this connection were the uncertainties about
the outcome of wage negotiations in the steel industry and about
the likely magnitude and duration of the expected subsequent
reduction in steel inventories; the lack of reasonably precise
information regarding the probable impact of developments
in Viet Nam on the economy; the still sensitive position of
sterling in foreign exchange markets; and the possibility that,
in view of the recent weakening in bond prices, domestic
security markets might over-react to any firming of monetary
policy, however modest was the intended change.
Some members who agreed that such factors made a policy
change inappropriate at present indicated that in the absence of
these factors they might have been inclined toward a shift in
the direction of firming. Among the grounds for firming men
tioned by members in this group were the strength in the
business outlook and the prospects for further price advances;
the continued rapid growth in business loans at banks; and
the recently less favorable balance of payments situation. Other
members expressed the view that even apart from the existing

ANNUAL REPORT OF BOARD OF GOVERNORS

uncertainties a firmer policy was not warranted at present. In
their judgment a reduction in the rate of over-all inventory
accumulation was likely to act as an offset to the economic
stimulus of developments in Viet Nam, and they saw little
ground at the moment for expecting inflationary pressures to
develop in the near future.
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 has expanded further, but with
markets characterized by uncertainties as to possible developments in
steel, sterling, and Viet Nam. Our international payments have reverted
to deficit in August, and gold outflows have continued, although at a
more moderate rate. In this situation, it remains the Federal Open
Market Committee's current policy to strengthen the international posi
tion of the dollar, and to avoid the emergence of inflationary pressures,
while accommodating moderate 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 main
taining about the same conditions in the money market as have prevailed
in recent weeks, while taking into account unsettled conditions in securi
ties and foreign exchange markets.
Votes for this action: Messrs. Martin, Balderston,
Daane, Ellis, Galusha, Maisel, Mitchell, Robertson,
Scanlon, Shepardson, and Irons. Vote against this
action: Mr. Treiber.
Mr. Treiber dissented because he believed that domestic
considerations warranted some restriction in credit availability
before inflationary pressures gained momentum, and because
in his judgment the need to bring about a fundamental improve
ment in the international payments of the United States was
pressing. While agreeing that, in light of the various existing
uncertainties, caution would be required in reducing the degree
of credit availability, he felt that moderate action of that kind
would not have untoward consequences.

FEDERAL RESERVE SYSTEM

September 8, 1965
Authority to purchase and sell foreign currencies.

At this meeting, which was held by telephone, the Committee
amended the final paragraph of the continuing authority direc
tive for foreign currency transactions to increase the dollar
limit specified for purchases of sterling by the Federal Reserve
Bank of New York on a covered or guaranteed basis in terms
of the dollar to $200 million equivalent from $50 million
equivalent.

Votes for this action: Messrs. Martin, Balderston,
Daane, Ellis, Maisel, Robertson, Scanlon, Shepard
son, Clay, Irons, and Treiber. Votes against this
action: None.
For several weeks negotiations had been in process among
Britain, the United States, and a number of other countries on
a program designed to assist the recovery of sterling, and today's
action was taken in connection with that program, on recom
mendation of the Special Manager of the System Open Market
Account. The U.S. Treasury was planning to participate with
the Federal Reserve in the package of assistance.

September 28, 1965
Authority to effect transactions in System Account.

Economic activity advanced further against a background of
optimistic business sentiment, and most analysts reportedly