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RESERVE
FEDERAL
release
press
For release after 3:30 p.m., EDST,
June 29, 1967.
June 29, 1967.
The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee have adopted revisions of
their respective Rules relating to the availability of information
to the public.
The revised Rules have been transmitted for publi
cation in the Federal Register, to become effective July 4, 1967.
They are designed to carry out the purposes of the Public
Information section of the former Administrative Procedure Act,
as revised last year and now codified in section 552 of Title 5
of the United States Code, which will become effective as of that
date.
Under the new Rules, unpublished records of the Board
and the Committee will be made available upon request unless the
particular records fall within stated exemptions contained in the
new law, whereas under the former Rules unpublished records
generally were not made available for public inspection except
with the express approval of the Board and the Committee.
After
July 4, records will be made available unless they are of the type
that cannot properly be disclosed and fall within one of the
following exemptions of the new law because they are
(1) exempted from disclosure by statute or
executive order;
(2) contained in or related to examination,
operating, or condition reports;
(3) privileged or related to the business, personal,
or financial affairs of any person and furnished in
confidence;
(4) contained in investigatory files compiled for
law enforcement purposes (except to the extent available
by law to a private party);
(5) related solely to internal personnel rules and
practices or other internal practices of the Board, or
are contained in personnel, medical, and similar files;
or
(6) contained in inter-agency or intra-agency
memoranda or letters that would not be routinely avail
able by law to a private party in litigation with the
Board.
In accordance with the revised Rules of the Federal
Open Market Committee, the current economic policy directive
relating to domestic open market operations, in the form adopted
at each meeting of the Committee, will be published in the Federal
Register approximately 90 days after its adoption.
Committee
meetings are usually held at three or four week intervals.
A
statement summarizing the reasons underlying the Committee's
policy decisions, along with the votes of the members, will be
made available to the public at the same time.
Such statements,
consisting of entries for the record of policy actions of the
Committee, have been included in prior years as part of the Board's
Annual Report to Congress pursuant to the requirements of section 10
of the Federal Reserve Act, and they will continue to be carried in
that Report.
The current economic policy directive adopted by the Federal
Open Market Committee at its
meeting on April 4,
1967,
together with
the Committee's continuing authority directive for domestic open
market operations, its authorization for System foreign currency opera
tions, and its foreign currency directive, as the latter documents are
now in effect, have been submitted for publication in the Federal
Register.
The Board and the Committee are also making available at
this time entries with respect to policy actions taken at the four
meetings of the Committee held this year through April 4.
The Board and the Federal Open Market Committee are taking
this occasion to transmit to the National Archives detailed records
of discussions and actions at the Committee's meetings during the
calendar year 1961, although the new law; does not require public
disclosure of records of deliberations of any Federal agency.
Similar
records of such meetings for the years prior to 1961 were made public
in the same manner in 1964, as announced in the Federal Reserve
Bulletin for August 1964.
Copies of the 1961 records will be made
available, within the next few weeks, at each Federal Reserve Bank
and Branch for the convenient reference of interested parties.
same procedure was followed with respect to earlier records.
The
-4
There are attached copies of the Rules regarding avail
ability of information of the Board of Governors of the Federal
Reserve System and the Federal Open Market Committee
of the Committee's directives and authorization
Federal Register.
and copies
as sent to the
There are also attached copies of the policy
record entries of the Federal Open Markaet Committee for its meetings
held this year through April 4.
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Section 10 of the Federal Reserve Act provides that the
Board of Governors shall keep a complete record of the actions taken
by the Board and by the Federal Open Market Committee on all questions
of policy relating to open market operations, that it shall record
therein the votes taken in connection with the determination of open
market policies and the reasons underlying each such action, and
that it shall include in its Annual Report to the Congress a full
account of such actions.
The Board and the Committee have decided to make available
at this time the entries with respect to the policy actions taken at
the 4 meetings of the Federal Open Market Committee held from the
beginning of the calendar year 1967 through April 4, 1967, in the
form in which they will appear in the Board's 54th Annual Report.
It is planned to publish entries for policy actions taken subsequent
to April 4, 1967, on a regular basis, with each entry to be published
approximately 90 days following the date of the meeting at which the
corresponding policy action or actions were taken.
The entries include the votes on the policy decisions made
at the meetings as well as a resume of the basis for the decisions.
The summary descriptions of economic and financial conditions included
in the entries are based on the information that was available to the
Committee at the time of the meetings, rather than on data for the
periods in question as they may have been subsequently revised.
-2
It will be noted from the record of policy actions that
in some cases the decisions were by unanimous vote and that in other
cases dissents were recorded.
The fact that a decision in favor of
a general policy was by a large majority, or even that it was by
unanimous vote, does not necessarily mean that all members of the
Committee were equally agreed as to the reasons for the particular
decision or as to the precise operations in the open market that
were called for to implement the general policy.
The policy directives of the Federal Open Market Committee
are issued to the Federal Reserve Bank of New York as the Bank
selected by the Committee to execute transactions for the System
Open Market Account.
Both the Manager of the System Open Market
Account and the Special Manager of the Account for foreign currency
operations attend the meetings of the Committee.
In the area of
domestic open market activities the Bank operates under 2 separate
directives from the Open Market Committee--a continuing authority
directive and a current economic policy directive.
At the beginning
of the calendar year the continuing authority directive in effect was
as follows:
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 maturing 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 following 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 the
kinds designated in the Regulation of the Federal Open
Market Committee in the open market, from or to acceptance
dealers and foreign accounts maintained at the Federal Reserve
Bank of New York, on a cash, regular, or deferred delivery
basis, for the account of the Federal Reserve Bank of New
York at market discount rates; provided that the aggregate
amount of bankers' acceptances held at any one time shall
not exceed $125 million or 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;
(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 United States, 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 agreement 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.
The Federal Open Market Committee authorizes and directs
2.
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 accommodation 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,
and provided further than the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed
$1 billion.
The current economic policy directive in effect at the
beginning of 1967 was that issued at the meeting held on December 13,
1966.
It read as follows:
The economic and financial developments reviewed at this meeting
indicate that over-all domestic economic activity is continuing to
expand, with rising defense expenditures but with additional evidences
of moderating tendencies in the private economy. While there has been
some slowing in the pace of advance of most broad price measures,
upward price pressures persist for many finished goods and services.
Bank credit and money have shown no net expansion in recent months.
Although demands on bond markets have increased, upward pressures on
long-term interest rates have moderated. The balance of payments
remains a serious problem. In this situation, it is the Federal
Open Market Committee's policy to foster money and credit conditions
conducive to noninflationary economic expansion and progress toward
reasonable equilibrium in the country's balance of payments.
To implement this policy, 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, unless
bank credit appears to be resuming a rapid rate of expansion.
In the foreign currency area, the Federal Reserve Bank of
New York operates under an authorization for System foreign currency
operations and a foreign currency directive.
The authorization in
effect at the beginning of the year read as follows:
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:
To purchase and sell the following foreign currencies
A.
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 agreement with the Bank of England,
up to $200 million equivalent.
To have outstanding forward commitments undertaken under
C.
paragraph A above to deliver foreign currencies, 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 circumstances, 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 follow
ing 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:
Foreign bank
Amount of
arrangement
(millions of
dollars equivalent)
Maximum
period of
arrangement
(months)
100
150
500
1,350
100
400
600
450
150
100
200
12
12
12
12
3
6
12
12
3
12
6
System drawings in Swiss francs
200
6
System drawings in authorized European
currencies other than Swiss francs
200
6
Austrian National Bank
National Bank of Belgium
Bank of Canada
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Netherland Bank
Bank of Sweden
Swiss National Bank
Bank for International Settlements
All transactions in foreign currencies undertaken under
3.
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, for
eign currencies shall be purchased through spot transactions 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 administration of the accounts main
tained 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.
Foreign currency holdings shall be invested insofar as
5.
practicable, considering needs for minimum working balances. Such
investments shall be in accordance with Section 14(e) of the Federal
Reserve Act.
A Subcommittee consisting of the Chairman and the Vice
6.
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 Governors the members of the Board designated by the
Chairman as alternates, and in the absence of the Vice Chairman of
the Committee his alternate) is authorized to act on behalf of the
Committee when it is necessary to enable the Federal Reserve Bank
of New York to engage in foreign currency operations before the
Committee can be consulted. All actions taken by the Subcommittee
under this paragraph shall be reported promptly to the Committee.
The Chairman (and in his absence the Vice Chairman of
7.
the Committee, and in the absence of both, the Vice Chairman of the
Board of Governors) is authorized:
With the approval of the Committee, to enter into
A.
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 operations, 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.
Staff officers of the Committee are authorized to trans
8.
mit pertinent information on System foreign currency operations to
appropriate officials of the Treasury Department.
All Federal Reserve Banks shall participate in the foreign
9.
currency operations for System Account in accordance with para
graph 3 G (1) of the Board of Governors' Statement of Procedure
with Respect to Foreign Relationships of Federal Reserve Banks dated
January 1, 1944.
10. The Special Manager of the System Open Market Account for
foreign currency operations shall keep the Committee informed on
conditions in foreign exchange markets and on transactions he has
made and shall render such reports as the Committee may specify.
The foreign currency directive in effect at the beginning
of the year read as follows:
FOREIGN CURRENCY DIRECTIVE
1.
The basic purposes of System operations in foreign currencies
are:
To help safeguard the value of the dollar in interna
A.
tional exchange markets;
To aid in making the system of international payments
B.
more efficient;
C.
To further monetary cooperation with central banks of
other countries having convertible currencies, with the International
Monetary Fund, and with other international payments institutions;
To help insure that market movements in exchange
D.
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
To facilitate growth in international liquidity in
E.
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
(1) are deemed to
international payments, if such fluctuations
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 or otherwise to have
potentially destabilizing effects on U.S. or foreign official reserves
or on exchange markets, for example, by occasioning market anxieties,
undesirable speculative activity, or excessive leads and lags in
international payments;
To temper and smooth out abrupt changes in spot
B.
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 othewise;
To aid in avoiding disorderly conditions in exchange
C.
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 transactions 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
To adjust System balances within the limits established
D.
in the Authorization for System foreign currency operations in light
of probable future needs for currencies.
System drawings under the swap arrangements are appropriate
3.
when necessary to obtain foreign currencies for the purposes stated
in paragraph 2 above.
4.
Unless otherwise expressly authorized by the Committee,
transactions in forward exchange, either outright or in conjunction
-10
with spot transactions, may be undertaken only (i) to prevent forward
premiums or discounts from giving rise to disequilibrating movements
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 currency for the settlement of System or Treasury commit
ments denominated in other currencies; and (vi) to provide cover for
System holdings of foreign currencies.
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January 10, 1967
Authority to effect transactions in System Account.
Expansionary forces in the economy were moderating as 1966
ended, and business inventory/sales ratios had risen substantially.
With inventory accumulation expected to slow, a reduced rate of
over-all economic growth appeared likely in the first quarter of
the new year.
Gross national product was estimated to have increased
substantially in the fourth quarter of 1966, but much of the advance
appeared to reflect the sharp rise in inventory accumulation.
Growth
slackened in consumer spending for goods, in business capital outlays,
and, apparently, in Federal defense expenditures.
The downtrend in
residential construction activity that had begun in the spring of
1966 continued in the fourth quarter, although in November housing
starts recovered most of their sharp October decline.
Industrial
production was little changed during the quarter at about the level
reached in August, as output curtailments in such industries as steel,
construction materials, automobiles, and some household appliances
offset continued gains in certain other industries.
There had been
some rise recently in claims for unemployment compensation, but labor
market conditions generally remained strong in the closing months of
1966.
1/10/67
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With respect to the outlook for the first quarter of 1967,
prospective business efforts to hold down the pace of inventory
accumulation appeared likely to lead to a marked slowing of the
growth rate in GNP, to some decline in industrial production, and
to a moderate increase in the unemployment rate from the level of
around 3.8 per cent that had prevailed recently.
Defense outlays
were expected to remain an expansive influence, although the evidence
available at the time of this meeting suggested some further slack
ening in the growth of such spending as well as in business capital
outlays.
On the other hand, the extended decline in residential
construction was expected to level out in the first quarter as a
result of improvement in mortgage markets.
Yields on home mortgages
touched a record high in November, the latest month for which data
were available, but net inflows of funds to savings and loan associa
tions and other major mortgage lenders had recovered recently, and
there were indications of some actual or prospective easing in the
supply of mortgage funds.
The pace of advance of broad price measures had slowed recently;
indeed, the wholesale price index declined in November for the second
successive month, to a level 2.3 per cent above a year earlier, as a
further reduction in prices of foodstuffs more than offset a small
increase in prices of industrial commodities.
The earlier succession
of substantial increases in consumer prices was broken in November,
when retail food prices declined somewhat and the total index rose by
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1/10/67
only one-tenth of 1 per cent.
However, unit labor costs in manufac
turing had risen further in recent months, as a result both of more
rapid increases in average hourly earnings and of smaller gains in
productivity.
Tentative estimates indicated some deterioration in the U.S.
balance of payments in the fourth quarter of 1966, as an apparent
improvement in the merchandise trade surplus was more than offset
by an indicated worsening on capital account.
While full information
was not yet available on fourth-quarter developments, it appeared
that the deficit on the "liquidity" basis of calculation had increased
despite substantial special receipts from Germany at the year-end, and
that the balance on the "official reserve transactions" basis had
reverted to deficit even though there had been large net inflows of
liquid funds through foreign branches of U.S. banks during the
quarter.1 /
Abroad, the German Federal Bank announced a reduction in
its discount rate, from 5 per cent to 4-1/2 per cent, effective
January 6, 1967.
1/ The balance on the "liquidity" basis is measured by changes
in U.S. reserves and in liquid U.S. liabilities to all foreigners.
The balance on the "official reserve transactions" basis is measured
by changes in U.S. reserves and in liquid and certain nonliquid
liabilities to foreign official agencies, mainly monetary author
ities. The latter balance differs from the former by (1) treating
changes in liquid U.S. liabilities to foreigners other than official
agencies as ordinary capital flows, and (2) treating changes in
certain nonliquid liabilities to foreign monetary authorities as
financing items rather than as ordinary capital flows.
-14-
1/10/67
System open market operations since the preceding meeting
had been directed at achieving somewhat easier conditions in the
money market against a background of year-end seasonal churning.
Net borrowed reserves of member banks fluctuated widely over the
four statement weeks ending January 4, but on the average they were
somewhat smaller than in the preceding 4 weeks--about $170 million,
as compared with $215 million.
The market yield on 3-month Treasury
bills declined more than 20 basis points to 4.80 per cent in the
third week of December and subsequently remained near that level.
Other money market rates declined less, partly for seasonal reasons
and partly because large financing needs of Government security
dealers added to demands for short-term funds.
A buoyant atmosphere pervaded bond markets in recent weeks,
as signs of moderating tendencies in the economy continued to appear
and as it became increasingly evident to market participants that
monetary policy had shifted toward less restraint--a view reinforced
by the System's action on December 27, 1966, rescinding the letter
of September 1 to member banks regarding lending to business and
discount window administration.1/
Despite large recent and prospec
tive offerings of corporate and municipal securities and a recent
public sale of $600 million of participation certificates by the
1/ For the text of the September 1 letter, see the Federal
Reserve Bulletin for September 1966, pp. 1338-39; for the text
of the December 27 announcement, see the Bulletin for January
1967, p. 83.
1/10/67
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Federal National Mortgage Association, yields on Treasury, corporate,
and municipal bonds all declined, with yields on long-term Treasury
bonds returning to about their levels at the end of 1965,
the increase in the discount rate.
following
Near the end of January the
Treasury was expected to announce the terms on which it would refund
securities maturing in mid-February, of which about $3.8 billion
were held by the public.
The recent declines in security yields were accompanied by
resumed expansion in commercial bank credit and private deposits.
Bank credit, which had declined on balance since August, increased
substantially between the last Wednesdays of November and December.
The increase was attributable primarily to expansion in holdings of
Government securities and in short-term loans to security dealers and
brokers, as banks acted to rebuild their sharply reduced liquidity
positions.
Business loans did not rise, apparently because of both
a continuation of restrictive lending policies and some further
weakening in demands for such loans.
Time and savings deposits expanded relatively fast in
December following slow growth since August, when banks began to
experience sizable runoffs of negotiable certificates of deposit
(CD's).
Although a record volume of CD's matured in December, banks
were able to increase the net volume outstanding somewhat as declines
in market yields on competitive instruments, particularly Treasury
bills, enhanced the relative attractiveness of CD's to investors.
1/10/67
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Expansion in the money supply (private demand deposits plus currency
outside of banks), which had resumed in mid-November after a period of
irregular decline beginning in July, continued in December, reflecting
in large part a reduction in Government deposits at commercial banks.
In 1966 as a whole the money supply increased by a little less than
2 per cent, compared with a 4.7 per cent rise in 1965.
Staff projections at the time of the Committee's preceding
meeting had suggested that there would be relatively little increase
from November to December in daily-average deposits of member banksthe "bank credit proxy"1/ -if the then-existing money market conditions
were maintained.
But with easier conditions prevailing in the latter
part of the month, these deposits increased at an annual rate of 3.4
per cent in December as a whole.
Current staff projections suggested that member bank deposit
expansion would increase temporarily to an annual rate in the 7 to 9
per cent range on the average during January (largely as a result of
1/ Since mid-1966 the Committee had been making increased use of
daily-average statistics on total member bank deposits as a "bank
credit proxy"--that is, as the best available measure, although in
direct, of developing movements in bank credit. Because they can
be compiled on a daily basis with a very short lag, the deposit
figures are more nearly current than available bank loan and investment
data. Moreover, average deposit figures for a calendar month are much
less subject to the influence of single-date fluctuations than are
the available month-end data on total bank credit, which represent
estimates of loans and investments at all commercial banks on one
day--the last Wednesday--of each month. For statistics on daily-average
member bank deposits, see the Federal Reserve Bulletin for October
1966, p. 1478, and subsequent months.
Some brief comments on the
relation between the member bank deposit series and the bank credit
statistics are given in the note on p. 1460 of the October 1966
Bulletin.
1/10/67
-17
expansion that had occurred around the turn of the year), and to a
somewhat more rapid rate in that month if there were some further
easing of money market conditions.
All of the projected increase
in January was in time and savings deposits and Government deposits;
private demand deposits were expected to decline somewhat, resulting
in little or no growth in the money supply.
In the Committee's discussion it was noted that appropriate
monetary policy over coming months would depend importantly on the
nature of Federal fiscal policies.
For the immediate future, however,
in light of the continued slackening of various expansionary forces
in the economy and the prospect for slower over-all growth in early
1967, the Committee decided that it would be desirable to relax
monetary restraint somewhat further.
The members agreed that the
renewed expansion in bank credit and the money supply in December
was appropriate; and a majority, taking note of the staff projections
for the money supply and for member bank deposits, thought that some
what easier money market conditions should be sought unless bank
credit appeared to be expanding significantly faster than expected.
The Committee agreed that the forthcoming Treasury financing
should be taken into account in the conduct of open market operations,
although it was expected that the financing would be a routine one
and that requirements for maintaining an "even keel" in the money
market would not come into play until late in the month.
Some
1/10/67
-18-
sentiment was expressed for extending System reserve-supplying
security purchases in intermediate- and longer-term Treasury
securities, both to stimulate flows of funds into longer-term
markets, including mortgage markets, and--for balance of payments
reasons--to avoid depressing short-term interest rates unduly.
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 further moderation in various
expansionary forces and sharply increased inventory
accumulation. The pace of advance of broad price
measures has slowed, although upward price and cost
pressures persist for many finished goods and services.
Partly reflecting the recent modification of monetary
policy, financial market conditions have become less
taut than earlier and bank credit expansion has resumed.
With respect to the balance of payments, trends in
international transactions indicate a continuing serious
problem. In this situation, it is the Federal Open
Market Committee's policy to foster money and credit
conditions conducive to noninflationary economic expansion
and progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, and taking account of
forthcoming Treasury financing, 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, unless bank credit appears
to be expanding significantly faster than currently
anticipated.
Messrs.
Votes for this action:
Martin, Brimmer, Clay, Daane, Hickman,
Maisel, Mitchell, Robertson, and Wayne.
Votes against this action: Messrs.
Irons, Shepardson, and Treiber.
1/10/67
-19
The members dissenting from this action thought that it
would be preferable not to relax monetary restraint further at
this time.
Among the considerations they advanced were the
continuing balance of payments problem and the desirability of
awaiting further information on prospective Federal taxes and
expenditures before changing monetary policy further.
Individual
dissenting members also expressed the judgments that, despite present
indications of slower economic growth early in 1967, the longer-run
prospects for the economy were not weak; and that the rate at which
member bank deposits were expected to grow in January, given no
change in money market conditions, was appropriate.
-20
February 7, 1967
Authority to effect transactions in System Account.
The pace of economic expansion continued to moderate in early
1967, according to reports at this meeting.
Tentative estimates
indicated that industrial production had declined somewhat in January
and that, with sales of new automobiles falling further, total retail
sales had failed to increase.
Layoffs and short workweeks continued to
be reported in the automobile industry and in some consumer appliance
industries, but the labor market as a whole apparently remained strong.
Staff projections suggested that expansion in GNP would be at
a sharply slower pace in the first half of 1967 than in 1966.
Inventory
accumulation was expected to decline markedly from its recent advanced
rate, slower growth was anticipated in defense spending and business
capital outlays, and only a small increase was expected in real takings
of goods by consumers.
On the other hand, it appeared likely that the
substantial decline in residential construction would end and that
State and local government outlays would continue to expand.
Projections by the Council of Economic Advisers, contained in
its recent annual report, also indicated slowing of the economic advance
in the first half of 1967.
The Council expected expansion to accelerate
in the second half of the year, when it anticipated a strong rise in
residential construction, an end to the decline in the rate of
inventory investment, and a rise in transfer payments (primarily as a
2/7/67
-21
result of a proposed increase at midyear in social security benefits).
The Council foresaw a sizable stimulus from fiscal policy in the first
half of the year, but the administration's budget recommendations
provided for a shift in the direction of fiscal restraint at midyear
in the form of a 6 per cent surcharge on income tax liabilities of
individuals and corporations.
In December the wholesale price index was stable and the
consumer price index again rose by only one-tenth of 1 per cent.
Effective February 1, the minimum wage was increased and its coverage
extended under the terms of legislation enacted in 1966.
Unit labor
costs in manufacturing were estimated to have been 2.7 per cent above
their year-earlier level in the fourth quarter of 1966, and it
appeared likely that such costs would continue to rise.
The deficit in the U.S. balance of payments on the "liquidity"
basis of calculation was estimated to have been at an annual rate of
about $2 billion in the fourth quarter of 1966, despite larger
dollar receipts from various official transactions.
For the full
year the deficit on this basis was estimated at $1.4 billion.
On the
"official reserve transactions" basis there was a small deficit in
the fourth quarter but a surplus of $175 million for the year.
Partial data for January indicated a continued sizable deficit on
both bases of calculation.
Liabilities of U.S. banks to their
foreign branches declined in late December and early January, but
remained well above their level in the spring of 1966.
2/7/67
-22
Abroad, interest rates had declined substantially from their
recent peaks in the Euro-dollar market and in various national
markets.
The Bank of England reduced its discount rate from 7 to 6-1/2
per cent on January 26, and subsequently the central banks of Canada,
Belgium, and Sweden reduced their discount rates by varying amounts.
Open market operations since the last meeting of the Committee
had been directed at attaining somewhat easier conditions in the
money market.
Net borrowed reserves averaged about $60 million in
January and member bank borrowings about $475 million, compared with
$190 million and $530 million, respectively, in December.
Rates on
Federal funds moved generally lower, and they fell sharply in the last
week of January when float rose temporarily in the wake of a severe
snowstorm in the midwest.
The yield on 3-month Treasury bills
declined further, from 4.80 per cent 4 weeks earlier to less than
4.50 per cent, although by the time of this meeting it had backed up
slightly.
Rates on other short-term instruments also moved signifi
cantly lower.
A major New York City bank reduced its prime lending
rate from 6 to 5-1/2 per cent on January 26, and subsequently many
other banks lowered their prime rates, but generally to 5-3/4 per cent.
Long-term security yields also had declined sharply further
in recent weeks.
Yields on new corporate bonds reached their lowest
levels since April 1966, and those on Treasury and municipal bonds
fell to levels prevailing prior to the increase in the discount rate
in December 1965.
Although the market atmosphere became cautious at
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2/7/67
times, mainly because of reports of a growing calendar of corporate
and municipal offerings, sentiment was buoyed by various develop
ments.
These included the evidences of further easing of monetary
policy; the President's statement--in his State of the Union message
of January 10--that he was proposing a surcharge on income taxes and
would strive to lower interest rates; and the reductions in discount
rates by foreign central banks and in prime rates by domestic
commercial banks.
Activity in the stock market was extremely heavy,
and prices of common stocks advanced virtually without interruption
after the first of the year.
On January 25 the Treasury announced that it would refund
securities maturing in mid-February with a cash offering of two new
securities, a 15-month note and a 5-year note, both bearirg 4-3/4 per
cent coupons and priced to yield 4.85 and 4.84 per cent, respectively.
With market yields declining, the new issues were heavily oversubscribed.
The Treasury was expected to announce in late February or early March
an offering of tax-anticipation bills due in June, and a large volume
of Federal agency securities and participation certificates was
expected to be marketed before midyear.
Net inflows of savings funds to depositary-type institutions
increased considerably in late 1966 and early 1967, and conditions
in markets for home mortgages appeared to have eased further recently.
The rate of new mortgage commitments still appeared to be lagging,
however, as many institutions used a large part of the inflows to
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2/7/67
improve their liquidity positions.
Housing starts declined less than
seasonally in December, but the annual rate remained relatively low.
The rate of increase in total bank credit between late
December and late January was the highest since mid-1966.
Banks sub
stantially increased their holdings of municipal and Federal agency
securities and their loans to businesses and security dealers.
The
sharp rise in business loans, following 5 months of slow net growth,
was in part a reflection of a temporary concentration of corporate
needs for funds to make accelerated tax payments.
Growth in time and savings deposits, which had resumed in
December, accelerated in January.
The increase was centered in large
denomination negotiable CD's, which became increasingly attractive
to investors as yields on competitive market instruments declined.
The net increase in such CD's outstanding at weekly reporting banks
was at a record high in January, and in the 6 weeks after mid-December
such banks recovered more than two-thirds of the runoff they had
experienced in the preceding 4 months.
The average maturity of new
issues of CD's was lengthened significantly in January for the first
time since mid-1966, and recently many banks had reduced their offering
rates on CD's.
As a result of the marked increase in time deposits--together
with a substantial rise in Government deposits, which was offset in
part by a decline in private demand deposits--the bank credit proxy
(daily-average member bank deposits) rose more from December to
2/7/67
-25
January than had been expected, even in the light of the easing of
money market conditions that had occurred.
New staff projections
suggested that, if money market conditions remained unchanged, bank
credit as measured by the proxy series would rise at an annual rate
of about 9 to 11 per cent from January to February.
The projections
allowed for continued rapid growth in time deposits, resumed growth
in private demand deposits, and some decline in Government deposits.
The Committee decided that it would be appropriate at this
time to maintain the easier money market conditions achieved under
the policies adopted at the three preceding meetings, unless bank
credit appeared to be deviating significantly from its expected
course.
Various reasons were advanced by individual members against
a further deliberate relaxation of monetary policy at present.
These included the recent and projected growth rates of bank credit,
which some members considered to be at about the upper end of a
desirable range in the current circumstances; the likelihood that
much of the impact on the economy of the policy actions already taken
was still to come; the risk that unduly rapid easing might necessi
tate a sharp reversal of policy later in the year; the possibility
that speculative excesses would be encouraged by continued increases
in prices of fixed income securities; and concern about the implications
of rising labor costs for the foreign trade balance and of declining
domestic interest rates for international capital flows.
The
current Treasury financing also was mentioned, although "even keel"
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2/7/67
considerations were considered less important than usual in view of
the market reception of the new securities.
At the same time, in light of the short-run economic outlook
there was considerable sentiment for "leaning toward ease" in open
market operations.
In particular, the Committee agreed that efforts
should be made to resist any sharp rises in interest rates but that
rates should be permitted to decline if market forces worked in that
direction.
It was noted in this connection that the recent declines
in interest rates had reflected expectational factors to an important
extent, and that long-term rates were particularly vulnerable at
present to a change in expectations.
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 further moderation in various
expansionary forces, with continued large inventory
accumulation. The pace of advance of broad price measures
has slowed, although upward price and cost pressures
persist for many goods and services. Interest rates have
declined markedly, financial conditions generally are
considerably easier, and bank credit expansion recently
has been vigorous. While interest rates abroad have also
declined, trends in international transactions indicate
a continuing serious balance of payments problem. 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.
To implement this policy, and taking account of the
current Treasury financing, System open market operations
until the next meeting of the Committee shall be conducted
2/7/67
-27
with a view to maintaining the prevailing conditions of
ease in the money market, but operations shall be modified
as necessary to moderate any apparently significant
deviations of bank credit from current expectations.
Votes for this action: Messrs.
Martin, Hayes, Brimmer, Clay, Daane,
Hickman, Irons, Maisel, Robertson,
Shepardson, and Wayne. Vote against
this action: Mr. Mitchell.
Mr. Mitchell dissented from this action because he favored
moving somewhat further toward ease.
He was inclined to give more
credence to the present expectations for a weaker economic performance
in the first half of the year than to those for a stronger performance
in the second half, and he thought that the major economic risk for
the immediate future was that a downturn in over-all economic activity
might be precipitated by the expected inventory adjustment.
-28
March 7, 1967
1.
Authority to effect transactions in System Account.
Evidences of marked slowing in the pace of economic expansion
were reported at this meeting.
In February, according to tentative
estimates, industrial production fell for the second consecutive
month, sales of new automobiles decreased sharply further, and total
retail sales declined from their reduced December-January level.
Although the unemployment rate remained at 3.7 per cent in January,
signs of easing demands for labor were beginning to appear in such
sensitive indicators as the length of the workweek in manufacturing,
claims for unemployment insurance, and indexes of "help wanted"
advertisements.
On the other hand, residential construction activity
turned up in January, after 10 months of decline, as conditions in
mortgage markets continued to ease.
Staff projections of GNP for the first half of 1967, which
earlier had suggested a sharply reduced rate of growth, had been
lowered somewhat further and now implied only moderate increases in
A
dollar GNP and little rise in real output of goods and services.
large reduction in the rate of business inventory accumulation was
still expected, although there was little evidence as yet to suggest
that the adjustment had begun; in January, with retail sales sluggish,
inventories of manufacturers rose sharply further despite cutbacks in
production, and manufacturers' stock/sales ratios advanced to the
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3/7/67
highest levels since 1961.
Defense spending was expected to
continue increasing, although at a slower rate; and residential
construction outlays were expected to be about the same in the
first quarter as a whole as in the fourth quarter of 1966, and
to rise in the second quarter.
However, continuing lack of strength
in consumer demands for durable goods was suggested by a Census
Bureau survey taken in mid-January, which found that smaller
proportions of consumers were planning to buy new cars and household
durable goods than was the case a year earlier.
It was indicated
that a Department of Commerce-Securities and Exchange Commission
survey, taken in February, would show that businesses planned to
make outlays on new plant and equipment in the first half of 1967
at a rate no higher than that actually recorded in the fourth
quarter of 1966.
The consumer price index was unchanged in January, but
average wholesale prices of both industrial commodities and
foodstuffs rose.
Advance estimates for February suggested that
average prices of industrial commodities had remained stable in
that month and that prices of foodstuffs had declined somewhat.
Unit labor costs in manufacturing rose sharply further in January.
With respect to balance of payments developments, capital
outflows from the United States had increased relatively little
recently despite the easing of domestic monetary conditions.
On
the other hand, revised data indicated that the surplus on U.S.
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3/7/67
merchandise trade had not improved in the fourth quarter of 1966,
as had been reported earlier.
Growth in imports, which previously
appeared to have leveled off in late 1966, was now shown to have
continued at a reduced rate through January 1967, and estimates of
growth in exports in the fourth quarter had been revised downward.
Prospects still favored improvement in the trade surplus over coming
months, when slowing inventory accumulation was expected to reduce
the demand for imports.
Abroad, economic activity had been slackening for several
months in a number of industrial countries, including the United
Kingdom and Germany, and monetary and fiscal policies were being
relaxed somewhat.
The German Federal Bank, which along with the
Bank of England and a number of other central banks had reduced
its discount rate earlier in the year, announced a further
reduction, from 4-1/2 to 4 per cent, on February 17.
Reserve
requirements of German commercial banks were lowered effective
March 1.
Conditions in domestic financial markets had passed through
two distinct phases since the preceding meeting of the Committee,
with a period of firmer money markets, congested bond markets, and
rising long- and short-term interest rates followed by a period of
easier financial conditions and declining rates.
Shifts in expec
tations of market participants contributed importantly to these
developments.
-31
3/7/67
Early in the period concern developed about the viability
of the levels to which interest rates had fallen, in view of a
steady stream of additions to an already large calendar of
corporate and municipal security issues, large inventories of
securities held by underwriters, and rumors of renewed sales of
FNMA participation certificates.
Moreover, market participants
began to reappraise the prospects for monetary policy, partly
because of congressional testimony by various officials suggesting
a strengthening of economic forces in the second half of the year.
A belief that the trend of monetary policy toward greater ease
had been halted, and perhaps reversed, was strengthened by the
development of firmer conditions in the money market, as reflected
by increases in rates on Treasury bills and Federal funds and
advances in lending rates to Government securities dealers posted
by major New York City banks.
The System injected a large volume
of reserves through open market operations in an effort to cope
with these firming tendencies, but operations were complicated
by persistent shortfalls of reserve availability from initial
projections.
Subsequently, money market conditions again turned easier,
earlier expectations regarding monetary policy were gradually
restored, and long-term interest rates--particularly on Treasury
securities--declined somewhat.
These developments were initially
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3/7/67
stimulated by large-scale official purchases of Treasury
securities on February 24 in conjunction with arrangements
undertaken to avoid a rise in the Federal debt above the legal
ceiling, and by concurrent purchases of bills for System Account
to supply reserves.
The view that monetary policy was still
trending toward ease was reinforced on February 28 when the
Board of Governors announced a reduction in member bank reserve
requirements for the purpose of meeting developing credit needs
throughout the country.
Reserve requirements against savings
deposits and the first $5 million of other time deposits at each
member bank were reduced in two successive steps:
from 4 to 3-1/2
per cent, and then to 3 per cent, effective with the reserve
computation periods beginning March 2, 1967, and March 16, 1967,
respectively.
By the day before this meeting the yield on 3-month Treasury
bills had fallen to about 4.35 per cent, roughly 20 basis points
below its level at the time of the preceding meeting, and other
money market conditions in general were about as easy as they had
been 4 weeks earlier.
In February as a whole, member bank borrow
ings averaged about $365 million, compared with $475 million in
January; and excess reserves exceeded borrowings by about $35
million, in contrast with a net borrowed reserve position of about
$65 million in the preceding month.
-33
3/7/67
Following congressional approval of legislation raising
the temporary debt ceiling on March 1, the Treasury announced
that $2.7 billion of tax-anticipation bills due in June would be
auctioned on March 7, the day of this meeting.
Treasury cash
balances were expected to reach relatively low levels before the
March 13 payment date for these bills, and it was possible that
the Treasury would need to borrow directly from the Federal
Reserve for short periods.
Bank credit expanded further between the last Wednesdays
of January and February, although apparently at a rate below that
of the two preceding months.
Banks used the additions to their
reserves mainly to improve their liquidity positions; acquisitions
of securities continued heavy, but business loans increased
relatively little and total loans declined.
Time and savings
deposits grew sharply further on the average from January to
February, although the rate of expansion moderated considerably
over the course of the latter month as large money market banks
became less aggressive sellers of negotiable CD's.
Private demand
deposits and the total money supply rose, after declining in January,
and Government deposits at commercial banks were about unchanged.
Daily-average member bank deposits--the bank credit
proxy--increased at an annual rate of about 15 per cent from
January to February, more than had been expected.
Most of the
3/7/67
-34
rise occurred early in February, when time deposits were growing
rapidly.
New staff projections for March suggested that growth
in the proxy would be at an annual rate of about 6 to 8 per cent
if money market conditions were unchanged, and somewhat larger
if money market conditions were eased somewhat further.
It
appeared unlikely that banks would resume aggressive selling of
negotiable CD's in the near future, in view of their large CD
sales in recent months and the uncertain outlook for loan demands
following the March and April dividend and tax dates.
Accordingly,
time deposits were projected to expand considerably less on the
average in March than in February.
The projections also allowed
for a substantially higher average level of private demand deposits,
reflecting sharp increases late in February, and some decline in
the average level of Government deposits.
The Committee agreed that somewhat easier
money market
conditions were desirable at present to combat the effects of
weakening tendencies in the economy, and that still easier
conditions should be sought if bank credit appeared to be
expanding significantly less than expected.
Individual members
mentioned various intermediate objectives, including those of
encouraging sustained growth in the money supply and further
declines in long-term interest rates, of stimulating banks to
relax
their lending policies more rapidly than they had to date,
-35-
3/7/67
and of confirming market interpretations that the current
reduction in reserve requirements was intended to be an easing
action rather than simply an alternative to open market operations
as a means of meeting seasonal reserve needs.
Some members stressed
the desirability of avoiding sharp shifts in expectations regarding
the near-term course of monetary policy, such as had occurred in
February.
Others, while sharing this position, placed equal
weight on the need to avoid generating expectations that monetary
policy was moving more rapidly toward ease than in fact was the
case.
In the course of the discussion several members expressed
the view that a reduction in the discount rate might well be
considered soon, although none indicated that he would favor such
action immediately.
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 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
-36-
3/7/67
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.
Votes for this action: Messrs.
Martin, Hayes, Brimmer, Daane, Francis,
Maisel, Mitchell, Robertson, Scanlon,
Shepardson, Swan, and Wayne. Votes
against this action: None.
2. Amendment of continuing authority directive.
On recommendation of the System Account Manager, Section 1(b)
of the continuing authority directive to the Federal ReserveBank of
New York regarding domestic open market operations was amended to
clarify the language describing the two limits specified on aggregate
holdings of bankers' acceptances by the Federal Reserve Bank of New York,
in accordance with the manner in which that language had always been
interpreted.
Specifically, the phrase "whichever is the lower" was
added at the end of the paragraph, following the description of the
two limits.
With this change, Section 1(b) read as follows;
To buy or sell prime bankers' acceptances of the
kinds designated in the Regulation of the Federal Open
Market Committee in the open market, from or to acceptance
dealers and foreign accounts maintained at the Federal
-37-
3/7/67
Reserve Bank of New York, on a cash, regular or
deferred delivery basis, for the account of the
Federal Reserve Bank of New York at market discount
rates; provided that the aggregate amount of bankers'
acceptances 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.
After reviewing various amendments to the continuing authority
directive that had been made during the past year, the Committee
renewed the directive in its existing form (as set forth in the
preface to this record of Federal Open Market Committee policy
actions), except for the change resulting from this amendment.
Votes for this action:
Messrs.
Martin, Hayes, Brimmer, Daane, Francis,
Maisel, Mitchell, Robertson, Scanlon,
Shepardson, Swan, and Wayne. Votes
None.
against this action:
3.
Review of continuing authorizations.
This being the first meeting of the Federal Open Market
Committee following the election of new members from the Federal
Reserve Banks
to serve for the year beginning March 1, 1967, and
their assumption of duties, the Committee followed its customary
practice of reviewing all of its continuing authorizations and
directives.
The action taken with respect to the continuing
authority directive for domestic open market operations has been
described in the preceding portion of the entry for this date.
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3/7/67
The Committee reaffirmed its authorization for System
foreign currency operations and its foreign currency directive,
in the forms in which both were outstanding at the beginning of
the year 1967, as set forth in the preface to this record of
policy actions.
Votes for these actions: Messrs.
Martin, Hayes, Brimmer, Daane, Francis,
Maisel, Mitchell, Robertson, Scanlon,
Shepardson, Swan, and Wayne. Votes
against these actions: None.
-39
April 4, 1967
Authority to effect transactions in System Account.
Recent information supported earlier indications of a marked
slowing in the pace of economic expansion and suggested that the
anticipated curtailment in the rate of business inventory accumula
tion was under way.
The latest staff projections for the first half
of 1967, like those of 4 weeks earlier, implied only moderate increases
in dollar GNP and little rise in real output.
Both retail sales and industrial production declined in
February, as tentative estimates had suggested.
In March sales of
new automobiles remained close to their reduced February level, and
it appeared from weekly data for most of the month that total sales
continued sluggish.
The production decline in February brought the
capacity utilization rate in manufacturing down to 87 per cent from
the 91 per cent level that had prevailed during most of 1966, and
was associated with sharp reductions at factories in employment, in
length of the average workweek, and in payrolls.
Total nonfarm
employment continued to rise, however, and the unemployment rate
remained at the January level of 3.7 per cent.
With respect to inventories, accumulation by manufacturers
slowed markedly in February from its earlier rapid pace.
Stocks of
wholesalers and retailers had not grown in January; as a result,
there was a substantial reduction in that month in the over-all
rate of inventory growth.
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4/4/67
The staff projections of GNP allowed for large reductions in
the rate of inventory accumulation in both the first and second
quarters of 1967.
Although Federal spending for defense and non
defense purposes apparently was rising somewhat more rapidly than
had been expected, near-term prospects for most other broad categories
of final demand did not appear strong.
Growth in incomes was expected
to slow in the second quarter--implying continued weakness in consumer
spending for goods.
Longer-term prospects for residential construction
remained favorable, but declines in building permits and housing
starts in February suggested that a strong expansion in that sector
was not in immediate prospect.
The results of the recent Commerce
SEC survey of business plans for plant and equipment expenditures
indicated a decrease in such spending (from the fourth-quarter rate)
in the first half of 1967, followed by a moderate rise in the second
half.
For the year as a whole, if reported plans were realized,
fixed capital outlays would be 3.9 per cent above those of 1966, in
contrast to increases of more than 15 per cent in each of the past
3 years.
While the survey was made before the President proposed
legislation to restore the tax incentives for investment that had
been suspended in October 1966, it appeared unlikely that enactment
of such legislation would have a significant effect on outlays
until after midyear.
The consumer price index rose slightly in February; since
October 1966 it had advanced at an annual rate of 1 per cent,
compared with a 4 per cent rate earlier in 1966.
Average wholesale
-41
4/4/67
prices declined in February, and according to advance estimates,
they were unchanged in March at a level slightly below their peak
of the preceding September.
Unit labor costs continued to rise in
February, and for the first quarter it appeared likely that they
would average more than 4 per cent above a year earlier.
Tentative estimates of the U.S. balance of payments in the
first quarter suggested that, despite some improvement in the
merchandise trade surplus, the deficit was larger than in the
preceding quarter on both the "liquidity" and "official reserve
transactions" bases of calculation.
However, it appeared that all
of the increase in the liquidity deficit and part of that in the
official settlements deficit was accounted for by differential
effects in the two quarters of various types of special transactions,
Much of the rise in the official settlements deficit reflected
repayments by U.S. banks during the early weeks of the year of
funds borrowed abroad through their foreign branches.
The widespread slowdown in economic activity in Western
Europe, which had begun around mid-1966, apparently continued in
the first few months of 1967 although in the United Kingdom there
were indications that the decline in activity might be leveling out.
Since the beginning of the year monetary and fiscal policy actions
had been taken in a number of countries to stimulate activity,
including numerous reductions in central bank discount rates.
On
March 16 the Bank of England reduced its discount rate for the second
time in 1967, from 6-1/2 to 6 per cent.
Discount rate reductions
also were made in March by the central banks of Sweden and the
Netherlands.
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4/4/67
System open market operations since the preceding meeting of
the Committee had been directed at fostering somewhat easier conditions
in the money market.
Growth in total and nonborrowed reserves of
member banks was rapid in March, as it had been in the first 2 months
of the year.
Free reserves rose to an average of $165 million from
about $35 million in February, member bank borrowings declined to
about $200 million from $365 million, and rates on Federal funds and
on bank loans to Government securities dealers moved into lower ranges.
Interest rates on short-term market securities fell considerably
further as a result of System operations and of other factors, includ
ing further reports of weakness in economic indicators, reductions
in foreign discount rates, and widespread expectations of an early
cut in the Federal Reserve discount rate.
The market yield on 3
month Treasury bills declined by about 35 basis points, to slightly
less than 4 per cent.
On March 22 a large New York City bank lowered
its prime lending rate from 5-3/4 per cent to 5-1/2 per cent, and
subsequently many other banks took similar action.
Long-term interest rates had also moved down somewhat in
recent weeks, but they remained above the 1967 lows, which had been
reached in late January and early February.
The declines were
limited by extremely large flotations of bonds in March, including
a record volume of corporate offerings, continued heavy sales of new
municipal securities, and a sizable issue of FNMA participation
certificates.
The volume of offerings appeared likely to remain
large in April, although not so large as in March.
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4/4/67
The Treasury was expected to announce near the end of April
the terms on which it would refund securities maturing in mid-May,
of which $2.9 billion were held by the public.
On Friday, March 10,
the Treasury temporarily replenished its cash balances by selling a
special certificate of indebtedness in the amount of $149 million to
the Federal Reserve.
The certificate was redeemed 3 days later.
Inflows of funds to savings and loan associations and mutual
savings banks were exceptionally large in February, and growth
appeared to continue in March.
With supplies of mortgage funds
exceeding demands, conditions in mortgage markets eased further.
Depositary-type institutions used a large part of their increased
inflows to repay indebtedness and to acquire marketable securities.
Commercial banks also continued to experience substantial
inflows of time and savings deposits in March.
Expansion in such
deposits over the last 4 months--December through March--had been
at an annual rate of 16 per cent, nearly twice the rate for the
full year 1966.
Growth in large-denomination CD's had moderated
considerably since early in 1967, but passbook savings deposits
began to rise sharply in mid-February after almost a year of
continuous decline.
Demand deposits and the money supply also
expanded sharply in March.
The annual rate of growth in the money
supply over the December-March period was 6 per cent, compared
with a rise of slightly less than 2 per cent in 1966.
Commercial banks made further sizable additions to their
holdings of securities in March, and in contrast with February
also expanded their loan volume substantially.
A large increase
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4/4/67
in business loans was associated, in part, with the needs of businesses
to finance their payments of income taxes and withheld individual and
social security taxes.
From February to March the bank credit proxy-
daily-average member bank deposits--rose at an annual rate of 15 per
cent, the same as from January to February and more than had been
expected.
Staff projections for April suggested that the bank credit
proxy would expand at an annual rate in the 10 to 13 per cent range
if monetary policy remained unchanged, and somewhat more rapidly if
easier money market conditions were sought.
The demand for business
loans was expected to be enlarged temporarily because of an unusually
sharp rise in April in the volume of accelerated tax payments.
The
projections allowed for some slackening in growth of time and savings
deposits from the exceptionally rapid pace of recent months, for a
large increase in Government deposits, and for a small decline in
private demand deposits.
With currency holdings expected to continue
rising, the money supply was projected to remain about unchanged.
There was broad agreement at this meeting that it would be
desirable shortly to reduce the Federal Reserve discount rate,
which had been maintained at 4-1/2 per cent since December 1965,
in order to bring it into better alignment with market interest
rates.
It was noted that lack of such action might result in a
reversal of the recent downward trends in interest rates, which
reflected in part anticipations of a reduction in the discount
rate.
Individual members of the Committee suggested that a lower
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4/4/67
discount rate would also help to encourage further declines in
yields on long-term securities and mortgage loans; in rates paid
by depositary-type institutions, which had been relatively sticky
in the recent period of declining yields; and in discount rates
of foreign central banks.
As to what degree of reduction in the discount rate would
be most desirable, one possibility discussed was a cut of 1/4 of
a percentage point, with a second 1/4 point reduction to be made
later if it appeared warranted by unfolding developments.
However,
most of the members favored a reduction of the discount rate by 1/2
of a percentage point, for various reasons.
A smaller reduction,
they thought, was likely to be interpreted by financial market
participants as a cautionary signal regarding System policy
intentions, and thus might lead to a back-up in market interest
rates that would be difficult to offset without very large injec
tions of reserves.
Also, a reduction of 1/4 point would create
uncertainties regarding the possibility of further discount rate
action--an effect deemed undesirable in a period preceding a
Treasury refunding operation.
Moreover, a 1/2 point cut was
viewed as likely to have significantly stronger effects than the
more modest action in encouraging reductions in other interest
rates domestically and abroad.
With respect to open market operations, a number of members
expressed the view that recent growth rates in member bank reserves,
4/4/67
-46
bank credit, and the money supply--while appropriate temporarily in
light of the slowing of the business expansion--were too high to be
sustained for an extended period.
In particular, they questioned
the desirability of any policy course that might tend to accelerate
growth in these financial aggregates, given the lagged effects of
monetary policy and the possibility that business activity would be
expanding more vigorously later in the year.
These members suggested
that operations might be directed toward maintaining the prevailing
state of net reserve availability, or of money market conditions in
general, with such modifications as might be necessary to moderate
apparently significant deviations of bank credit growth in either
direction
from current expectations.
Other members favored open market operations consistent
with the somewhat easier money market conditions that they expected
would follow the anticipated reduction in the discount rate, or
operations directed at attaining somewhat greater reserve availability.
In general, these members thought that continued expansion in
financial aggregates at rates in the neighborhood of those recently
prevailing would be appropriate in the present economic and
financial environment.
At the conclusion of the discussion the Committee agreed
that open market operations should be directed at attaining somewhat
easier conditions in the money market by supporting the easing
expected to result from the anticipated discount rate action, but
not at achieving further easing independently of that action unless
4/4/67
-47-
bank credit appeared to be expanding significantly less than currently
anticipated.
With this understanding, the Committee voted to issue
the following current economic policy directive to the Federal Reserve
Bank of New York:
The economic and financial developments reviewed at
this meeting support earlier indications of a marked slowing
of expansion in over-all economic activity. Retail sales
have continued sluggish and curtailment in the rate of
business inventory accumulation is in process. Average
commodity prices have changed little recently, but unit
labor costs in manufacturing have risen further.
Bank
credit expansion has remained vigorous, short-term
interest rates have declined markedly further, and long
term rates have moved down somewhat despite very heavy
securities market flotations. The balance of payments
deficit increased in the first quarter despite some improve
ment in the foreign trade surplus. In several important
countries abroad, monetary and fiscal policies have eased
further in response to slackened economic activity.
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, 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.
Votes for this action: Messrs.
Martin, Hayes, Brimmer, Daane, Francis,
Maisel, Mitchell, Robertson, Scanlon,
Shepardson, Swan, and Wayne. Votes
against this action:
None.
@FedFRASER