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MEMORANDUM OF DISCUSSION
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington, D. C., on Tuesday, March 4, 1969, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Bopp
Brimmer
Clay
Coldwell
Daane
Maisel
Mitchell
Robertson
Scanlon
Sherrill
Messrs. Francis, Heflin, Hickman, Swan, and
Treiber, Alternate Members of the Federal
Open Market Committee
Messrs. Morris, Kimbrel, and Galusha, Presidents
of the Federal Reserve Banks of Boston,
Atlanta, and Minneapolis, respectively
Mr. Holland, Secretary
Mr. Broida, Deputy Secretary
Messrs. Kenyon and Molony, Assistant Secretaries
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Axilrod, Baughman, Eastburn, Green,
Hersey, Solomon, and Tow, Associate
Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Sherman, Consultant, Board of Governors
Messrs. Coyne and Nichols, Special Assistants
to the Board of Governors
Mr. Williams, Adviser, Division of Research
and Statistics, Board of Governors
Mr. Keir, Assistant Adviser, Division of
Research and Statistics, Board of Governors
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Mr. Bernard, Special Assistant, Office of
the Secretary, Board of Governors
Miss Eaton, Open Market Secretariat Assistant,
Office of the Secretary, Board of Governors
Messrs. Parthemos, Taylor, and Jones, Senior
Vice Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and St. Louis,
respectively
Messrs. Eisenmenger and MacLaury, Vice
Presidents of the Federal Reserve Banks
of Boston and New York, respectively
Messrs. Garvy and Kareken, Economic Advisers
of the Federal Reserve Banks of New York
and Minneapolis, respectively
Mr. Shotwell, Assistant Vice President and
Economist, Federal Reserve Bank of
Cleveland
Mr. Cooper, Manager, Securities and Acceptance
Departments, Federal Reserve Bank of
New York
The Secretary reported that advices had been received of the
election by the Federal Reserve Banks of members and alternate
members of the Federal Open Market Committee for the term of one
year beginning March 1, 1969, that it appeared that such persons
were legally qualified to serve, and that they had executed their
oaths of office.
The elected members and alternates were as follows:
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York as alternate;
Karl R. Bopp, President of the Federal Reserve Bank of
Philadelphia, with Aubrey N. Heflin, President of the
Federal Reserve Bank of Richmond, as alternate;
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Charles J. Scanlon, President of the Federal Reserve Bank
of Chicago, with W. Braddock Hickman, President of the
Federal Reserve Bank of Cleveland, as alternate;
George H. Clay, President of the Federal Reserve Bank of
Kansas City, with Eliot J. Swan, President of the
Federal Reserve Bank of San Francisco, as alternate;
Philip E. Coldwell, President of the Federal Reserve Bank
of Dallas, with Darryl R. Francis, President of the
Federal Reserve Bank of St. Louis, as alternate.
By unanimous vote, the following
officers of the Federal Open Market
Committee were elected to serve until
the election of their successors at
the first meeting of the Committee
after February 28, 1970, with the
understanding that in the event of the
discontinuance of their official con
nection with the Board of Governors or
with a Federal Reserve Bank, as the
case might be, they would cease to
have any official connection with the
Federal Open Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Robert C. Holland
Arthur L. Broida
Kenneth A. Kenyon and
Charles Molony
Howard H. Hackley
David B. Hexter
Daniel H. Brill
Stephen H. Axilrod, Ernest T.
Baughman, David P. Eastburn,
Ralph T. Green, A. B. Hersey,
Robert G. Link, J. Charles
Partee, John E. Reynolds,
Robert Solomon, and Clarence
W. Tow
Chairman
Vice Chairman
Secretary
Deputy Secretary
Assistant Secretaries
General Counsel
Assistant General Counsel
Economist
Associate Economists
By unanimous vote, the Federal
Reserve Bank of New York was selected
to execute transactions for the System
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Open Market Account until the adjourn
ment of the first meeting of the Federal
Open Market Committee after February 28,
1970.
By unanimous vote, Alan R. Holmes
and Charles A. Coombs were selected to
serve at the pleasure of the Federal
Open Market Committee as Manager of the
System Open Market Account and as Special
Manager for foreign currency operations
for such Account, respectively, it being
understood that their selection was
subject to their being satisfactory to
the Board of Directors of the Federal
Reserve Bank of New York.
Secretary's Note: Advice subsequently
was received that Messrs. Holmes and
Coombs were satisfactory to the Board of
Directors of the Federal Reserve Bank of
New York for service in the respective
capacities indicated.
By unanimous vote, the minutes of
actions taken at the meeting of the
Federal Open Market Committee held on
February 4, 1969, were approved.
The memorandum of discussion for
the meeting of the Federal Open Market
Committee held on February 4, 1969, was
accepted.
Consideration was then given to the continuing authoriza
tions of the Committee, according to the customary practice of
reviewing such matters at the first meeting in March of every year,
and the actions set forth hereinafter were taken.
By unanimous vote, the following
procedures with respect to allocations
of securities in the System Open Market
Account were approved without change:
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1. Securities in the System Open Market Account shall
be reallocated on the last business day of each month by
means of adjustments proportionate to the adjustments
that would have been required to equalize approximately
the average ratios of gold holdings to note liabilities
of the twelve Federal Reserve Banks based on the ratios
of gold to notes for the most recent five business days.
2. Until the next reallocation the Account shall be
apportioned on the basis of the ratios determined in
paragraph 1.
3. Profits and losses on the sale of securities from
the Account shall be allocated on the day of delivery of
the securities sold on the basis of each Bank's current
holdings at the opening of business on that day.
A proposed list for distribution of periodic reports pre
pared by the Federal Reserve Bank of New York for the Federal Open
Market Committee was presented for consideration and approval.
By unanimous vote, authoriza
tion was given for the following
distribution:
1.
Members and Alternate Members of the Committee,
other Reserve Bank Presidents, and officers
of the Committee.
*2. The Secretary of the Treasury.
*3. The Under Secretary of the Treasury for Monetary
Affairs and the Deputy Under Secretary for
Monetary Affairs.
*4. The Assistant to the Secretary of the Treasury
working on debt management problems.
*5. The Fiscal Assistant Secretary of the Treasury.
6. The Director of the Division of Federal Reserve
Bank Operations, Board of Governors.
7. The officer in charge of research at each of the
Federal Reserve Banks not represented by its
President on the Committee.
* Weekly reports only.
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8.
9.
The officers of the Federal Reserve Bank of New York
working under the Manager and Special Manager of
the System Open Market Account.
With the approval of a member of the Committee or
any other President of a Federal Reserve Bank,
with notice to the Secretary, any other employee
of the Board of Governors or of a Federal Reserve
Bank.
By unanimous vote, the Committee
reaffirmed the authorization, first
given on March 1, 1951, for the Chairman
to appoint a Federal Reserve Bank to
operate the System Open Market Account
temporarily in case the Federal Reserve
Bank of New York is unable to function.
By unanimous vote, the following
resolution to provide for the continued
operation of the Federal Open Market
Committee during an emergency was
reaffirmed:
In the event of war or defense emergency, if the
Secretary or Assistant Secretary of the Federal Open
Market Committee (or in the event of the unavailability
of both of them, the Secretary or Acting Secretary of
the Board of Governors of the Federal Reserve System)
certifies that as a result of the emergency the avail
able number of regular members and regular alternates
of the Federal Open Market Committee is less than seven,
all powers and functions of the said Committee shall be
performed and exercised by, and authority to exercise
such powers and functions is hereby delegated to, an
Interim Committee, subject to the following terms and
conditions:
Such Interim Committee shall consist of seven
members, comprising each regular member and regular
alternate of the Federal Open Market Committee then
available, together with an additional number, suffi
cient to make a total of seven, which shall be made up
in the following order of priority from those available:
(1) each alternate at large (as defined below); (2) each
President of a Federal Reserve Bank not then either a
regular member or an alternate; (3) each First Vice
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President of a Federal Reserve Bank; provided that (a)
within each of the groups referred to in clauses (1),
(2), and (3) priority of selection shall be in numerical
order according to the numbers of the Federal Reserve
Districts, (b) the President and the First Vice President
of the same Federal Reserve Bank shall not serve at the
same time as members of the Interim Committee, and (c)
whenever a regular member or regular alternate of the
Federal Open Market Committee or a person having a higher
priority as indicated in clauses (1), (2), and (3)
becomes available he shall become a member of the Interim
Committee in the place of the person then on the Interim
Committee having the lowest priority. The Interim Com
mittee is hereby authorized to take action by majority
vote of those present whenever one or more members thereof
are present, provided that an affirmative vote for the
action taken is cast by at least one regular member,
regular alternate, or President of a Federal Reserve Bank.
The delegation of authority and other procedures set forth
above shall be effective only during such period or
periods as there are available less than a total of seven
regular members and regular alternates of the Federal Open
Market Committee.
As used herein the term "regular member" refers to
a member of the Federal Open Market Committee duly
appointed or elected in accordance with existing law;
the term "regular alternate" refers to an alternate of
the Committee duly elected in accordance with existing
law and serving in the absence of the regular member for
whom he was elected; and the term "alternate at large"
refers to any other duly elected alternate of the Committee
at a time when the member in whose absence he was elected
to serve is available.
By unanimous vote, the following
resolution authorizing certain actions
by the Federal Reserve Banks during an
emergency was reaffirmed:
The Federal Open Market Committee hereby authorizes
each Federal Reserve Bank to take any or all of the
actions set forth below during war or defense emergency
when such Federal Reserve Bank finds itself unable after
reasonable efforts to be in communication with the Federal
Open Market Committee (or with the Interim Committee acting
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in lieu of the Federal Open Market Committee) or when
the Federal Open Market Committee (or such Interim
Committee) is unable to function.
(1) Whenever it deems it necessary in the light of
economic conditions and the general credit situation then
prevailing (after taking into account the possibility of
providing necessary credit through advances secured by
direct obligations of the United States under the last
paragraph of section 13 of the Federal Reserve Act), such
Federal Reserve Bank may purchase and sell obligations of
the United States for its own account, either outright or
under repurchase agreement, from and to banks, dealers,
or other holders of such obligations.
(2) In case any prospective seller of obligations
of the United States to a Federal Reserve Bank is unable
to tender the actual securities representing such obli
gations because of conditions resulting from the emergency,
such Federal Reserve Bank may, in its discretion and
subject to such safeguards as it deems necessary, accept
from such seller, in lieu of the actual securities, a
"due bill" executed by the seller in form acceptable to
such Federal Reserve Bank stating in substantial effect
that the seller is the owner of the obligations which
are the subject of the purchase, that ownership of such
obligations is thereby transferred to the Federal Reserve
Bank, and that the obligations themselves will be deliv
ered to the Federal Reserve Bank as soon as possible.
(3) Such Federal Reserve Bank may in its discretion
purchase special certificates of indebtedness directly
from the United States in such amounts as may be needed
to cover overdrafts in the general account of the Treasurer
of the United States on the books of such Bank or for the
temporary accommodation of the Treasury, but such Bank
shall take all steps practicable at the time to insure
as far as possible that the amount of obligations acquired
directly from the United States and held by it, together
with the amount of such obligations so acquired and held
by all other Federal Reserve Banks, does not exceed $5
billion at any one time.
Authority to take the actions set forth shall be
effective only until such time as the Federal Reserve
Bank is able again to establish communications with the
Federal Open Market Committee (or the Interim Committee),
and such Committee is then functioning.
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By unanimous vote the Committee
reaffirmed the authorization, first
given at the meeting on December 16,
1958, providing for System personnel
assigned to the Office of Emergency
Preparedness, Special Facilities
Division, on a rotating basis to have
access to the resolutions (1) provid
ing for continued operation of the
Committee during an emergency and (2)
authorizing certain actions by the
Federal Reserve Banks during an
emergency.
There was unanimous agreement
that no action should be taken to
change the existing procedure, as
called for by resolution adopted
June 21, 1939, requesting the Board
of Governors to cause its examining
force to furnish the Secretary of the
Federal Open Market Committee a report
of each examination of the System Open
Market Account.
Reference was made to the procedure authorized at the meet
ing of the Committee on March 2, 1955, and most recently reaffirmed
on March 5, 1968, whereby, in addition to members and officers of
the Committee and Reserve Bank Presidents not currently members of
the Committee, minutes and other records could be made available
to any other employee of the Board of Governors or of a Federal
Reserve Bank with the approval of a member of the Committee or
another Reserve Bank President, with notice to the Secretary.
It was stated that lists of currently authorized persons
at the Board and at each Federal Reserve Bank (excluding secretaries
and records and duplicating personnel) had recently been confirmed
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by the Secretary of the Committee.
The current lists were reported
to be in the custody of the Secretary, and it was noted that re
visions could be sent to the Secretary at any time.
It was agreed unanimously that
no action should be taken at this time
to amend the procedure authorized on
March 2, 1955.
By unanimous vote, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed
by the Committee, to execute transactions
in the System Open Market Account in
accordance with the following continuing
authority directive relating to trans
actions in U.S. Government securities,
agency obligations, and bankers'
acceptances:
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, to the
extent necessary to carry out the most recent current
economic policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities in the open market, from or to
Government securities dealers and foreign
and international accounts maintained at the
Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the
System Open Market Account at market prices
and, for such Account, to exchange 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 follow
ing such meeting and ending with the close of
business on the day of the next such meeting;
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-11(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 (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;
(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 agree
ments 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.
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2. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York to
purchase directly from the Treasury for the account of
the Federal Reserve Bank of New York (with discretion,
in cases where it seems desirable, to issue participa
tions 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 that the total amount of such
certificates held at any one time by the Federal Reserve
Banks shall not exceed $1 billion.
By unanimous vote, the foreign
currency directive given below was
reaffirmed:
FOREIGN CURRENCY DIRECTIVE
1. The basic purposes of System operations in
foreign currencies are:
A. To help safeguard the value of the dollar
in international exchange markets;
B. To aid in making the system of inter
national payments 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;
D. To help insure that market movements in
exchange rates, within the limits stated in the Inter
national Monetary Fund Agreement or established by
central bank practices, reflect the interaction of
underlying economic forces and thus serve as efficient
guides to current financial decisions, private and
public; and
E. To facilitate growth in international
liquidity in accordance with the needs of an expanding
world economy.
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2. Unless otherwise expressly authorized by the
Federal Open Market Committee, System operations in
foreign currencies shall be undertaken only when
necessary:
A. To cushion or moderate fluctuations in
the flows of international payments, if such fluctuations
(1) are deemed to reflect transitional market unsettlement
or other temporary forces and therefore are expected to
be reversed in the foreseeable future; and (2) are deemed
to be disequilibrating 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;
B. To temper and smooth out abrupt changes in
spot exchange rates, and to moderate forward premiums
and discounts judged to be disequilibrating. Whenever
supply or demand persists in influencing exchange rates
in one direction, System transactions should be modified
or curtailed unless upon review and reassessment of the
situation the Committee directs otherwise;
C. To aid in avoiding disorderly conditions
in exchange markets. Special factors that might make
for exchange market instabilities include (1) responses
to short-run increases in international political tension,
(2) differences in phasing of international economic ac
tivity 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 trans
actions may be undertaken if the Special Manager reaches
a judgment that they may help to reestablish supply and
demand balance at a level more consistent with the
prevailing flow of underlying payments. In such cases,
the Special Manager shall consult as soon as practicable
with the Committee or, in an emergency, with the members
of the Subcommittee designated for that purpose in
paragraph 6 of the Authorization for System foreign
currency operations; and
D. To adjust System balances within the
limits established in the Authorization for System foreign
currency operations in light of probable future needs for
currencies.
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3. System drawings under the swap arrangements
are appropriate 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 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 dis
turbances; (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 arrange
ments, and to facilitate operations of the Stabilization
Fund; (v) to facilitate the use of one currency for the
settlement of System or Treasury commitments denominated
in other currencies; and (vi) to provide cover for System
holdings of foreign currencies.
Chairman Martin then noted that a memorandum from the
Secretariat entitled "Proposed technical amendments to authorization
for System foreign currency operations" had been distributed to the
Committee on February 27, 1969.1/
He asked Mr. Holland to comment.
Mr. Holland remarked that the Secretariat proposed several
changes in the authorization which recent experience had suggested
would be helpful in clarifying the Committee's intent.
One was to
add the phrase "and express authorizations pursuant thereto" at the
end of the introductory text to paragraph 1, to make clear that the
language of the authorization extended to operations under all
1/ A copy of this memorandum has been placed in the Committee's
files.
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3/4/69
express authorities given by the Committee as well as to those
under the specific language of the foreign currency directive.
It was also proposed to add a new paragraph 1B(1) to cover
explicitly the spot side of System warehousing operations for
the Stabilization Fund.
Those spot transactions were now sub
sumed under the general language of the existing 1B(1), which
authorized the holdings of foreign currencies up to amounts
necessary to fulfill forward commitments.
Since paragraph 1C(1)
authorized forward commitments to the Stabilization Fund, the
existing 1B(1) was technically adequate to cover the corres
ponding spot operations, but the staff thought that use of a
separate paragraph for the purpose would be clarifying.
Certain
other changes were proposed in the various parts of 1B and in
1C(1), of which some--including renumbering--were of a conforming
nature, and some were to improve the language.
Finally, it was
proposed to incorporate more precise descriptions of the System's
two swap arrangements with the Bank for International Settlements
in the table of paragraph 2 listing authorized swap arrangements.
After discussion, the Committee agreed that the changes in
the authorization recommended by the Secretariat were appropriate.1/
Mr. Brimmer suggested that the Committee consider a question
that it had discussed in the past--namely, whether to withhold for
1/ These changes are incorporated in the text of the authori
zation shown at a later point in this memorandum.
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90 days information on its actions in its organization meetings,
such as that of today, with respect to the various continuing
authorizations and directives.
Mr. Hackley noted that the following statement was contained
in the Committee's rules regarding the availability of information,
under the heading "Deferred availability of information:"
example, the Committee's current economic policy directive
"For
. .
is published in the Federal Register approximately 90 days after
the date of its adoption . . . ."
The passage had been formulated
without specific reference to other policy instruments for the
purpose of providing flexibility with respect to the timing of
public release of information on changes in the other instrumentseither to delay release of information considered unusually sen
sitive for longer than 90 days or to expedite release if that was
considered desirable.
Thus, making such information available
before 90 days would not be inconsistent with the rules currently
in effect.
Mr. Holland observed that information on the actions in
question would be included in the minutes of actions for today's
meeting, the full text of which normally would be available to the
public, on request, in 90 days.
As Mr. Hackley had suggested, the
Committee could agree to make information available sooner on its
actions with respect to the continuing authorities.
To the best
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3/4/69
of his knowledge, however, no request for copies of the minutes
of actions for any meeting of the Committee had been received
to date.
Chairman Martin remarked that he would expect public
interest in the organizational matters dealt with today to focus
mainly on the identity of the new members of the Committee from
the Reserve Banks.
Mr. Molony said he saw no reason for withholding infor
mation on the new make-up of the Committee.
Mr. Hayes added that
such information would, of course, be published in the March issue
of the Federal Reserve Bulletin in the normal course of events.
Mr. Daane noted that the changes the Secretariat had
recommended in the foreign currency authorization were intended
only to be clarifying and did not involve changes in substance.
To publish them in advance of the usual 90-day schedule might only
result in a certain amount of confusion.
Mr. Robertson remarked that the issue, as he understood
it, was not one of publication but whether to make the information
in question available if a request was received before 90 days had
elapsed.
In reply to the Chairman's request for comment, Mr. MacLaury
said he agreed with Mr. Daane that clarifying changes in the foreign
currency authorization were not likely to be of interest to the
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public.
-18
As the members knew, however, he planned to propose a
substantive change in the authorization later in today's meeting.
He was not sure at the moment what the implications would be, in
terms of release date, if the Committee approved that change.
Chairman Martin then suggested that the matter be held
over for consideration at a later meeting of the Committee.
Before this meeting there had been distributed to the
members of the Committee a report from the Special Manager of
the System Open Market Account on foreign exchange market con
ditions and on Open Market Account and Treasury operations in
foreign currencies for the period February 4 through 26, 1969,
and a supplemental report covering the period February 27 through
March 3, 1969.
Copies of these reports have been placed in the
files of the Committee.
In supplementation of the written reports, Mr. MacLaury
said that there was no change in the Treasury gold stock this
week, and he knew of no significant gold transactions coming up.
Thus the Stabilization Fund's holdings of $432 million should
remain largely intact for the foreseeable future.
In the London
gold market the price had remained in a range between $42.40 and
$42.80 during February with turnover in both London and Zurich
quite modest.
There had been no indication of South African
sales in either of those markets in recent months; nevertheless,
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-19
South Africa's foreign exchange holdings had risen from $100
million last November to $200 million now.
It still seemed
unlikely that South Africa's balance of payments would continue
to permit the financing of as large an accumulation of gold in
its reserves during 1969 as was the case last year, but to date
there was little evidence that they were about to be forced into
the market.
Mr. MacLaury commented that the main factor influencing
developments in the exchange markets during the past month had
been the growing tightness in the Euro-dollar market.
Three-month
rates, for example, were approximately 3/4 of a percentage point
higher today at around 8-1/2 per cent than they had been at the
beginning of February.
During the first half of the month, that
tightening did not reflect any net increase in Euro-dollar takings
of American bank branches abroad--in fact, such borrowings were
unchanged on balance from mid-January to mid-February.
it reflected mainly developments on the supply side:
Rather,
primarily
the cessation of large net outflows from Germany and, to a lesser
extent, the required repatriation by French banks of their net
assets in the Euro-dollar market.
In the last couple of weeks,
however, foreign branches of American banks had again been building
up their placements with head offices to a peak last week of $8.9
billion, up nearly $3 billion from the end of the year.
3/4/69
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Mr. MacLaury remarked that the pull of the high rates in
the Euro-dollar market had been felt by most European currencies
in recent weeks.
Fortunately, sterling had had a fairly good
month in spite of the pull of Euro-dollar rates, and the Bank
of England was able to announce today a small reserve gain--$19
million--despite $238 million of debt repayments, including $200
million to the International Monetary Fund.
The gross gain of
over $250 million fairly accurately reflected market developments
in February, with buying of sterling triggered by the improved
trade figures announced at mid-month but with the Bank of England
continuing on balance to acquire dollars on a smaller scale there
after.
Firm indications by Chancellor Jenkins of continuing
improvement in British public finances helped give sterling a
boost, as did the increase last Thursday in the Bank rate to 8
per cent.
The latter move was mainly a reaction to persistent
expansion of bank credit in Britain itself but it should also help
to offset, for the time being at least, the effects on sterling
of high Euro-dollar rates.
The French franc remained largely insulated from external
pressures by exchange controls, Mr. MacLaury continued.
As he had
mentioned, the required repatriation of dollars by French commercial
banks seemed to add to the tightness in the Euro-dollar market at
times, and it probably accounted for some net inflow to the Bank
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3/4/69
of France during the month, although there also was some market
covering of forward sales.
In the last few days, however, the
spot franc had eased despite official support, with the impending
confrontation between the Government and the unions on wage nego
tiations being the major cause of uncertainty.
The Bank of France
on balance increased its drawings under the swap arrangement with
the System by $25 million during February, after two months of
paydowns financed mainly by enforced repatriation of privately
held foreign exchange.
Mr. MacLaury reported that all the other major continental
currencies had been under pressure at times during the month.
Maturing forward purchases of dollars by the German Federal Bank
exceeded new outflows in early February with a consequent rise in
German reserves.
However, in the last couple of weeks net exports
of funds reemerged, possibly reflecting a reduced trade surplus
and conversion of sizable mark borrowings by foreigners in Germany,
as well as the pull of the Euro-dollar market.
The Italian author
ities sold nearly $200 million in the first two weeks of February
before deciding to let the spot lira rate fall quite sharply.
The
guilder also traded below par during most of the month, although
reserve losses were small.
The Belgian National Bank was able to
repay some $27-1/2 million of its drawings on its swap line during
the period, but in that case also, the spot rate was under pressure
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3/4/69
at times during the month.
Finally, additional dollar outflows
from Switzerland in February enabled the System to make further
paydowns on its Swiss franc drawings, reducing the amount out
standing to $40 million from the recent high of $320 million.
All in all, Mr. MacLaury said, the dollar had shown
considerable strength in the major exchange markets since the
turn of the year.
The reason for that strength clearly was the
increasing pull of tightening monetary conditions in the United
States.
Although the effects of that tightening, particularly
as reflected in the rapid rise in Euro-dollar rates and in
Euro-dollar borrowings by U.S. banks, had caused some uneasiness
on the part of European central banks, there was little evidence
as yet of any undue strain from that source on particular currencies
or on international financial markets in general.
Mr. MacLaury remarked he might say just a word about the
agreement reached at Basle last month concerning possibilities for
recycling movements of speculative funds between countries.
The
memorandum setting forth the governors' conclusions had been re
1/ and, as the Committee knew, the press reports
leased to the press
1/ Copies of the memorandum, dated February 10, 1969, and
entitled "Conclusions of the Central Bank Governors of the Group
of Ten and Switzerland on Point 8 of the Bonn Communique," to
gether with a letter of transmittal from President Zijlstra of
the Bank for International Settlements to Dr. Schiller, were
distributed to the Committee on February 26, 1969.
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3/4/69
had indicated that nothing new had come out of the central
bankers' deliberations on the subject.
While it was true that
the statement of conclusions might have disappointed those who,
for one reason or another, were looking for a large pool of new
automatic credit facilities, the fact was that a number of new
principles had been agreed upon that could prove most useful in
coping with future difficulties.
For example, paragraph five of
the conclusions stated the governors' belief that "in any new
group arrangement designed to recycle speculative flows, both
the shares of the participants and the timing of drawings should
reflect the direction of the flows involved."
Moreover, the
paragraph stated that "Central banks that were drawn on and were
not gaining reserves at the time should be afforded refinancing
facilities for the period of the drawing from other central banks
that were gaining reserves at the time."
Those principles, if
adhered to in any ad hoc credit arrangements set up in the future,
could represent a significant step forward in dealing with con
centrations of flows among a small number of countries such as
had occurred last fall.
Mr. MacLaury then said that the Special Manager, who had
not been present at the February 4 meeting of the Committee, had
been surprised by one passage in the memorandum of discussion for
that meeting.
The passage in question was that in which Mr. Maisel
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3/4/69
indicated that he continued to feel there was a need for better
coordination of Treasury and Federal Reserve foreign currency
operations.
Mr. Coombs had found it surprising because in his
judgment the coordination of such operations had been as close as
one might reasonably hope.
Mr. Maisel remarked that he had not meant to raise a
question about day-to-day operations, since he recognized that
there was full coordination in that area.
What concerned him
were the much broader questions of over-all coordination in
concepts and decision-making with respect to foreign currency
stabilization operations of the Federal Reserve and the Treasury.1/
By unanimous vote, the System
open market transactions in foreign
currencies during the period February 4
through March 3, 1969, were approved,
ratified, and confirmed.
Chairman Martin then invited Mr. Daane to comment on
developments at the recent meeting in Basle the latter had attended.
Mr. Daane said he had little to add to what Mr. MacLaury
had already reported concerning the Basle meeting, which was held
Subsequent to the meeting Mr. Maisel asked that the
1/
following additional observations be included in the record at
this point: "These questions arise not only with respect to the
Special Manager's operations. Partly they arise with respect to
problems of when short-run needs become intermediate-term credit;
at what point and how the transfer of the credit source from the
Federal Reserve to the Treasury ought to be made; and how agreement
should be reached as to whether continued use of System swap lines
was tending to become a virtual commitment of longer-term credit."
3/4/69
-25
on the weekend of February 8-9.
The principal focus of the
meeting was the response to be made to the Bonn communique of
November 22, 1968, which had called on the governors of the
central banks of the Group of Ten to examine new central bank
arrangements to alleviate the impact of speculative movements
on reserves.
The technical group that had considered the
question--in which Mr. Coombs had played a highly useful rolehad developed a draft statement that was quite similar to the
statement adopted at the meeting on Sunday (February 9).
The agreement could be viewed in various ways, Mr. Daane
continued.
Mr. Coombs had described it as "the lowest common
denominator."
His (Mr. Daane's) own feeling was that it repre
sented the best result that could have been hoped for, particularly
since it was quite clear that the two countries--Germany and
Switzerland--that had been the recipients of speculative inflows
were not prepared to agree to an automatic recycling mechanism.
He would underscore the point Mr. MacLaury had made that the
agreement was a meaningful one.
Paragraph five--from which
Mr. MacLaury had read--put a great deal of responsibility on the
receiving countries both to assume a greater share of the risk
of recycling and to offer refinancing facilities to the countries
that were not receiving funds.
Although the agreement obviously
was not what many--including the delegates at Bonn--had hoped for,
it seemed nevertheless to be useful.
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3/4/69
The Chairman then invited Mr. Brimmer to report on the
meeting he had attended of the Economic Policy Committee of the
OECD.
Mr. Brimmer commented that the EPC meeting, which was
held in Paris on February 10-11, might be described as a follow-up
to the "rump" session of last November at which the discussion had
been less than satisfactory because of the absence of key German
and Italian delegates who were attending the concurrent meeting in
Bonn.
The February EPC meeting was the first in which the new team
at the Treasury and the Council of Economic Advisers participated
as senior U.S. representatives--although some, such as Mr. Volcker,
had attended such meetings in the past in other capacities.
The chief topic of discussion was that of capital flows,
Mr. Brimmer continued.
That discussion was particularly useful
because of the emphasis placed on the recent enormous inflows to
the United States.
There were comments about the need for co
ordination to minimize the adverse effects of those flows on other
countries, and there were complaints about high U.S. interest rates.
The argument was exactly the reverse of that of several years ago
when the burden of the complaint had been that the United States,
by keeping its interest rates low, was exporting inflation to the
rest of the world.
This time it was argued that by relying too
heavily on monetary policy and permitting interest rates to rise
too rapidly, the United States was damaging the growth efforts of
3/4/69
-27-
the major European countries.
With respect to the Euro-dollar
market, suggestions were made--mainly in the form of questionsthat the U.S. monetary authorities should take some action to
limit the ability of U.S. banks to bid for Euro-dollars.
Views
on the matter were not unanimous; the Swiss representative, for
example, had no objections to the flows to the United States, and
Dr. Emminger argued that if reliance had to be placed on monetary
policy to fight inflation it was necessary to accept the conse
quences in the form of higher interest rates.
However, Dr. Emminger
evidently changed his mind subsequently; in a public statement a
few weeks later he urged the U.S. authorities to take some action,
perhaps on reserve requirements, to reduce U.S. bank demands on
the Euro-dollar market.
Mr. Brimmer went on to say that there also was a good
discussion of the surplus countries, Germany and Italy, with the
sharper focus on the latter.
The Italian authorities were doing
very little to increase Italy's rate of economic growth and to
reduce its enormous balance of payments surplus.
Relative to GNP,
the Italian payments surplus on goods and services was considerably
larger than that of Germany.
Turning back to the discussion of the U.S. situation,
Mr. Brimmer said it was generally expected that this country would
continue its fight against domestic inflation.
Chairman McCracken
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3/4/69
of the CEA stressed the view that stabilization efforts had to be
conducted in a way that would avoid excessive unemployment, and
that view naturally raised the question of the extent to which
the Administration was prepared to allow unemployment to increase
in combatting inflation.
Mr. McCracken did not respond specifically
to that question, but he left the impression that the Administration
would persist in its anti-inflationary program.
There was general
agreement on the desirability of continuing the U.S. capital con
trol program in some form.
Chairman Martin then asked Mr. Solomon to report on the
recent meeting of Working Party 3.
Mr. Solomon said the discussion in the WP-3 meeting concen
trated first on Italy and then on the general balance of payments
situation.
Since Mr. Brimmer had already commented on the Italian
situation, he would add only one or two observations.
As Mr. Brimmer
had noted, Italy's surplus was larger than Germany's in a relative
sense and it also had persisted for a longer period.
The emphasis
on the Italian situation in recent international meetings reflected
a developing trend toward a more even-handed approach to payments
problems, involving discussion of the problems of surplus countries
as well as those of deficit countries.
It was worth noting that
during the whole WP-3 discussion no one suggested, or even hinted,
that Italy's surplus had become excessive because deficit countries
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3/4/69
were following inappropriate policies--a line of argument that
undoubtedly would have been advanced several years ago.
Mr. Solomon commented that Italy's economy currently
was growing at a relatively rapid rate.
Although there still was
some excess capacity, the authorities were hesitant about pressing
for a faster rate of growth--which would have the effect of re
ducing the Italian payments surplus--because of concern over the
effects on the internal price level.
They also were concerned
about the risk that a sizable reduction in their surplus on current
account would mean that their over-all payments balance would
shift to deficit and remain there, since they expected the current
net outflow on capital account to continue in any event.
Moreover,
they feared that declines in their reserves might stimulate spec
ulation against the lira that would lead to further, cumulative
declines.
The way in which the Italian authorities formulated
their problem was an excellent example of the type of attitude
toward reserve management that seemed to make activation of the
arrangements for special drawing rights important.
With respect to the general balance of payments situation,
Mr. Solomon continued, the question with which the participants
in WP-3 were concerned was whether there could be any viable
international payments equilibrium, given the objectives of in
dividual countries with respect to the structure as well as the
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3/4/69
over-all balance of their external flows.
The conclusion to
which WP-3 seemed to be coming was that the activation of SDR's
might be a necessary precondition for such an equilibrium, not
an event that should occur after equilibrium had been attained.
He would go into that matter a little further in his statement
later in the meeting.
Chairman Martin then asked Mr. MacLaury to present his
recommendations.
Mr. MacLaury noted that a $13 million drawing by the
Belgian National Bank would mature for the first time on
April 11, 1969.
That was the only Belgian drawing outstanding
at present, and he would recommend its renewal for another
three-month period if requested by the Belgians.
Renewal of the drawing by the
Belgian National Bank for a further
period of three months was noted
without objection.
Mr. MacLaury then noted that a $200 million drawing by
the Bank of England would mature for the third time on April 3,
1969.
As he had indicated, despite the strains imposed by
developments in the Euro-dollar market the British were making
headway with respect to their reserves at this point, and if
they continued to do so the Bank of England could be expected
to make repayments on its swap debt to the System.
He would
recommend renewal of the drawing if requested by the British,
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3/4/69
but for a period of slightly less than three months--specifi
cally, to July 1, 1969.
On that basis, if the renewed drawing
were outstanding for the full term, the period for which the
swap line would have been active would remain within the twelve
month limit which--under the language of paragraph 1D of the
authorization--could be exceeded only if specifically authorized
by the Committee.
During the coming months the Committee would
want to focus on the policy question that would be raised if the
Bank of England were to propose that the line remain in use for
more than twelve months; however, it would be premature to con
sider that question today.
Mr. Mitchell remarked that in his judgment it would be
desirable to consider the question at an early date.
Mr. Brimmer concurred.
He noted that he had talked about
the matter with Messrs. Coombs and MacLaury before today's meeting
and he thought the Committee could not count on the Bank of England's
avoiding a request for a further renewal as of July 1.
The safer
assumption was that they would need some additional accommodation
at that time.
That being the case, he thought the staff should
begin very soon to consider possible alternative means, perhaps
involving assistance from the Treasury, of providing what would
in effect be intermediate-term financing to the British.
It would
be unfortunate if the System found itself obliged to extend
3/4/69
-32
intermediate-term credit under the swap line simply because of
the lack of time to work out other arrangements.
Chairman Martin suggested that the staff be asked to
prepare a memorandum on the subject and that the Committee plan
on considering the question in the course of its next few meetings.
There was general agreement with the Chairman's suggestion.
Mr. Solomon noted that the bulk of the Bank of England
drawings now outstanding had been initiated in November 1968;
apart from the drawing Mr. MacLaury had mentioned and two others
of $50 million each, individual British drawings would not be
outstanding for a full year until November 1969.
Thus, if the
Committee was prepared to focus on the duration of the main part
of the British swap debt, rather than on the period for which any
use had been made of the line, substantial time would be available.
Renewal until July 1, 1969
of the $200 million drawing by the
Bank of England was noted without
objection.
Mr. MacLaury then observed that a memorandum from the
Special Manager recommending an increase in the limit on the Sys
tem's outright holdings of foreign currencies specified in paragraph
1B(2) of the foreign currency authorization--which would now be
paragraph 1B(3) under the amendments to that instrument that had
been agreed upon earlier today--had been distributed to the
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3/4/69
Committee on February 28, 1969.1/
He apologized for the fact
that the members had had only a relatively short time to consider
the recommendation.
As the memorandum noted, Mr. MacLaury continued, the
proposal was to increase the limit on outright holdings of author
ized currencies from $150 million equivalent to $250 million.
The present limit of $150 million had been established in 1963,
and since that time the scale of the System's foreign currency
operations had grown considerably.
The System's outright holdings
had risen to nearly $140 million, largely as a result of market
purchases of German marks in recent weeks, so that the leeway
remaining at present was only a little over $10 million.
As on
an earlier occasion in 1966, the Special Manager had thought it
desirable to accumulate mark balances, since marks were trading
well below par and the balances were likely to prove useful for
market operations or to repay swap drawings on the German Federal
Bank if such drawings should prove necessary.
Moreover, the
Treasury had indicated that it would be prepared to purchase any
marks which the System found it did not need to help cover the
Treasury's outstanding mark-denominated debt.
Mr. MacLaury remarked that the $100 million increase in
the limit recommended would permit the System to continue buying
1/ A copy of this memorandum has been placed in the Committee's
files.
3/4/69
-34
marks in the market at a modest rate.
In his judgment the
recent purchases--which had come to $127 million over a period
of about 5 or 6 weeks--were accurately described as modest.
Although they added to member bank reserves, the System Account
Manager had advised that mark purchases on such a scale did not
pose problems for domestic operations.
Mr. Mitchell said he did not understand the rationale
for System acquisitions of foreign currencies that was implied
by the Special Manager's memorandum and Mr. MacLaury's comments
today.
The principle suggested seemed to be that it was desirable
to accumulate an authorized currency because it was trading well
below par.
The matter might be academic in the present instance,
in view of the Treasury's need to repay mark-denominated debt,
but it was not clear to him whether the Account Management would
have been buying marks recently in the absence of that need.
Mr. MacLaury replied that the fact that the Treasury had
mark debt outstanding removed the element of risk from System
holdings of marks and made the decision to accumulate them a
relatively simple one.
However, it undoubtedly would have been
considered desirable to acquire marks even in the absence of the
Treasury's need.
The objective was not to acquire a currency
simply because it was trading below par, but to take advantage
of existing market availabilities to accumulate modest holdings
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3/4/69
of a currency that was likely to prove useful for future oper
ations.
An additional reason for the current mark acquisitions
was to operate in parallel with the German Federal Bank, which
had been buying marks recently in a stabilization operation
designed to moderate the decline in the exchange rate.
In his judgment, Mr. MacLaury continued, decisions
regarding purchases of particular currencies should be made on
a case-by-case basis, looking mainly toward the System's likely
future needs.
In that connection he might note that apart from
marks and about $3-1/2 million of guilders, the System held only
nominal amounts of foreign currencies outright at the moment.
From time to time there was a modest accumulation of uncovered
sterling as a result of earnings in connection with British
swap drawings.
Those holdings were used mainly to meet the needs
of the U.S. Disbursing Officer in London.
Mr. Daane said he personally was quite sympathetic to
the recommendation.
In his judgment the present situation was
closely analogous to that of 1966, when marks acquired by the
System had proved useful.
Moreover, the operations in marks
were consistent with the spirit of the agreements that had been
reached in Frankfurt in November 1967, following the devaluation
of the pound, regarding coordinated action to ensure orderly
exchange market conditions.
In general, he was sympathetic with
3/4/69
-36
the concept of giving the Special Manager the necessary latitude
to operate as needed to help normalize exchange market conditions,
for the purposes of protecting the dollar and cooperating with
other central banks--in this case, the German Federal Bank.
His
only question was whether the $100 million increase in the limit
that had been proposed was adequate, but he was prepared to accept
the Special Manager's judgment on that question.
Mr. MacLaury commented that one consideration affecting
the desirable scope for System holdings of foreign currencies was
that opportunities for investing such holdings were limited.
He
added that in the case of the mark there were special arrangements
with the German Federal Bank that somewhat alleviated the problem.
Mr. Mitchell observed that while he had no objection to
the acquisitions of marks he still thought the principle that
guided the Special Manager's decisions with respect to acquisi
tions of particular foreign currencies was unclear.
One possible
course would be for the Committee to approve a $100 million in
crease in the authority but to restrict its use to marks.
The
Account Management already had authority to acquire a certain
amount of foreign currencies outright.
If at some future time
the Special Manager concluded that it was desirable for the
System to take a larger position in some currency than existing
authorities permitted, he could make a specific recommendation
which the Committee could judge on its merits.
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3/4/69
In response to Mr. Daane's comment that a limit of $250
million on total outright holdings of foreign currencies did not
appear to be large, Mr. Mitchell remarked that the limit might be
expanded in the future.
Mr. Maisel asked whether Mr. MacLaury would amplify on
his comment regarding the special arrangements that had been made
with the German Federal Bank in connection with the problem of
investment of System mark balances.
Concerning the observation
that purchases of marks by the System were useful partly for
stabilization purposes, he asked how the appropriate roles of the
System and the Treasury's Stabilization Fund might be distinguished.
In response to Mr. Maisel's first question, Mr. MacLaury
said that, as the Committee knew, the Federal Reserve did not have
legal authority to invest its foreign currency balances in securi
ties of foreign governments.
Accordingly, it had opened time
deposits in marks with the BIS, which in turn invested the balances
in the Euro-currency market.
However, the German Federal Bank
preferred not to have the volume of such investments grow too
large.
Under the special arrangements he had mentioned the System
held some of its mark balances uninvested and the German Federal
Bank held an equivalent amount of uninvested dollar balances.
With respect to the second question, from the time the System first
undertook foreign currency operations in 1962, its objective had
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3/4/69
been to work closely along with the Treasury in exchange market
stabilization operations.
Mr. MacLaury then said he might comment on Mr. Mitchell's
suggestion that the Account Management should seek specific au
thority for sizable acquisitions of particular foreign currencies
when it considered such acquisitions desirable.
Obviously, there
could be differences of opinion with respect to the latitude that
should be given the Desk for particular types of operations.
In
his judgment, however, the $250 million limit now recommended for
outright holdings would not involve an unduly large degree of
latitude--relative, say, to that involved in a $150 million limit
under the circumstances of 1963.
In general, he hoped the Com
mittee would feel it could count on the Special Manager not to
use the expanded authority to acquire unnecessary, and perhaps
weak, foreign currencies.
Mr. Brimmer noted that Mr. Coombs' memorandum said the
prime consideration underlying recent operations in marks had been
"to accumulate mark balances against the very real possibility of
a market rebound that would make it desirable for the System once
again to engage in spot or forward sales of marks or to draw
heavily on the swap line with the Federal Bank."
He (Mr. Brimmer)
asked whether the System was likely to find it necessary either to
draw on the swap line or to sell marks out of its balances in the
near term.
-39
3/4/69
Mr. MacLaury replied that the answer probably would
depend on how "near term" was defined.
While one could not
speak with certainty in matters of the present sort, at the
very least it seemed probable that the System would have a
need for marks around the end of the year--when seasonal
pressures normally built up--if not much sooner in connection
with some market disturbance.
Mr. Brimmer then said he was prepared to support the
Account Management's recommendation, on the basis that there
was likely to be a need for the mark balances that were being
accumulated.
Chairman Martin said he also was prepared to support
the recommendation.
It would be important, he thought, for the
Special Manager to keep the Committee informed on his use of the
expanded authority and for the members to keep the matter under
review.
The Chairman then noted that Mr. Coombs' memorandum had
been distributed only a few days before today's meeting.
He
thought that was unfortunate, and he hoped that in the future it
would ordinarily prove possible to give the members more time to
consider such memoranda.
Mr. Hickman asked whether the accumulation of marks by
the Federal Reserve might result in requests from other central
-40-
3/4/69
banks, including those of countries with weak currencies, for
similar System operations in their currencies.
Mr. MacLaury replied that he could not recall such re
quests in the past and would not expect any problems of that sort
to arise.
The existence of the swap network offered the System's
partners an alternative means of acquiring needed dollars and
thus reduced the chances that such requests would be received.
In any case, the Account Management had always made it a point
to preserve the System's initiative with respect to uncovered
purchases of foreign currencies, and would continue to do so.
Mr. Hickman then said that he thought the current pur
chases of marks were quite appropriate, and he hoped they did
not lead to pressure on the System to acquire other, undesired,
currencies on an uncovered basis.
He also hoped the Special
Manager would consult with the Committee before undertaking
sizable uncovered purchases even of strong currencies, since
political or other developments could bring almost any currency
under sudden pressure.
Mr. Hayes said he was sure the Committee could count on
the Special Manager to resist requests to acquire undesired
currencies.
Chairman Martin agreed, but added that it might be
helpful to Mr. Coombs to know he had the support of the Committee
-41-
3/4/69
on the matter.
He thought it was important for the members
always to keep in mind the possible impact of information on
the Committee's actions when that information was published.
The Chairman then remarked that the Committee seemed
to be prepared to approve the Special Manager's recommendation,
on the understanding that operations under the enlarged au
thority would be kept under close review.
By unanimous vote, the author
ization for System foreign currency
operations was amended to 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
and express authorizations by the Committee pursuant
thereto:
A. To purchase and sell the following foreign
currencies in the form of cable transfers through spot or
forward transactions on the open market at home and abroad,
including transactions with the U.S. Stabilization Fund
established by Section 10 of the Gold Reserve Act of 1934,
with foreign monetary authorities, and with the Bank for
International Settlements:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
3/4/69
-42Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in
paragraph A above, up to the following limits:
(1) Currencies purchased spot, including
currencies purchased from the Stabilization Fund, and
sold forward to the Stabilization Fund, up to $1 billion
equivalent;
(2) Currencies purchased spot or forward, up
to the amounts necessary to fulfill other forward commit
ments;
(3) Additional currencies purchased spot or
forward, up to the amount necessary for System operations
to exert a market influence but not exceeding $250 million
equivalent; and
(4) Sterling purchased on a covered or guaranteed
basis in terms of the dollar, under agreement with the Bank
of England, up to $300 million equivalent.
C. To have outstanding forward commitments
undertaken under paragraph A above to deliver foreign
currencies, up to the following limits:
(1) Commitments to deliver foreign currencies
to the Stabilization Fund, up to the limit specified in
paragraph 1B(1) above;
(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 $550 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
3/4/69
-43-
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 for periods up to a maximum of 12
months with the following foreign banks, which are among
those designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N,
Relations with foreign Banks and Bankers, and with the
approval of the Committee to renew such arrangements on
maturity:
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
Amount of
arrangement
(millions of
dollars equivalent)
100
225
1,000
100
2,000
1,000
1,000
1,000
1,000
130
400
100
250
600
600
1,000
3. Unless otherwise expressly authorized by the Committee,
all transactions in foreign currencies undertaken under paragraph
1(A) above shall be at prevailing market rates and no attempt
shall be made to establish rates that appear to be out of line
with underlying market forces.
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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 admin
istration of the accounts maintained by the Federal
Reserve Bank of New York with the foreign banks des
ignated by the Board of Governors under Section 214.5
of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be invested
insofar as practicable, considering needs for minimum
working balances. Such investments shall be in accord
ance with Section 14(e) of the Federal Reserve Act.
6. A Subcommittee consisting of the Chairman and
the Vice Chairman of the Committee and the Vice Chairman
of the Board of Governors (or in the absence of the
Chairman or of the Vice Chairman of the Board of 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.
7. The Chairman (and in his absence the Vice Chairman
of the Committee, and in the absence of both, the Vice
Chairman of the Board of Governors) is authorized:
A. With the approval
enter into any needed agreement
Secretary of the Treasury about
for foreign currency operations
Secretary;
of the Committee, to
or understanding with the
the division of responsibility
between the System and the
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
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C. From time to time, to transmit appropriate
reports and information to the National Advisory Council
on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized
to transmit pertinent information on System foreign
currency operations to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall participate in
the foreign currency operations for System Account in
accordance with paragraph 3G(1) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relation
ships 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.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
Open Market Account covering domestic open market operations for
the period February 4 through 26, 1969, and a supplemental report
covering February 27 through March 3, 1969.
Copies of both reports
have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
As the written reports to the Committee indicate,
market sentiment shifted decisively towards expectations
of sustained monetary restraint during the period since
the Committee last met. The dominant mood contrasted
sharply with the air of skepticism about Federal Reserve
policy that existed in mid-January. Steady pressure on
bank reserve positions through open market operations
contributed to this shift in sentiment. With CD attri
tion continuing, banks began to find that adjustment
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alternatives were becoming more difficult--and expen
sive--as interest rates rose and as their liquid assets
ran down. Euro-dollars were not as readily available.
With the three-month rate now at 8-7/16 per cent,
Euro-dollars have become an expensive alternative to
CD's. In addition to market developments, testimony
before Congress by Chairman Martin and by Administration
spokesmen stressing that inflation was the number one
domestic problem requiring an extended period of monetary
restraint played a significant role in the change of
market sentiment. A number of market observers, however,
still remain unconvinced that restraint will be main
tained--as they believe it should--once signs of a
slowdown in economic growth become apparent; and others
feel that a money crunch--somehow defined--cannot be
avoided if inflationary expectations are to be eliminated.
There were healthy signs during the period that the
stock market was also being affected by the change in
expectations. Warnings from responsible sources on
conglomerates and on speculative new issues, together
with prospective action on one-bank holding companies,
contributed to the more cautious atmosphere.
By the close of the period, as banks increased
their efforts to liquidate intermediate-term securities,
the market was anticipating some further action on the
interest-rate front--either a further increase in the
prime rate alone or some further move on the monetary
policy side that would trigger a move in the prime rate.
The increase in the British Bank rate on Thursday
(February 27) intensified these expectations, but the
general market reaction to the British move was quite
moderate.
Given the general market attitude, a strong demand
Treasury bills developed during the
short-dated
for
period from investors seeking a safe haven while awaiting
interest rate developments. On balance, the three-month
rate changed very little over the period, although for
a time in February it had dipped close to the lower end
of the 6 to 6-1/4 per cent range anticipated at the last
meeting of the Committee. In yesterday's regular Treasury
bill auction average rates of 6.22 and 6.34 per cent were
established for three- and six-month Treasury bills, down
only a couple of basis points from rates set in the auction
just preceding the last meeting of the Committee.
The technical position of the bill market remains
quite strong, with numerous dealer short positions in
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short-dated Treasury bills. In general, Government
securities dealers have lightened their positions over
the past month. At the end of February dealer positions
in all maturities aggregated only $2.3 billion, $1.4
billion below the end-of-January level. Nonbank dealer
use of bank credit has declined correspondingly; in
fact on one recent day dealer operations provided the
New York banks with reserves on balance, reflecting
the very heavy volume of short sales made by the dealer
departments of the banks.
Looking to the future, the Treasury bill rate will
be subjected to conflicting pressures in the weeks ahead,
as the blue book1/stresses. The 6 to 6-1/4 per cent
range anticipated in the blue book appears reasonable,
but higher rates could develop before the March tax
date, particularly in the event of a prime rate change,
and lower rates later on as the Treasury begins to pay
off debt. I have little to add to other blue book
expectations about the short-term monetary variables
that concern us. From time to time I expect that we
may be faced with deviations from the expected pattern
of the Federal funds rate and bank borrowing--depending
on bank adjustment policies--that will not be of any
particular longer-term significance.
As you know, the credit proxy for February, ad
justed for Euro-dollars, rose at an annual rate of 2
per cent, compared to the zero to 3 per cent decline
expected at the time of the last meeting. This somewhat
stronger result was only known on the last day of the
month; earlier estimates of the proxy had indicated a
decline in about the range anticipated. For January
and February combined the proxy plus Euro-dollars shows
no change, although month-end bank credit figures indi
cate a growth rate of just under 3 per cent in both
months. For March a decline of 3 to 6 per cent is
expected in the proxy--assuming Euro-dollar borrowings
remain at current levels. Provided that this anticipation
is borne out there would be a small decline, at an annual
rate of a per cent or two, in the average proxy for the
first quarter. Very preliminary estimates indicate that
the credit proxy will show some expansion in April.
1/ The report, "Money Market and Reserve Relationships,"
prepared for the Committee by the Board's staff.
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The credit estimates, and interpretation of
a proviso clause, may pose some difficult problems
in the weeks ahead. Presumably, the Committee would
wish to avoid a sharp decline in bank credit, partic
ularly if accompanied by strong pressures on financial
markets, but any significant relaxation of day-to-day
money market conditions could generate market suspicions
that the System was drawing back from a policy of sus
tained restraint. On the other side, a credit decline
that proceeds unchecked for long could lead to market
expectations that the System was ready to countenance
At some point, if pressures
a severe credit "crunch."
become extreme, it may become desirable to consider
modification of Regulation Q as an alternative to
relaxation of money market conditions. Fine tuning
of money market conditions to provide for moderate
credit growth may indeed be difficult to achieve, and
a highly flexible approach may be necessary.
In this context, the Committee's interpretation
of the proviso clause of the directive is of consid
erable importance for the weeks just ahead. One
possible interpretation would be to permit considerable
leeway for a stronger proxy than is currently projected
before implementing the proviso on the tighter side.
On the other hand, the proviso might be implemented on
the somewhat easier side if the decline in the proxy
approaches the lower end of the currently projected
range. Any move towards somewhat easier money market
conditions triggered by a substantial decline in the
proxy might have to be tempered if the market began
to suspect that the System was turning away from a
policy of over-all restraint.
As far as open market operations in the weeks
ahead are concerned, a flexible approach appears to be
called for. Current projections do not call for much
in the way of reserve supply, but there may be room for
some judicious run-off of our heavy holdings of maturing
Treasury bills, thereby opening up room for modest
purchases of coupon issues that could assist the banking
system in making liquidity adjustments.
As far as the Treasury is concerned, the results
of the February refunding illustrate once again the
difficulties of Federal financing in an inflationary
atmosphere. Attrition was heavy and bank and dealer
underwriting minimal in the light of uncertain interest
3/4/69
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rate expectations. The Treasury will have a major
undertaking on its hands to increase the average
maturity of the debt, as it would clearly like to
do. The best hope--barring a major break in infla
tionary expectations and pressures--is through some
change in the interest rate ceiling that would permit
advance refundings once again. It is encouraging that
the Treasury has indicated its intention to press for
new legislation in this area.
As you know, the Administration is also seeking
a change in the debt ceiling. I understand that
hearings are scheduled to begin tomorrow in the Ways
and Means Committee. There is, of course, no guarantee
of action before the seasonal problem emerges in April.
The Treasury still expects to need about $2 billion in
cash in April, although Federal Reserve projections of
the Treasury's cash position are more optimistic than
the Treasury's own forecast. Treasury projections
would still indicate that the twin problems of cash
needs and debt ceiling might require special recourse
to the Federal Reserve some time during April.
Mr. Mitchell observed that market psychology and the
market's interpretation of System policy seemed increasingly to
be influenced by changes in M1--the money supply narrowly defined.
The staff currently was projecting a 6 to 9 per cent rate of
expansion in the money stock in March as a result of an expected
sizable decline in the Treasury cash balance.
He wondered what
sort of defensive operations the System might undertake to offset
or neutralize the flow of Treasury funds into private deposits
and what the resulting impact on other money market indicators
might be.
Mr. Holmes replied that he found it hard to answer that
question since it was often more difficult to anticipate short-run
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3/4/69
movements in the money stock than in other monetary aggregates.
In any event, he did not think the market tended to focus pri
marily on changes in the money stock; market expectations were
importantly influenced by changes in interest rates as well as
by those in other aggregate measures.
At the moment, the dominant
attitude in the market was that pressures were bound to increase
as CD attrition continued.
In adjusting to that attrition many
banks had already run through their short-term assets and were
beginning to dispose of intermediate-term securities.
Mr. Mitchell then noted that Mr. Holmes had suggested the
possible desirability of some modification of Regulation Q ceilings
if pressures in the money market became severe.
In recent weeks
there had been a net inflow of funds from the Euro-dollar market,
but continued availability from that source could not be predicted.
Assuming the Euro-dollar well ran dry, it might become necessary
to encourage member bank borrowing from the System or to raise
Regulation Q ceilings in order to provide some relief to the banks
without easing money market conditions.
If that were done, however,
the System would lose ground in its efforts to control bank credit.
Thus, he returned to his original question about what could be
done to control M 1
Mr. Holmes replied that in his opinion it was not feasible
to attempt direct control of short-run movements in the money stock.
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3/4/69
The Desk could, of course, be instructed to tighten money
market conditions each time M1 seemed to be expanding too
rapidly and to ease such conditions in the opposite situation.
However, efforts at close control over short-run fluctuations
in M 1 could involve drastic medicine.
He noted in that con
nection that the New York Bank staff was tentatively projecting
that the rapid run-up in M1 in March would be followed by a
decline in private demand deposits at a rate of around 14
per cent in April.
Mr. Maisel observed that fluctuations in Treasury cash
balances accounted for the bulk of the short-run movements in
the money stock.
Accordingly, if movements in M1 were the
basic problem to be resolved, serious consideration should be
given to turning over the management of M1 to the Treasury or
at least to getting the Treasury to cooperate in such management.
Mr. Mitchell noted that the System was continually en
gaging in defensive open market operations to offset undesired
effects of various developments.
Defensive operations could
also be undertaken to offset movements in Treasury cash balances
if the latter were creating fluctuations in M1 that had unwanted
effects on the market's interpretation of System policy.
Mr. Daane remarked that it was important to consider the
impact of operations not only on M 1 but also on reserves.
As
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3/4/69
Mr. Holmes had implied, actions to keep M 1 under control could
produce undesirable consequences for reserves and bank credit.
Mr. Mitchell commented that the solution to that problem
would seem to be to raise Regulation Q ceilings, although there
might be questions about the appropriate timing of such an action.
Mr. Brimmer asked whether his impression was correct that
projections of bank credit had tended to prove less reliable re
cently than in the past.
The Manager had noted that the increase
in the adjusted bank credit proxy in February--at a 2 per cent
annual rate--had become evident only on the last day of the month.
At the time of the last meeting of the Committee the February
projection, which appeared to have been offered with a reasonable
degree of confidence, had been for a decline in the adjusted proxy
at a zero to 3 per cent annual rate.
Mr. Holmes replied that the magnitude of the recent re
visions did not seem unusual to him.
At the same time, the weekly
changes in the projections for a particular month--which often
were in opposite directions in successive weeks--highlighted the
danger of moving to implement the proviso clause as soon as a
revision in the projection suggested that bank credit was deviating
from earlier expectations.
Mr. Brimmer noted that the possible need for an increase
of Regulation Q ceilings had been suggested.
He wondered how the
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potential benefits of such an action could be reconciled with
the possible undesirable effects on market psychology.
Mr. Holmes indicated that it was difficult to evaluate
the benefits and costs of such an action under current circum
stances.
At the moment market expectations seemed to be poised
to move in either direction.
An increase in the prime rate
could, for example, trigger aggressive selling of securities
and quickly lead to a crunch.
He personally did not expect a
crunch to develop in the period ahead, partly because banks had
been doing a good job of anticipating tax-date pressures; given
the prevailing uncertainties, they had been managing their money
positions cautiously, which was all to the good.
The possibility
remained, nevertheless, that market pressures could increase to
the point at which some type of relief might be required.
Mr. Brimmer observed that in his recent conversations
with bankers around the country he had formed the impression that
the word "crunch" currently meant something other than it had in
1966.
Today it seemed that the word was used to refer to a
situation in which it was necessary for banks to sell coupon se
curities at a loss in order to meet loan commitments.
Mr. Holmes indicated that banks were already being forced
by the large CD attrition to sell securities at a loss, and such
adjustments were becoming more difficult and more expensive for
them.
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Mr. Brimmer commented that in his judgment such a
development had been intended under current monetary policy.
The more losses banks experienced on sales of securities, the
more pressure they would be under to make adjustments in their
lending operations.
Mr. Hayes said he thought Mr. Brimmer's observation was
correct up to a point, but determination of that point was quite
difficult.
If carried too far, a policy of restraint could result
in a flood of securities being sold into an unreceptive market;
in that connection the municipal market might be particularly
vulnerable.
Moreover, there could be highly undesirable con
sequences in terms of market psychology.
By and large, borrowers
had responded calmly thus far to indications that monetary policy
was getting tighter; there had been no repetition of the devel
opments of 1966 when a surge of requests for banks to honor firm
loan commitments had snowballed into a panicky market atmosphere.
In his view it seemed desirable to maintain firm but steady
pressure in order to minimize the risks of such developments.
Mr. Hickman commented that while the projections indi
cated that the money stock would grow rapidly on average in March,
they showed little change between the end of February and the end
of March.
To avoid a mistaken psychological reaction in the market
to the higher average level of the money stock in March, it might
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3/4/69
be desirable to offer an official explanation--possibly in the
form of a speech--of the temporary nature of the expansion and
its relation to movements in Treasury cash balances.
By unanimous vote, the open
market transactions in Government
securities, agency obligations,
and bankers' acceptances during
the period February 4 through
March 3, 1969, were approved,
ratified, and confirmed.
The Chairman then called for the staff economic and
financial reports, supplementing the written reports that had
been distributed prior to the meeting.
Copies of these materials
have been placed in the files of the Committee.
Mr. Brill made the following statement concerning eco
nomic developments:
While we are all grateful for even fragmentary
indications that some steam is being let out of the
boom, I for one would be a lot more comfortable about
the ultimate success of our restraint program if the
evidence of slowing was a little broader and not so
largely confined to the consumer sector.
By and large,
businessmen seem less concerned with current indications
of slowing in final demands than with prospects of re
surgence in the future and with the pressure of rising
wage costs on their profit margins.
But there can be little doubt, any longer, that
the consumer is not a source of economic strength.
The January pick-up in retail sales did not carry very
far; weekly sales data for February suggest no further
rise, and perhaps a slight decline. While the flu and
bad weather probably play a small part in this, the
underlying factor has been the slower growth in dis
posable incomes and the prospects of continuing large
tax bites in the months ahead. These more basic factors
are being reflected in recent surveys of consumer
3/4/69
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attitudes and spending plans, which do not offer
the likelihood of a resurgence in consumer demands
in the near future.
So far, the principal recognition, at the
business level, of the protracted drifting off in
consumer demands has been in the auto industry,
where sales have been slipping since last fall.
In both January and February, auto output was cut
short of original production schedules. Despite
this, inventories of new cars have risen, and March
production schedules have been cut back sharply from
those announced earlier.
There is a possibility that producers of other
consumer goods may be falling in line. The infor
mation on manufacturers' inventories for January,
just received, indicates that producers' stocks of
nondurable goods and of consumer durables other than
autos were reduced significantly in January. Overall,
the rise in manufacturers' inventories was very small,
following the large increase in December. So some
business adjustment may be under way. But continued
production increases in lines such as appliances and
furniture make one leery of broad assessments.
One other area of adjustment is worth noting.
Prices of consumer industrial products--at wholesale
and retail--have been rising at a slower pace since
last fall than the general price indexes. This is
especially marked at the wholesale level, where the
increase in consumer goods prices since October has
been at an annual rate of less than 1 per cent,
compared with the 4.0 per cent rate of rise for all
industrial commodities.
But these bits of evidence that slowing at the
consumer level is working back to influence some
producers' behavior are outweighed by the many in
dications that the business sector as a whole is
still orbiting in a different plane. Demands for
labor are strong, with much of it--we suspectreflecting hoarding of scarcer skills. For many
materials and products, there is little reluctance
to test the market with announced price increases.
And, probably most significant, business plans for
capital spending appear strong. I don't put much
credence in some of the private surveys, which
appear to be mainly advertising vehicles for their
3/4/69
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sponsors, without much attention to standards of
statistical reliability and without good track
records. But one of the more reliable--the NICB
survey of capital appropriations by large manu
facturing companies--recently showed great strength
in new appropriations and appropriation backlogs.
In light of this survey, and the confidential
Commerce survey reported to you earlier, it will
be surprising if the upcoming official survey, due
in a week, indicates any slackening in business
demands for capital goods.
The continuing dichotomy between consumer and
business behavior poses a serious problem for policy
makers. So long as businessmen doubt the ultimate
success of stabilization policies, they will continue
to add to demands for materials, machinery, and labor,
keeping up the pressure on prices and wages. Cer
tainly, the business and financial communities--aided
and abetted by an aggressive financial press--will
be alert to the slightest move in any financial
variable that conveys a hint that policy is backing
away from restraint.
But in our concern to succeed in cooling-off
the economy, we can't lose sight of the cumulating
financial effects of the restraint exercised so far,
and the impacts these will have, with a lag, on the
real economy. It seems to me that the present stance
of policy, if continued, could generate more financial
restraint than we need or could afford for the longer
term. Even if last fall's growth rates of bank credit
were too rapid, we can't restore economic equilibrium
by averaging past excesses with current contraction.
The trick is to get back on a moderate credit growth
path, and then stay there until some results are
achieved in the real economy.
Thus, I approach with trepidation a policy
estimated to result in a significant further contrac
tion in bank credit in March. I smell "crunch" in
the air. This, I submit, would be a failure, rather
than a success, of policy making.
On the other hand, it is hard to find enough
economic signals to support the thesis that the time
has come to ease up overtly on the monetary reins.
Perhaps what we need is a combination of actions,
designed to permit some resumption of bank credit
Such
flows but at higher costs to all participants.
-58-
3/4/69
a combination might include higher reserve requirements
throughout the banking system, higher Q ceilings, and
a higher discount rate. It would not be inconsistent,
I believe, with the policy objective outlined in the
staff's February projection: it would avoid a complete
drying up of bank credit, but would limit the potential
expansion and make it more costly.
But such a package would be strong medicine, indeed,
and probably ought to be regarded as an emergency measure
to avoid a complete blockage of fund-flows through the
banking system during a period when a severe posture of
monetary restraint must be maintained. If we can get
through the next few weeks without having to call up
all this artillery, so much the better. Some elements
of the package might still be useful in countering too
much downward pressure on rates in early spring, when
markets may begin to anticipate Treasury debt repayment.
Mr. Axilrod made the following statement regarding financial
developments:
Financial markets remain perplexing, though perhaps
somewhat less so than several weeks ago. The policy of
monetary restraint being pursued by the Federal Reserve
has had an increasing impact on markets, and few financial
observers appear any longer to question our determination.
On the other hand, there is some question, on the part of
banks particularly, about how long and how far the current
policy can be pursued without tending to something in the
nature of a "crunch", and thus requiring some restructuring
in existing relationships among Federal Reserve monetary
policy and regulatory instruments. But any such need does
not depend only on the impact of existing Federal Reserve
policy. It depends also, and importantly, on the intensity
and structure of credit demands and on market psychology.
Thus, perhaps the most helpful analysis to offer the Com
mittee, at this point, is to attempt to sort out demand
forces, supply constraints, and psychology, although
recognizing that the three are not mutually independent.
On the demand side, the recently available flow-of
funds data make it clear that private credit demands
continued to be very strong through the fourth quarter.
Consumer credit, bank loans to businesses, corporate
security issues, and mortgages all showed as much or
more strength than in the third quarter. The Federal
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Government, meanwhile, was the principal source of
lower credit demands, as its fourth-quarter borrowing
was at a less than seasonal pace.
The rapid pace of fourth-quarter private borrowing
may not have been fully maintained into early 1969, al
though the partial nature of the data thus far available
and the difficulties in evaluating seasonal influences
in the financial area make this judgment very hazardous.
State and local government bond offerings appear to be
moderating somewhat under the pressure of cancellations
and postponements, and the gradual slowing of consumer
instalment credit expansion that began in late 1968 seems
to be continuing. In the corporate bond market, the
volume of new issues has at least not shown a tendency to
build up significantly. And businesses do not yet appear
to be taking down the sizable overhang of bank commitments
in any accelerated fashion, though their actual rate of
borrowing has continued on the strong side. Mortgage
credit demands remain high.
While private credit demands may not be burgeoning,
any weakening thus far is probably only modest at best.
Thus, with Federal Reserve policy restricting the growth
of bank reserves and bank credit to close to zero and
leading to a further slowing of net inflows of funds to
thrift institutions, interest rates so far in 1969 have
generally returned to around advanced levels reached in
late 1968 or early 1969, or have moved upward. It has
been mostly long-term rates that have risen above earlier
peaks, with the largest rise in mortgage yields and the
next in interest rates paid by State and local governments.
The rise in long-term rates reflects in the main
adjustments that are being made by institutional lenders
to the reduced supplies of funds. Because of limited in
flows of funds, thrift institutions have charged higher
interest rates on mortgage loans; to lock in these high
yields they have also continued to increase their commit
ments, with the result that a substantial potential demand
on Federal Home Loan Banks has built up. Potential
demands on FNMA have also been built up to substantial
size as lenders have bid aggressively for forward
commitments of funds.
With respect to banks, major reporting banks have run
through a considerable amount of liquidity since the CD
run-off began in December, with the result that they have
found it increasingly necessary to withdraw from the
3/4/69
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municipal market, sell longer-term U.S. Government securi
ties, and stiffen their attitude toward mortgage lending.
In addition, of course, they have tightened lending terms
and conditions on business loans, as the mid-February
Lending Practices Survey shows. However, this tightening
of lending terms to business, while it may have affected
some marginal borrowers, does not appear to have been so
severe as to have caused a pick-up in demands in corporate
bond markets.
The failure so far of the corporate bond calendar to
build up is not just a reflection of banks' continued
efforts to hold on to corporate customers, however. It may
be that some of the edge is now being taken off infla
tionary expectations, and that businesses do not see an
urgent reason to anticipate their longer-term credit
needs, although we do not have figures yet that would
suggest spending plans have been revised down. The
recent stock market decline may be a little harder evi
dence of moderating expectations, with more of the public
coming to believe that monetary policy is biting and that
a more noticeable slowing in economic expansion is becoming
likely.
This brief review of recent tendencies in demand,
market psychology, and supply suggests a modest abatement
of demand from a few private sectors, and the hesitant
beginnings of less exuberant market attitudes. But both
such developments are tenuous as of now. For instance,
the recent upward revisions in bank deposits and money
supply data may suggest that credit and transaction
demands have been a little larger than were folded into
earlier daily and weekly projections.
If we are to be more certain of constraining demands
and moderating an over-ebullient psychology--as is
desirable--this would appear to depend on the feedback on
psychology and credit demands of continued stringency in
the supply of funds. Continuation of the present course
of monetary policy for at least one more meeting--even in
the face of a projected bank credit contraction in Marchwould contribute to this end. By spring the outlook is
still for some decline in short-term interest rates when
Treasury net debt repayment at last develops and as
economic expansion continues to slow--at least as projected
by the staff. Such developments, if they eventuate, would
present an occasion for policy to permit somewhat less
stringency in short-term markets, but with the relaxation
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kept modest enough so as to minimize the risk of undoing
progress toward reducing inflationary pressures.
Maintenance of the present course of policy until
that time has some risks, however. Loan demands on banks
could prove strong enough in March and around mid-April,
when they will be bolstered by needs to meet tax payments,
to force banks to bid even more actively for Euro-dollars
or to undertake strenuous adjustments in their portfolio
of longer-term securities, with resulting serious conges
tion in longer-term markets. Such a problem, if it should
develop and threaten highly adverse psychological
repercussions in all financial and goods and services
markets, could be ameliorated in the short-run by addi
tional System reserve provision, including purchases
outside the Treasury bill area. This might be associated
with a higher short-run money supply growth--and in any
event the average level of the March money supply is
expected to be well above the February average--but still
total deposits are weak. Another alternative would be to
bring other monetary instruments into play, as suggested
by Mr. Brill, thereby permitting more of a flow of bank
credit, though at higher interest costs. Whatever approach
is taken, the negative bank credit projection for March
suggests to me that there may be room for some additional
reserve supply without leading to any significant resurgence
of inflationary attitudes.
Mr. Solomon made the following statement on international
financial developments:
At its last two meetings, the Committee has been
given projections of the U.S. balance of payments for
1969--projections that show what we have called a
tolerable outcome for the year. We have stressed that
this outcome is dependent on certain conditions that are
not likely to persist beyond 1969. Specifically, our
imports will increase less this year than we would expect
in a normal year of healthy non-inflationary growth. Our
interest rates will be higher this year than we would
expect year in and year out in the future. And the
restraints on capital outflow--the IET and the Commerce
and Federal Reserve programs--may be more stringent this
year than can be expected in the future. We know that
the Administration is very anxious to relax these con
trols and that a first step in this direction will
probably be taken soon.
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It may be useful to ask ourselves a number of
questions regarding what we can expect of the U.S.
balance of payments beyond 1969, when these special
favorable factors may not be operative. We should also
ask what sort of balance of payments we should aim at
in the future. One purpose in asking these questions
is to ascertain whether new policy initiatives will be
required to cope with the balance of payments.
A major question concerns the trade surplus. Here
several sub-questions arise. Have we lost significant
competitiveness as a result of the price advances of the
past three years? The relatively favorable performance
of our exports seems to point to a negative answer, but
our import performance seems to say yes, though here it
is terribly difficult to separate price effects from
income effects and from the effects of changing consumer
tastes. We simply do not know how much the rate of
growth of our imports will subside when aggregate demand
returns to a normal rate of expansion. In particular,
we do not know whether the growth of our exports will
significantly exceed import growth when the economy
resumes a non-inflationary rate of expansion and there
fore whether the trade surplus will increase. We must
certainly face the possibility that, when a normal rate
of expansion resumes after the cooling-off period that
we hope we are now entering, our trade surplus will look
quite small as compared with what it was in the mid-1960's.
This in turn leads to another question. Given the
recent ability of the United States to attract capital
from Europe, should we perhaps content ourselves with a
smaller trade surplus than we earlier thought we needed?
given what
Another way of asking this question is this:
appear to be persistent large current account surpluses
in Italy and Germany and given the need for the U.K. to
achieve a substantial current account surplus, is it
reasonable for the United States to expect to enlarge
its current account very much? Not everyone can be
above the average, and not.everyone can be in current
account surplus. If European investors continue to find
American securities attractive--while at the same time
the United States invests private and public capital in
Europe and the less-developed countries--it might make
sense for the United States to reconcile itself to a
smaller net capital outflow and a smaller current account
surplus than we earlier thought was appropriate. Such a
balance of payments structure need not be incompatible
with an ample flow of capital from all developed countries
together to the less-developed world.
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In considering these two possible balance of pay
ments patterns--a smaller or a larger current account
surplus--we must take account of the balance of payments
aims of other countries and must assess our own ability
to influence other countries' policies, in addition to
asking what policies we must follow. For example, if
we believe that, for a variety of reasons, the United
States should have a substantial surplus on current
account--as in the mid-1960's--we may have to consider
policies that improve our international competitive
position. Since we cannot expect to roll prices back,
this inevitably faces us with the exchange rate
question or, as a possible alternative, the border tax
question. Yet we cannot determine our exchange rate
unilaterally. Here again we run into the aims of other
countries.
On the other hand, in assessing the viability of
our balance of payments with a smaller trade surplus,
we must ask what policies we would need to follow in
order to assure a continuing capital inflow from Europe
and a not excessive capital outflow from the United
States. We are still unsure of the sustainability of
the surge in 1968 of foreign purchases of U.S. stocks,
even though, incidentally, the inflow rose to $300
million in the month of January. We also need to con
sider whether there are implications for future monetary
policy in choosing to aim at a balance of payments
structure with a small net capital outflow.
A related set of choices concerns the existing
restraints on U.S. capital outflow. I would judge that
the real costs of these restraints to the nation and to
the world have up to now been rather small. And they
have provided benefits by stimulating the development of
an international capital market in Europe. Yet these
measures are obviously irritating and odious to the busi
ness community. It is uncertain whether a substitution
of market-oriented capital restraints--similar to the
IET--for the present Federal Reserve and Commerce programs
would be more palatable.
In any event if it turns out that the United States
is unwilling for long to maintain Governmental restraints
on private capital outflow, we are faced once again with
adopting policies either to enlarge the current account
or to attract even more foreign capital in this direction.
Up to now I have focused mainly on questions about
the future structure of the U.S. balance of payments. We
can ask still other questions regarding the over-all
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balance of payments position of the United States and
other countries. One problem that will hang over our
heads for some time will be the large volume of Euro
dollar liabilities that we have incurred in the past
three years. American banks owe about $9 billion to
the Euro-dollar market through their branches.
If
interest rate relationships should change drastically
as between the United States and Europe, we may face a
flood of dollars out of private hands into the reserves
of European countries. We might then be considering
selective devices to induce U.S. banks to retain these
funds as an alternative to tighter monetary policy than
would be needed for domestic reasons.
Assuming we do not have to face the problem of a
massive return flow of Euro-dollars and are able to
maintain an official settlements balance of payments
within a range of, say, plus or minus $1 billion, there
is a real question whether the world can achieve a
durable equilibrium without the early creation of SDR's.
This is so because Britain must achieve a surplus on
official settlements in order to repay debt, which will
reduce other countries' reserves. Many countries in
side and outside Europe normally gain reserves each
year. Unless reserves are created, it is hard to avoid
a situation in which the surpluses that countries aim
for do not exceed the deficits that other countries are
able and willing to sustain. This is the conclusion to
which Working Party Three seems to be coming.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Hayes, who made the following statement:
While recent developments in the economy have been by
no means uniformly exuberant, there is still no conclu
sive evidence of a substantial and pervasive slowdownalthough some moderation in the rate of advance seems
likely to occur this year. Consumer spending seems to
be the major area where slackening is visible, and this
could lead to some need for inventory adjustment which
could spread the effects of the weaker retail buying to
other sectors. So far, however, whatever inventory
excesses may have developed appear to be of modest
proportions. There is no assurance that retail sales
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will remain weak or that offsetting strength will not
materialize from other sources. And we have made no
progress so far on the price front, although the recent
performance of the stock market suggests that infla
tionary psychology may be a shade less dominant than
it was a few weeks ago.
The latest balance of payments projections look
to a worsening of the over-all balance in 1969, with an
expected improvement in the trade surplus likely to be
more than offset by a deterioration of the capital
balance. Of course, even the trade improvement that
is projected depends largely on a visible dampening of
the business expansion in the United States. The
Euro-dollar market has become appreciably tighter
under the influence of a reduced supply in the face
On the
of continued heavy demand from American banks.
other hand, the supply is being replenished to some
extent by our continuing heavy liquidity deficit and
by some loss of central bank reserves. The exchange
markets have been active, with the dollar generally
strong.
Increasing monetary restraint and the sharp rise
in market interest rates have produced a dramatic
turn-around in bank credit and deposits.
Such a
turn-around, if not carried too far, can only be
welcomed after last year's excessive credit expansion.
The zero growth rate for the proxy--after adjustment
for Euro-dollars--in January and February no doubt
strikes most of us as quite appropriate. On the other
hand, the March projection of a 3 to 6 per cent dropeven if highly tentative--may raise a question whether
we may be pressing too hard. However, any worries
over this projection should be tempered by two con
siderations. First, a temporary run-down of Treasury
deposits will be one important cause of the March proxy
decline, if there is one. Second, we are perhaps
more skeptical than usual
justified in being a little
of the significance of the bank credit figures when
disintermediation may be resulting in a substitution
of other credit for bank credit, with perhaps little
or no effect on the total. My own inclination would
be not to be greatly disturbed by a negative figure
in March unless it is accompanied by an excessive
tightening of credit markets in general.
I recognize,
of course, that we would probably not like to see a
repetition of such declines in bank credit for several
months in a row.
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As long as we seem to be getting very tangible
results in the way of a slower expansion of the monetary
aggregates, it seems to me that we would do well to
hold to a steady policy, avoiding any changes that might
suggest either a weakening of that policy or a ruthless
disregard of the danger of a new credit crunch. With
respect to open market targets over the next four weeks,
I would suggest maintaining about the conditions that
have developed since the last meeting, even though
these are perhaps a shade firmer than we thought likely
at that time. This would imply roughly a Federal funds
rate around 6-1/2 to 6-3/4 per cent, member bank borrow
ings of $700 million to $1 billion, and net borrowed
reserves around $500 million to $700 million. The
three-month Treasury bill rate might fluctuate around
a 6 to 6-1/4 per cent range under these conditions 1/
In
The staff's draft directive looks fine to me.view of the importance of avoiding too abrupt a change
in bank credit, I would favor keeping the two-way
proviso clause, but I think its implementation could be
a very delicate matter, closely bound up with market
psychology. On the up side, there might well be con
siderable latitude for expansion--say a rate of increase
in the proxy of 5 per cent--before the Manager implemented
the proviso clause. On the down side, on the other hand,
I would be prepared to see the proviso implemented if
the lower end of the projected range seemed likely to
be attained, particularly if this were accompanied by
strong upward interest rate pressures. While advocating
retention of the proviso, I would nevertheless urge that
the working of the proviso clause should not be of such
a magnitude as to change basic market expectations. In
the event that a tendency toward a market tightness and
excessive bank credit shrinkage were to persist despite
modest use of the proviso clause, it might be well to
consider some increase in the Regulation Q ceilings.
Here again, however, there would be real risks that the
increase in ceilings might be interpreted as a major
easing of policy. Thus, the upward ceiling adjustment
might well have to be accompanied or followed by an
increase in the discount rate. All of these considera
tions are, of course, for the future rather than the
present.
1/ The draft directive submitted by the staff for consideration
by the Committee is appended to this memorandum as Attachment A.
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3/4/69
Mr. Morris recalled that at the past two meetings he had
expressed concern that the transition being made to a restrictive
policy might be too abrupt and severe for an economy in a
decelerating phase, even though the pace of that deceleration
was maddeningly slow.
Happily, his fears had not been realized
in January and February.
Instead of a contraction in bank
credit in those months, there had been a leveling off.
The
policy of restraint was being felt but, thus far, the change had
been orderly and a panic response from the market had been
avoided.
In January, Mr. Morris said, the new monetary policy had
been cushioned appropriately through the Euro-dollar market.
In
February, the projection had simply missed the target on the high
side in the closing days of the month.
February was the first
month since he had been on the Committee for which he considered
the actual results to be superior to the staff's projections.
In Mr. Morris' judgment, the current flow of economic
data did not yield a clear-cut picture of the pattern for 1969.
In such a context, it was particularly important for the members
to keep an open mind and to treat the economic projections with
the skepticism that even the best of projections so richly
deserved.
He thought that if one looked at the economy in a
Keynesian framework one had to be impressed by the divergent
trends over the past six months between private consumption and
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3/4/69
private investment.
In his judgment, those divergent trends
clearly could not be sustained beyond mid-year; if retail sales
did not move up from the plateau they had been on since August
1968, one could expect business investment spending plans to be
cut back in the latter part of 1969.
He was not forecasting
that such a sequence of events would in fact materialize, but
he thought the Committee had to be alert to the possibility
that private demand could be weaker in the last half of 1969
than current projections suggested.
Mr. Morris observed that the National Bureau's indicators
provided a similarly indecisive picture of trends in the economy.
He was happy to see that the staff had added to the green book1/
a brief section on leading indicators.
As the green book suggested,
the leading indicators had tended to level off since October, but
no real weakness had set in as yet.
Equally significant to a
dedicated National Bureau man was the very sharp rise in the
lagging indicators, a development characteristic of the closing
phase of a business expansion.
Thus, the performance of the
National Bureau indicators would be compatible with a forecast
of a weaker economy in the second half even though it did not
provide a firm basis for such a forecast at the moment.
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
3/4/69
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Mr. Morris said he thought the Committee, in formulating
monetary policy today,
should give considerable weight to the
fact that economic forecasting currently had more than the usual
hazards,
given the formlessness of the incoming data.
In
that
uncertain economic context he would support a monetary policy
which could be described as substantially but not severely
restrictive, the language used by Chairman Martin in his recent
testimony before the Joint Economic Committee.
He thought the
policy pursued in January and February had been of that character.
One dimension of that restraint--not mentioned in the staff
reports--was that there occurred a sharp resurgence of loans
against insurance policies in
the month of January.
The Boston
Reserve Bank's survey of ten large New England life insurance
companies showed that policy loans rose by $33 million in the
month of January, the largest monthly increase since 1966.
That
suggested a possible trend toward higher loans which would soon
be reflected in reductions in the liquidity of insurance companies.
Mr. Morris felt that the policy of restraint of the past
few months had put a dent in inflationary expectations, as the
stock market decline indicated, but had not yet shattered those
expectations.
By and large, professional investors appeared to
have moved to the sidelines; they were not buying stocks but
neither were they engaged in
massive selling, which suggested
that their confidence had not been severely weakened.
The only
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net buyers of stocks recently seemed to be the odd-lotters, and
of course they were always the last to get the word.
In sum, he
thought progress was being made in eroding inflationary expecta
tions.
In establishing a policy for March, Mr. Morris said, the
Committee had to give weight to the fact that monetary restraint
was certain to bite more sharply than in January and February
because the easy adjustment mechanisms available to banks had
been largely used up.
Future adjustments would be more painful.
In that context, there arose the question of how to define a bank
credit proviso so as to produce substantial but not severe
restraint.
Clearly, that was a matter of judgment rather than
scientific calculation.
His own judgment would be that the Com
mittee should aim for a less restrictive bank credit target than
the 3 to 6 per cent rate of decline projected for March.
His
preference would be for a one-way proviso guarding against
downward deviations from the projection.
However, he could
accept the draft two-way proviso if it was interpreted in the
manner suggested by Mr. Hayes, which seemed to amount to about
the same thing.
Mr. Coldwell observed that economic activity in the
Eleventh District was still at a high level.
Industrial produc
tion was down slightly but employment was stronger than seasonal.
Unemployment was at minimal levels, especially in the large
3/4/69
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cities.
For example, the unemployment rate in Dallas was now
1.1 per cent, which meant in effect that workers were not avail
able.
The evidence suggested that retail trade was still strong
in the area.
Price increases affecting a very wide range of goods
and services were becoming a number one topic of conversation and
were impressive by any recent standards.
Mr. Coldwell said that bank loan demands in the District
were very strong, especially business loans.
The liquidity of
some banks was declining, but borrowings through CD's and from
the Reserve Bank and recourse sales of loans and securities were
providing funds to large banks, while country banks generally
were in excess reserve positions.
Borrowings from the Dallas
Reserve Bank had doubled over the past four weeks.
In addition,
District banks had sharply increased their daily net purchases
of Federal funds.
Mr. Coldwell reported that a survey taken last week of
14 large savings and loan associations with about $1-1/2 billion
of savings showed a savings inflow of $3.3 million since the end
of 1968.
Of the 14 associations, five indicated that their
savings inflows were substantially less than a year earlier.
Similarly, five said their current volume of new commitments was
below a year ago, with three indicating that the level was sub
stantially lower.
Nevertheless, the associations seemed to be
in much better shape than in 1966, and despite some slowness of
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3/4/69
savings inflows they were more troubled by the possible future
impact of high interest rates than by their current situations.
Turning to national conditions, Mr. Coldwell remarked
that while modest progress had been made in slowing the economy
that progress was insufficient.
Capital spending was still ad
vancing, consumers were still fundamentally optimistic, and
speculative activity was very strong, especially in real estate.
Wages,
costs, and prices were going up rapidly.
Strong infla
tionary expectations were still forming the basis for business
and consumer spending decisions.
It
seemed to him that before
concluding from recent data that the economy was cooling off, one
should take account of the various temporary factors that had had
adverse effects on consumer spending, production,
and earnings.
overtime worked,
Those factors included the influenza epidemic, bad
weather, strikes, and transportation tie-ups.
In his judgment
there was a distinct possibility of a rebound in activity in the
spring.
With regard to financial developments, Mr.
Coldwell
observed that the margins of available funds at banks were narrow
ing, but in the main they were basically adequate to meet even
strong business loan demand.
Pressure on reserves was being
accommodated by reducing liquidity or by borrowing.
Activity
was at advanced levels with respect to Euro-dollars,
Federal
funds, and discounting.
In addition, larger banks were selling
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3/4/69
securities on a repurchase basis and selling participations in
loans to country banks.
However, the pressures on banks had not
been sufficiently great to cause major changes in lending poli
cies.
Loans were being made to bank customers even for speculative
purposes.
Mr. Coldwell believed that while progress had been made
under recent monetary policy, businessmen still had not been
convinced that inflation would not bail them out of rising costs.
As a result, wages and prices continued to rise.
What was needed
was further visible evidence of monetary restraint, but in moderate
proportions.
He favored an increase of 1/4 percentage point in the
discount rate, partly because it would represent a moderate action
and partly because the current rate was out of line with the
market and might be encouraging borrowing.
A discount rate in
crease also would give recognition to the fact that the market was
leading the way toward higher interest rates.
As a visible move,
it would strengthen convictions that the System was committed to
restraint and itmight convince some speculators and others that
inflation at an increasing pace was not inevitable.
In sum, Mr. Coldwell said, he would recommend a 1/4 per
centage point increase in discount rates with supporting open
market action to further restrain the economy in a moderate,
steady, and slowly increasing fashion.
To implement such an open
3/4/69
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market policy,
targets at the upper end of the ranges given in
the blue book 1/ would seem acceptable.
He could support the
directive as drafted, except that he would propose a clarifying
addition to the statement on bank credit in the first paragraph.
Specifically, he suggested amending the statement to read:
the first
"In
on
two months of the year bank credit changed little
average, as investments contracted while loan demands, especially
from businesses,
shown in
remained strong."
The remainder of the sentence
the draft would then be included as a separate sentence.
Mr.
Swan reported that the unemployment rate in
Pacific Coast states had turned out to be the same in
the
January
as in December--4.2 per cent--despite the increase in unemployment
insurance claims that he had noted at the last meeting.
claims had continued to rise in
There was a sharp drop in
the first
Such
two weeks of February.
housing starts in
the West in
which undoubtedly was related to bad weather.
January
The weather also
limited lumbering activity and contributed to the recent soaring
of lumber prices.
District banks were coming under some pressure,
continued.
Mr.
Swan
Borrowings from the Reserve Bank had risen, especially
"A
1/ The blue book passage referred to read as follows:
3-month bill in a 6-6.25 per cent range might be consistent with
a Federal funds rate averaging in a 6-3/8 - 6-5/8 per cent range,
with member bank borrowings in a $700 - $900 million range, and
net borrowed reserves in a $500 - $700 million range."
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3/4/69
in
the last two weeks.
Paradoxically,
District banks as a group
remained net sellers of Federal funds, but that was entirely due
to the position of one large District bank; the other banks
were net purchasers.
He had found support in recent conversa
tions with bankers for the conclusions of the Bank Lending
Practices Survey; banker attitudes toward monetary restraint
were finally beginning to change and bankers were becoming
somewhat concerned about their ability to meet prospective business
loan demands.
A check with the Reserve Bank's sample of five
large California savings and loan associations indicated some
increase in savings accounts in February, but if the sample were
blown up to a total the rise for the month apparently would be
somewhat less than in February 1968.
Turning to policy, Mr. Swan said he shared some of the
concerns expressed about the projected decline in
the bank credit
proxy in March, but he hoped the Committee could avoid an overt
policy change in
either direction at this time.
Mr. Brill had
proposed an interesting package of policy measures which could
result in somewhat higher interest rates and some expansion in
the availability of funds.
However,
he (Mr.
Swan) hoped it
would
prove possible to get through the next few weeks without taking
such measures, since they could lead to the provision of somewhat
more funds to the market than was desirable.
While he would
prefer a slightly different course for bank credit in March than
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that projected, he would not object to another month of leveling
off or modest decrease and he would not like to see market con
ditions eased in
In
order to achieve an upturn.
terms of his policy prescription,
Mr.
Swan remarked,
he came out about where Messrs. Hayes and Morris had.
He could
accept the draft directive, but he would advocate an asymmetrical
interpretation of the two-way proviso under which the Manager
would be instructed to modify operations promptly if bank credit
was approaching the lower limit of the projected range, whereas
no action would be called for on the upside unless there was a
significant deviation above the upper limit.
Mr.
Galusha said he was happy to report that the end of
nonpar banking in
the Ninth District was now definitely in
as the result of several years of effort.
A few days ago,
sight,
the
Governor of North Dakota--the last of the District's nonpar
states--had signed a bill making par clearance mandatory as of
July 1,
1971.
There was some evidence that the Ninth District economy
was presently growing a little
Mr. Galusha continued.
less rapidly than earlier,
Also, according to the Reserve Bank's
most recent survey, District manufacturers were now a shade less
optimistic than before; sales were up 12 per cent, year-over-year,
in
the previous quarter and the expectation was for a 9 per cent
increase in the current quarter.
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Surprisingly perhaps,
Mr.
Galusha added,
construction industry was continuing on its
for how long was anybody's guess.
the District's
merry way,
although
Construction employment was
up sharply in January; so too was the total of building permits.
Loan commitments of savings and loan associations had also in
creased, if slightly, despite a more-than-seasonal decrease in
total liabilities.
Among District weekly reporting banks,
the decrease in
considerable:
large-denomination CD liabilities
in
January it
of maturing certificates,
Mr.
Galusha said,
had been
was 50 per cent of the dollar total
and in
February 40 per cent.
The
decreases should be about as great in March and April as in
February,
and some of the District's largest banks, who were
well aware of that, were clearly concerned.
The Reserve Bank
had already had several requests for rather large loans.
So far
the Bank's policy had been to lend smaller-than-requested sums
and to encourage borrowing banks to limit business loans.
a considerable search,
After
the Bank had found one instance of a
manufacturer postponing an expansion plan because of distasteful
loan conditions.
One swallow did not make a spring, but as the
end of winter approached in
Minneapolis one got his comfort
where he could.
Mr.
Galusha noted incidentally
that a few of the District's
country banks had reported outlying counties and school districts
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switching from time deposits to Treasury securities.
The rates
of growth of country bank total assets and time liabilities had
decreased somewhat.
But compared with city banks, country banks
were still in a relatively comfortable position.
As to Committee policy, Mr. Galusha said he had to confess
to getting a little nervous every time he compared bank credit and
money supply growth rates for November-December 1968 with those for
January-February 1969.
Whatever might be said, the System had not
"steadily and gradually" increased monetary restraint.
Very soon
its critics surely would again be decrying the System's erratic
behavior.
Nor was it clear how misguided such criticism would be.
But the Committee perhaps could delay a while longer before at
tempting to force slight increases in the rates of growth of bank
credit and certain other monetary aggregates.
It could delay
briefly and still be roughly on the course charted for it by
Mr. Brill and his associates at the Committee's last meeting.
The danger of delaying was clear, Mr. Galusha remarked.
Yet it was extremely important that the outlook be for relatively
modest increases in nominal GNP, not just in the first half of
1969 but in the second half as well.
A bearish medium-term out
look was required to change inflationary expectations.
This morning, then, Mr. Galusha said, he was for no change
in Committee policy.
He accepted as reasonable the monetary targets
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given in the blue book.
He was for the staff directive as drafted
and again favored a two-way proviso clause.
Mr. Galusha observed that he had perhaps already made
clear, by implication, how he felt about changing reserve require
ments and discount rates.
To be explicit, however, he favored
leaving reserve requirements as they were, at least for now; and
increasing discount rates, if at all, only after the prime rate
had been increased again.
ceiling rates unchanged.
Finally, he favored leaving Regulation Q
He granted, however, that increasing
ceiling rates for large-denomination CD's might soon be necessary,
if only to force a modest increase in rates of growth of certain
monetary aggregates--such as, for example, bank credit.
Mr. Scanlon reported that the general economic picture in
the Seventh District continued basically unchanged.
There was
some evidence of easier demand, especially for consumer durables,
and, hopefully, that would continue until there was some easing of
pressure on labor markets.
In most major District centers, labor
markets appeared to have tightened further.
In the Gary-Hammond
area, two important steel companies had begun to hire women for
production jobs, a development reminiscent of World War II.
Mr. Scanlon noted that price increases had been reported
much more frequently in January and February than a year ago, and
they applied to a wide range of both hard and soft goods.
A larger
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proportion of the purchasing agents in Chicago recently had
reported increases in prices paid and in production, employment,
inventories, and new orders.
They had indicated slower deliveries
from suppliers and more frequent complaints of quality-defective
goods--reflecting labor shortages or other production problems.
While the buildup of inventories might be somewhat on the excessive
side insofar as some consumer durables were concerned, his con
tacts with Midwest businessmen revealed that many found their
inventories low by past standards--so low as to hamper production
in some cases.
February auto sales had relaxed some of the uneasiness
that had been evident in that industry, Mr. Scanlon said.
A rise
in spending for new and used producer equipment appeared to have
gathered momentum, demand for construction equipment was up from
last year, and some manufacturers reported at least a temporary
pick-up in sales of farm equipment.
The demand for construction
equipment apparently had strengthened in both domestic and foreign
markets.
Orders for railroad equipment had increased sharply.
Shipments of heavy trucks and trailers were very strong.
Orders
for components of capital goods--such as drives, bearings, and
gears--had spurted since last fall.
Steel orders continued to be
better than expected, with a favorable order book now building for
March and April.
Orders had increased "across-the-board."
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Mortgage funds, of course, were extremely tight, Mr. Scanlon
continued.
Insurance companies had almost ceased to grant single
family mortgages in the District and had largely withdrawn from
the farm mortgage market in states having usury laws of 7 per cent
or less.
Policy loans had risen again.
The shift in housing
permits to multiple unit structures, with lenders commonly taking
an equity interest, had continued.
Mr. Scanlon commented that loan demand at District banks
appeared to have strengthened in recent weeks.
Nearly all of the
District's large banks in the Lending Practices Survey reported
business loan demand either moderately or greatly stronger than
three months ago and they expected that situation to continue
during the quarter ahead.
The recent growth in business loans had
not been so fast as in 1966, however.
The banks reported they were
screening out borrowers who were not their best customers, and most
of them reported that they were refusing certain types of loans,
charging more for the less desirable credits, and generally
rationing available funds.
Some of them indicated less willingness
to make term loans and mortgages, but only in one case did that
reluctance extend to consumer loans.
The current Survey produced
an unusually large number of comments to the effect that the demand
bankers saw was larger than they could accommodate with present
prospects for deposit growth, and there was a good deal of evidence
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of increasingly restrictive loan policies.
The weekly condition
reports showed that real estate and consumer loans had continued
to expand moderately thus far.
Mr. Scanlon observed that liquidation of Governments had
continued as the further run-off of CD's had been only partially
offset by Euro-dollar borrowings.
The large banks had not made
much use of the discount window, but the number of smaller bor
rowers had been rising.
The number of penalties assessed for
reserve deficiencies had been substantially larger than before the
change in Regulation D, probably because of the one-week reserve
period.
While banks could reduce liquidity somewhat further,
continued strong credit demands would indicate either some strin
gent rationing of credit or more business for the discount window.
As to policy, Mr. Scanlon believed that the Committee
should maintain a posture of persistent firmness at this point.
He would prefer slow and steady rates of monetary and credit
expansion.
He was not sure that that could be achieved within
the existing framework of ceilings on CD's because of the sizable
changes that tended to be associated with fairly small shifts in
bill rates above or below the Q ceilings.
Furthermore, the annual
report of the Manager of the Open Market Account indicated rather
impressively that the Committee had not been able to find a close
and meaningful linkage between money market conditions and the rate
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of growth of bank credit, which suggested that interest rates
probably would have to be relegated to a position of less im
portance in the Committee's instructions to the Manager.
In
turn, that placed a high priority on the work with respect to
the directive that had recently been undertaken by Messrs.
Maisel, Morris, and Swan.
Within the framework of the staff's projections of
bank credit and money for the first half of 1969, it appeared
to Mr. Scanlon that fairly substantial rates of expansion were
contemplated in the second quarter to achieve the projected
rates for the first half.
He would prefer that such changes
be fairly gradual, if that could be achieved.
The draft directive was acceptable to Mr. Scanlon.
Mr. Clay commented that price inflation remained the
principal economic problem in this country.
Thus far there
had been little evidence of improvement in the price inflation
situation.
In addition to the continuing price increases,
there was a disturbing pattern of large wage settlements that
would affect cost-price expectations and developments ahead.
Business spending and business spending plans were
indications of strong expansionary forces at work, Mr. Clay
said, and there was reason to believe that production cost
increases and price inflation expectations constituted
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important factors in those decisions.
Employment and unemploy
ment data further underscored the pressures on the economy, and
the increases in industrial production reflected the expansionary
tendencies,
The most significant development on the encouraging side,
Mr. Clay noted, was the slower pace of consumer spending, which
was so important a segment of the national economy. Many had
interpreted that as a forerunner of a readjustment in business
investment in both inventories and fixed capital outlays and a
lessening of pressure on resources and prices generally.
While
that sequence of developments might materialize, it had to be
recognized that such a course of events was by no means assured.
Mr. Clay thought it would be necessary to keep the pressure
of monetary restraint on the economy.
He said that with an aware
ness of the time lag for the full impact of monetary actions.
However, that view also was predicated on a judgment that the
price inflationary forces and expectations were probably much
stronger and less responsive to restraint than might be generally
assumed.
Error on the side of relaxation or inadequate restraint
would simply take the economy on yet another round of accelerating
cost-price inflation.
Mr. Clay said the shift in policy to a more restrictive
posture had brought substantial response in financial variables
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and probably in the public's understanding of the Federal
Reserve's determination to pursue such a policy.
It was too
soon to know what the impact would be on economic activity
and prices.
Continuation of present policy presumably would
have further financial effects, and it might be that it would
lead to more financial stringency than was consistent with
longer-term objectives.
For the present, however, it would
seem appropriate to continue monetary policy essentially
unchanged.
In view of the staff projection for bank credit,
it would be well to tolerate a smaller deviation on the down
side than on the upside before implementing the bank credit
proviso.
The blue book statement of monetary variables most
likely to be associated with a continuation of current policy
appeared reasonable.
The draft directive appeared to Mr. Clay to be satis
factory.
Mr. Heflin reported that business in the Fifth District
continued strong; with signs of some deceleration in the rate
of advance centering mainly in the consumer and residential
construction sectors.
The Richmond Reserve Bank's optimism
index suggested that District businessmen remained essentially
bullish on the future.
At the national level, the recent rash of price increases
was disturbing to Mr. Heflin, although in the perspective of last
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year's wage contracts and credit expansion, he thought some
further markups had to be expected in the months ahead.
Of
greater concern for the near-term future was the growing
evidence that business investment outlays might be out of line
with the current pace of expansion in final demand.
While he
was not yet convinced that the System had succeeded in bringing
over-all expansion under control, he believed that it now had
substantive evidence of a significant moderation in demand in
the consumer and Government sectors.
Signs of continued
exuberance in the economy appeared to be increasingly concen
trated in the business investment sector.
Mr. Heflin remarked that the recent stock market slide
might, of course, have some implications for future business
plans.
The decline had now assumed a magnitude that involved
a substantial wealth effect and could well be interpreted as
an additional sign of developing moderation in the pace of
business.
Apart from that, its psychological impact was almost
certain to be in the right direction from the standpoint of
the System's objectives.
That was all the more the case in
view of the fact that the latest break seemed to be related
to a growing market conviction that the System was dead serious
about tight money.
Mr. Heflin noted that credit markets had remained
tight since the Committee's last meeting and were likely to
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become even tighter over the next four weeks.
The economy was
now moving into a period of fairly heavy seasonal demands for
credit, at a time when CD run-offs were continuing and the large
banks were experiencing greater difficulty in finding Euro-dollar
accommodation.
He was not at all sure that the full market im
pact of last week's bank rate increases in Europe and Canada had
been seen.
Nor was he sure that markets had fully discounted
the rumored hike in the prime rate.
In the policy area, Mr. Heflin thought the Committee's
posture since the December discount rate increase had been about
right and had produced altogether wholesome results.
In view of
the magnitude of the task the System confronted, he believed it
would be a mistake to give the market any suggestion that it was
backing away from that posture.
While he would be concerned by
any sustained decline in bank credit, he believed that for the
present the directive was satisfactory as drafted, with the
proviso clause to be interpreted in the manner suggested by
Mr. Hayes.
He would hold in reserve the package of measures
Mr. Brill had outlined, including a discount rate change, for
possible use if future circumstances suggested a need for stronger
medicine.
Mr. Mitchell remarked that some of the banking system's
liquidity was being absorbed under the monetary policy that had
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been followed since mid-December, and the necessary amount of
monetary restraint was probably already in train.
At present
the main need was to maintain a posture that, on the one hand,
would not dispel the psychological effects that had been achieved
and, on the other hand, would not bear down too heavily, given
the lagged effects of monetary policy actions.
However, Mr. Mitchell continued, the System might soon
encounter serious difficulties if it tried to rely on the present
combination of policy instruments.
The effects of the recent
monetary restraint had been greater in some areas than in others,
and if the System continued to rely on the same tools it was
likely to create a crunch.
In his judgment, it probably would
be desirable in the interval before the next meeting of the
Committee to take the kinds of policy actions Mr. Brill had
outlined today.
He would prefer to have the System take such
actions on its own initiative, rather than wait until it was
forced to do so by persisting declines in bank liquidity.
However, he was not prepared to advocate immediate action along
those lines.
Accordingly, he planned to vote today for a di
rective along the lines of the staff draft.
Mr. Daane commented that under its present policy the
System was walking on ice--a not impossible act, but one that
required great care.
The complexities of the situation the
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System faced were illustrated by the conflicting kinds of
comments he had heard recently from knowledgeable market
observers.
Some had told him in the past week that while
they thought present monetary policy was correct, that policy
was being undercut by the assurances System officials had
offered that a crunch would be avoided--assurances which, in
their judgment, had led bankers to take a more accommodative
attitude toward borrowers than they would have otherwise.
Others had told him that they thought a crunch--however they
defined the term--already existed, and had expressed the hope
that the System would not take any regulatory action to limit
U.S. bank access to the Euro-dollar market, which they consid
ered an important safety valve.
In their opinion the scarcity
and high cost of Euro-dollar funds by themselves were adequate
to constrain bank use of that source of funds.
For his own part, Mr. Daane said, he did not think the
System's current policy had been vitiated by assurances that
a crunch would be avoided, and he favored continuing that policy.
At the same time, he thought it would be important to avoid any
suggestion that the System was backing away from the existing
degree of restraint.
For that reason, he would be highly re
luctant to raise the Regulation Q ceilings at this juncture.
More generally, Mr. Daane continued, he was not persuaded
that the package of actions Mr. Brill had described would be
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appropriate in the near term, and he certainly would not want to
take such actions immediately.
He had some sympathy with the view
that a discount rate above the present level would be logical, but
he would not want to take the overt step of raising the rateespecially not prior to an increase in the prime rate.
Mr. Daane said the draft directive was acceptable to him.
With respect to the proviso clause, he was less concerned than
some others who had spoken about the risk of downward deviations
of bank credit from the projection, particularly in view of the
recent tendency toward upward revisions in the estimates of the
proxy series.
Mr. Maisel remarked that the Committee faced two critical
questions at this time.
The first concerned the appropriate rate
of growth of bank credit, and the second concerned the appropriate
means for achieving the desired growth rate.
In his judgment the
decline in bank credit projected for March was not desirable, and
accordingly he would favor either the one-way proviso Mr. Morris
had proposed or a two-way proviso interpreted asymmetrically as
Mr. Hayes had suggested.
In operating under the proviso, however,
it would be important for the Desk to look ahead to the probable
behavior of bank credit after March.
A situation in which the
absence of growth in March was associated with an expected decline
in April would have an entirely different significance from one in
which expansion in April was anticipated.
3/4/69
-91If action to stimulate bank credit growth were required,
Mr. Maisel continued, the System would have to face the problem
of its effects on market expectations.
The choice presumably
would be between supplying additional reserves through open
market operations or raising the Regulation Q ceilings.
In his
judgment it would be preferable to rely on open market operations
for the purpose; to increase the Q ceilings would be to lose con
trol to an important extent, whereas open market operations could
be controlled closely.
Accordingly, he thought the Desk should
stand ready to furnish reserves at the margin, particularly since,
as Mr. Hayes had pointed out, money market conditions currently
were slightly firmer than had been anticipated.
He thought
Mr. Hickman's point was well taken that it might be desirable to
rely on public statements to avoid undesirable psychological re
actions to the data that might be published.
Certainly, it would
be better to follow such a procedure than to stay with an improper
policy because of fears that a change would have unwanted effects
on psychology.
Mr. Brimmer observed that he could accept the staff's
draft directive as written, although he had no objection to the
change in the first paragraph that Mr. Coldwell had suggested.
The Committee might also want to make a small additional change,
in the sentence regarding the balance of payments.
That sentence
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would be clearer, he thought, if the words "and a deficit also
reappeared" were added at the beginning of the final clause.
As
to the second paragraph, he favored retaining the two-way proviso
shown in the staff's draft.
With respect to policy, Mr. Brimmer said he was convinced
that quite a few banks were counting on the Federal Reserve to
supply them with funds so that they would not have to deny any
loans their good customers might want.
System avoid doing so.
It was important that the
In his judgment it would be a serious error
to raise Regulation Q ceilings at this time.
When the ceilings had
been raised in 1965 and on large-denomination CD's in 1968 the large
banks had rapidly built up the volume of CD's outstanding and had
thus been able to expand their business loans and other earning
The Manager should have authority to
assets at undesirable rates.
buy coupon issues if heavy selling by banks threatened to produce
disorderly market conditions.
As Mr. Maisel had suggested, how
ever, it would be undesirable for the System to give up control
by raising the Q ceilings.
As to discount rates, that question
would be faced by the Board as advices were received of actions
by the Reserve Bank directors.
Mr. Brimmer went on to say that he was disturbed by the
recent inflows of Euro-dollars.
The contrast to which Mr. Galusha
had referred between rates of bank credit growth in the last two
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months of 1968 and the first two months of 1969 was less striking
if one considered the proxy series adjusted for Euro-dollar inflows.
In addition, it was his impression that the recent tendency toward
upward revisions in that proxy series had been associated to a
large extent with underestimates of such inflows.
If the System
were to take the view that access to the Euro-dollar market offered
a useful safety valve for some large banks it should still be con
cerned with the effects of the inflows on the course of aggregate
bank credit.
Personally, he had been concerned for some time with
the fact that the effects of Euro-dollar inflows on U.S. bank credit
were far from neutral.
In a concluding remark, Mr. Brimmer referred to Mr. Solomon's
observation that the Administration was anxious to relax the re
straints on capital outflows.
It was important to keep in mind that
if the Administration decided to provide additional leeway under
the Commerce Department or Federal Reserve programs, the difficulties
facing the Open Market Committee would be increased considerably.
Mr. Sherrill said he had come to believe that the momentum
of inflation was even greater, and that it was likely to take a
longer time to bring it under control, than he had thought earlier.
For that reason, he believed the monetary conditions likely to be
required might be harder on all participants than had been hoped.
It was important that the System avoid creating the impression that
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the banks would not have difficult adjustments to make.
Partly
for that reason, there was some risk of a crunch, which he would
define as a situation in which banks sold securities at such a
rate that the System would have to step in, buying securities
and creating the liquidity for others to do so also.
A shift
from a pattern of continuing moderate sales of securities by
banks to large-scale dumping could develop suddenly, offering
the System very little time to react; accordingly, it was nec
essary for the System to be prepared to act quickly.
Hopefully,
it would be possible to get through the coming period without
such developments occurring.
Mr. Sherrill favored the staff's draft of the directive,
with the two-way proviso clause to be interpreted in the manner
Mr. Hayes had suggested in order to minimize the risk of a crunch
by providing for prompt action on the downside.
If significantly
easier money market conditions were found to be required under the
proviso clause, he thought the System should instead take actions
along the lines of those Mr. Brill had discussed.
Actions of that
type might well prove necessary before the next meeting of the
Committee.
Mr. Hickman remarked that economic activity had shown a
mixed pattern thus far in the first quarter.
Consumer spending had
slowed and would probably remain sluggish through the tax-payment
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period.
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That would ultimately be reflected in a leveling off in
industrial production as inventories of consumer goods were brought
in line with sales.
Investment spending was also likely to slow,
along with residential construction, which should soon respond to
the growing stringency of mortgage credit.
On the other hand,
construction activity was still strong, and conditions in the labor
market remained extremely tight.
Rapid increases in prices through
February, and expectations of further price increases, indicated
that the problem of inflation was far from being solved.
While
his staff did anticipate near-term moderation in the rate of gain
in over-all prices, that would be due entirely to relief in food
prices; the index of wholesale industrial prices and prices of
nonfood consumer goods and services were still under strong up
ward pressure.
In recent weeks, Mr. Hickman said, most of the monetary
and credit aggregates had moved slightly beyond the upper end of
the ranges specified at the last meeting of the Committee.
Although
short-term bill rates moved lower until last week, primarily as a
result of strong demand and short supply, CD rates were still not
competitive with bill rates.
Banks were continuing to experience
a run-off of CD's, albeit at a reduced pace due to the smaller
volume of maturities coming due.
The CD run-off had served the
useful purpose of reducing bank liquidity and had indicated to the
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market that the System was serious in its efforts to control
inflation, but the degree of restraint associated with that CD
run-off was not an acceptable goal if continued indefinitely.
Bank liquidity had already been reduced sharply, and the net flow
of funds from the Euro-dollar market was shrinking, making it more
difficult for banks to offset CD losses.
Moreover, further run-offs
of CD's could lead to substantial bank selling of municipal and
Government securities, with additional upward pressure on yields,
In Mr. Hickman's opinion a decline in the credit proxy at
an annual rate of 4 to 7 per cent as projected by the staff for
March was not consistent with the policy of moderate, but steady,
restraint stressed by the Chairman in his recent testimony before
the Joint Economic Committee.
He would recommend that the Committee
shift to a policy of less restraint and seek to encourage moderate
growth in the credit proxy, say in the order of 3 to 5 per cent,
at an annual rate.
To achieve that, he would favor a bill rate
below the range specified by the staff in connection with the draft
directive; specifically, he favored a 91-day bill rate in the range
of 5.85 to 6.0 per cent.
Moderately lower bill rates would temper
the run-off of CD's, reduce the pressure on Euro-dollars, moderate
bank selling into the securities markets, and perhaps avoid another
increase in the prime rate.
Mr. Bopp said that like most observers he found it much
harder to foresee the state of the economy after midyear than over
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the next few months.
The difficulties were compounded because
real and financial indicators were giving conflicting signals.
The outlook which the Philadelphia Bank's staff projected for
the next few months differed somewhat from that given in the
green book.
His staff's projection called for more strength
both in residential construction and business outlays for fixed
investment, while their estimates of consumption spending in the
second quarter were somewhat less than those of the Board's staff.
However, the combination of higher plant and equipment outlays,
residential construction, and Government spending resulted in a
substantially smaller decline in inventory accumulation.
Thus,
while the Philadelphia Bank saw the rate of growth as moving in
the direction of further moderation, they saw a stronger quarter
than that envisaged by the Board's staff.
Mr. Bopp remarked that reports for the Third District
confirmed the outlook for too much near-term strength.
A recent
spot check had turned up no evidence that large firms believed
inventories were excessive compared with either present or ex
pected sales.
A larger sampling of Third District firms showed
that businessmen were optimistic about the six-month outlook.
Only one company had cut back on capital spending plans since the
McGraw-Hill survey last fall.
Most had accelerated capital spending
in anticipation of higher prices and rising labor costs, with three
out of five anticipating rising levels of general business activity.
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If signs of restraint were few in the real sector of the
economy, Mr. Bopp continued, that was not so in the financial
sector.
Last year's rapid rates of growth in the credit proxy
had disappeared in only two months.
curtailment in March.
The forecast was for further
Growth in the money supply had slowed
sharply and the projected bulge in March was expected to be only
temporary.
Even without more restraint, revised expectations of
the Federal budget surplus and Treasury cash needs and a likely
step-up in the rate at which banks liquidated securities in re
sponse to expected loan demand would contribute to continued
pressure on money market rates.
In short, Mr. Bopp said, restraint was clearly visible in
the financial sector, but much less apparent in the real sector.
In view of the lags that were apparently at work, there was reason
for some concern that further reductions in the volume of bank
credit could have an excessive impact on the economy later in the
year.
Since current signs of economic strength were sufficiently
widespread, restraint still was the appropriate course.
The
costs--domestic and international--of fueling continued inflation
were too high.
But the potential costs in terms of income and
employment of sudden and excessive restraint were also sufficiently
high for the projection for bank credit in March, on top of the
experience in January and February, to be disturbing.
3/4/69
-99Therefore, Mr. Bopp thought the Desk should resist
contractions in bank credit during the next four weeks.
The
problem, of course, was how to do that without creating the
wrong impression.
The System, quite correctly, had been trying
to convey the idea that policy was directed toward gradual and
persistent restraint.
It would be a mistake to undo the progress
made in fostering that psychology.
to push restraint too far.
Yet it would also be a mistake
Hopefully, given prevailing expectations
for higher rates, the Desk could let up on the brake somewhat with
out precipitating undue effects in the money market.
The two-way
proviso seemed appropriate, with toleration of smaller deviations
on the downside than on the upside.
Mr. Kimbrel commented that he presently found it especially
difficult to sort out what bankers in the Sixth District were actu
ally doing from what they reported they were doing.
More District
bankers were now saying that monetary policy was restricting their
operations.
He had reported at the last meeting that not a single
banker had complained to him about monetary tightness.
Since then,
some bankers had visited the Reserve Bank to pave the way for a
possibly greater use of the discount window in the future.
Some
bankers had told him that they were turning down loan applications
from national accounts even at the risk of losing substantial
deposit accounts.
The results of the Atlanta Bank's Lending
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Practices Survey were similar to those reported for the nation,
with slightly stronger business loan demand expected by bankers
for the next three months.
Bankers were saying that if policy
had not begun to bite already it was about to do so.
However, Mr. Kimbrel continued, there seemed to be a
difference between what bankers were saying and what the figures
indicated they were doing.
If they were beginning to say "no"
to loan applications, they were not doing it often enough to show
up in the figures.
In January loans declined at the smaller banks,
on a seasonally adjusted basis, and the pace of loan growth fell
off at the large banks.
However, large District banks reported a
considerable increase in total loans in the first three weeks of
February, and the smaller banks reported an upsurge in loans during
the first two weeks of the month.
Some District banks, like those
in the money market centers, had had to reduce investments, in
crease their borrowings, and make greater use of Federal funds
in order to meet loan demands.
District banks as a group had be
come net buyers of Federal funds, whereas they had customarily
been net sellers.
However, those adjustments had been much more
limited than in 1966.
The figures suggested to Mr. Kimbrel that, although policy
might have begun to bite, it had not bitten very deeply so far as
Sixth District banks were concerned.
Smaller District banks had
3/4/69
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largely escaped the restraint, and what those at the larger
banks.were saying reflected more their worry about the future
than their present actions.
policy of "gradualism."
That might fit into the desired
He certainly would not like to see the
conditions of 1966 repeated, but at the same time he believed
the System should be sure there was some bite to gradualism.
Mr. Kimbrel said he had been a little fearful that a
continued decline in the credit proxy at the January rate and
the rate originally projected for February might be too strong
medicine for a policy of gradually applying restraint.
Recent
developments, however, suggested that that might not be the case.
Under those circumstances, if the set of money market indicators
outlined in the blue book was likely to produce a decline in the
credit proxy in March at the magnitude suggested, he would leave
policy about as it was.
It might be that the System could not delay some action
on the discount rate much longer, Mr. Kimbrel observed.
However,
he had reservations about the desirability of such action because
of the difficulty of having it properly interpreted by the public
and by the banking sector.
Personally, he disliked giving banks
a rationalization for a prime rate increase, but with member bank
borrowing expanding and short-term rates as high as they were,
raising the rate did have some logic.
He would also hope the
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System could delay any increase in Regulation Q ceilings for
the time being.
In his own District, Mr. Kimbrel continued, smaller
banks had been largely untouched by monetary restraint.
A firm
enough open market policy might eventually reach them, but he
was inclined to think that an increase in reserve requirements
would beneficially speed the process.
Under those conditions, Mr. Kimbrel concluded, his
choice would be to accept the directive as drafted.
Mr. Francis said it seemed to him that the Committee
and the Board had earnestly desired and attempted since December
to turn in the direction of exercising restraint on total demand
and thereby on inflation.
Whether the policy had succeeded seemed
to him a moot question.
Mr. Francis noted that the condition of the commercial
banks had become increasingly strained.
That development had
followed from the disintermediation resulting from market interest
rates rising relative to Regulation Q ceilings and from increasing
credit demand.
The squeeze on the commercial banks imposed by the
bite of Regulation Q was no more evidence that the System was ex
ercising general restraint on the economy than the great surge of
bank credit at a 14 per cent annual rate in the third and fourth
quarters of 1968 had been evidence of a great burst of ease, or
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the deceleration of growth of total bank credit in early 1968
had been evidence of effective policy tightening.
The effects
of Regulation Q upon bank credit in recent years had destroyed
whatever value that magnitude might ever have had as a target
and means of monetary control.
Market interest rates were high, Mr. Francis continued,
but that also was not good evidence that the System had succeeded
in exercising restraint in the last two and a half months.
The
main rise of rates had occurred between August and mid-December,
a period when the Committee had decided on relative ease.
The
rise of general interest rates after late August and the high
present level had resulted from the tremendous demand for loan
funds rather than from restraint on supply.
Mr. Francis noted that average borrowings from the Federal
Reserve had risen by about $500 million since early December.
That was evidence that member banks were under great stress as
a result of the huge demands put on them and the deprivation of
funds to them under the workings of Regulation Q.
It was not
evidence of Federal Reserve restraint on total credit or on total
spending.
The figures with respect to the narrowly measured money
supply had recently been greatly affected by the exceptionally
large volume of Treasury deposits in the commercial banks,
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Mr. Francis said.
On only two other occasions in four years
had those deposits been so high.
When one made an adjustment
for those extraordinary Treasury deposits, one found that the
money supply had increased at a 5.9 per cent annual rate in the
last three months.
In view of the continued rapid expansion of
the monetary base and total member bank reserves in the last three
months, there was little basis for confidence in recent, current,
or imminent deceleration of growth of the money supply.
The
monetary base had gone up at a 6.4 per cent rate, about the same
as the 6.2 per cent rate of the preceding two years.
Member bank
reserves had risen at an 11 per cent rate in the latest three-month
period compared with an 8 per cent rate in the previous two years.
Despite the System's firm intentions, Mr. Francis remarked,
he could not find evidence in those data that it had begun to exer
cise monetary restraint.
In his opinion the only way the Committee
could assure itself that its desire for monetary restraint would
be implemented would be to direct the Desk to produce growth of
Federal Reserve credit, member bank reserves, and the monetary
base at rates about half those of the past year.
That should be
significant and effective, though not nearly so extreme as in the
period from April 1966 to January 1967 when the money supply did
not increase at all.
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At the same time that the System seemed to be failing
to achieve general restraint, Mr. Francis remarked, the commer
cial banks--due to the high market interest rates which followed
from the high inflation-stimulated demand for funds--were being
severely wrenched with harmful results and to no good end.
Al
though Regulation Q was not a responsibility of this Committee,
he felt impelled to comment on it here, since its effects might
play a significant role in open market policies.
If the System
should continue to force disintermediation on the commercial
banks through Regulation Q and at the same time should begin to
exercise restraint on its marginal contribution to the expansion
of bank credit and money, it might force an extreme crunch at
the commercial banks.
But if the System relaxed Regulation Q
in step with market interest rate developments of recent months,
the banks could avoid a great disruption of their customer re
lations, while at the same time the System could avoid continuance
of an inordinate marginal contribution to the expansion of total
credit, total liquidity, and money supply in the narrow sense.
Mr. Francis said he continued to feel that the discount
rate was out of touch with reality.
Mr. Robertson prefaced his prepared remarks with a
reference to the various comments that had been made in the
go-around concerning the risks of a credit crunch.
In his
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judgment, he said, anyone forced to make difficult adjustments
in a time of monetary restraint was likely to complain that a
crunch existed.
The System could not afford to be unduly sen
sitive to such complaints if it was to maintain restraint for
the period required to cope with existing inflationary pressures.
Mr. Robertson then made the following statement:
I think the facts we have before us today argue
strongly that we bear down hard to maintain and, if
necessary, even reinforce our posture of monetary
restraint.
While some financial indicators show signs of
being affected by our actions, there are other mea
sures that are still very buoyant. For example,
despite professions of changed bank lending policies,
the total of bank funds actually loaned to businesses
continues to run high, fueling corporate outlays that
are adding to inflationary troubles. To be sure,
monetary policy takes time to do its work in this
area, but I do not believe we can complacently assume
time is on our side. Inflationary pressures also can
cumulate over time, and the momentum of spiraling
prices and costs is still proceeding apace, as the
green book attests. I believe business attitudes on
the whole are still very much conditioned by infla
tionary expectations. As long as that remains true,
we have work yet to be done.
In getting on with our job, we have to take
account of both short-run and longer-run considerations.
With the credit and deposit pressures likely to be
associated with the March tax date less than two weeks
ahead, and with another prime rate increase hanging
fire day by day, I favor our maintaining our present
firm hold on reserve positions for now. This could
mean some rise in both borrowings at the discount
window and in day-to-day market rates at times through
mid-March as banks endeavor to adjust to the demands
upon them, and that might be therapeutic. I would not
think it helpful to add to such seasonal pressures,
but I would not offset them either. Thereafter, there
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3/4/69
is a chance, recognized in the blue book, that bill
rates and market pressures could ease off seasonally.
If that starts to develop, I think the System ought
to be poised to move in quickly with a countering
policy action.
My choice among our instruments for this purpose
is still an increase in reserve requirements. As I
said at our last meeting, I think our need at such a
point would most likely be for a widely visible signal
of curtailed reserve availability--and a reserve re
quirement increase ranks ahead of open market operations
on the first count and ahead of a discount rate increase
on the second. I would not want to rule out a discount
rate increase under any and all circumstances, but I
do think that fighting inflation with interest rates
alone is not the right posture for us to be in. I would
rather hold a firm line--on discount rates, Q ceilings,
and reserve provision at the Trading Desk--and be pre
pared to throw a reserve requirement increase into the
breach as unmistakable evidence to all banks and bank
customers of our determination to persevere if and as
any seasonal money easing starts to appear.
On this basis, I am prepared to vote for the draft
directive as submitted by the staff.
Mr. Robertson added that he thought the change Mr. Coldwell
had suggested in the first paragraph of the draft directive would
represent an improvement.
He had no objections to having the
two-way proviso interpreted in the manner Mr. Hayes had proposed.
Chairman Martin commented that the System presently was
feeling its way with respect to monetary policy.
Obviously, not
all members of the Committee were completely satisfied with the
way things were going,
In view of the prevailing cross-currents
and the problems of market psychology, however, it seemed to him
that the System's main need at the moment was for patience.
As
various members had suggested today, further policy actions might
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be needed later--involving, perhaps, reserve requirements,
discount rates, Regulation Q, or open market operations.
Mr. Robertson had indicated that an increase in reserve re
quirements might be the appropriate next step.
However, he
(Chairman Martin) thought that any such action was likely to
be followed quickly by a need to increase discount rates; and
he was not sure which of the two types of actions might best
come first.
As to Regulation Q, the Chairman continued, he personally
was not very happy with the way the ceilings had been operating.
He thought it had been feasible to maintain the existing ceilings
thus far only because of the safety valve offered by the Euro-dollar
market.
That safety valve obviously was not unlimited; the interest
rates at which funds were available were a matter of significance
to U.S. banks, and as had been reported today those rates had been
rising sharply.
In general, banks were faced with the same kinds
of problems of gauging the future as the System was; they were
unsure of the strength of loan demand in coming months and unde
cided about the desirability of an increase in the prime rate.
In his judgment, the Chairman continued, it was not clear
that the appropriate degree of restraint on domestic spending had
been achieved thus far.
To review recent history briefly, monetary
policy probably had been easier in the period before enactment of
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the tax increase than it would have been if fiscal action had
not been anticipated.
After the action on taxes and on Federal
expenditures there had been an error of judgment regarding the
momentum of the economic expansion.
Accordingly, to use a
favorite phrase of his, the System was now wrestling with the
heritage of past errors.
Chairman Martin remarked that it was important that
Committee members not react mechanically on the basis of what
ever statistics might become available.
Recently, he had
repeatedly found reason to question some implications of partic
ular data.
To take an illustration from the discussion today,
Mr. Brill had reported that automobile sales had been slipping
since last fall.
But today's papers reported that sales had
been good in the last ten days of February and one member of the
industry had recently commented to him that the sales outlook was
highly favorable.
Turning to the directive, the Chairman said he thought
that the changes in the first paragraph of the staff's draft that
had been suggested by Messrs. Coldwell and Brimmer were desirable.
As to the second paragraph, he did not think a revision of the
proviso clause shown in the draft was needed, since the Manager
undoubtedly understood from the discussion today how the Committee
intended that clause to be interpreted.
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The Chairman then proposed that the Committee vote on
a directive consisting of the staff's draft with the two changes
he had mentioned.
In reply to a question by Mr. Coldwell, Mr. Holmes said
he understood that the Committee would want the proviso clause
implemented along the lines Mr. Hayes had suggested.
Specifically,
the proviso was to be activated on the downside if the adjusted
bank credit proxy was approaching the lower limit of the projected
range--that is, if it was declining at an annual rate of about 5
or 6 per cent in March--and if activation was not likely to change
market expectations.
On the upside, he understood that bank credit
could grow at a rate of up to about 5 per cent before the clause
was to be implemented.
Chairman Martin said he thought the Committee would be
doing itself a disservice if it related its instructions for open
market operations too rigidly to specific numerical projections
of bank credit.
In his judgment more flexibility was desirable.
By unanimous vote, the Federal
Reserve Bank of New York was autho
rized and directed, until otherwise
directed by the Committee, to execute
transactions in the System Account
in accordance with the following
current economic policy directive:
The information reviewed at this meeting suggests
that expansion in real economic activity has been moder
ating, but that upward pressures on prices and costs
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are persisting. Prospects are for some further slowing
in economic expansion in the period ahead. Most market
interest rates have edged up on balance in recent weeks.
In the first two months of the year bank credit changed
little on average, as investments contracted while loan
demands, especially from businesses, remained strong.
The outstanding volume of large-denomination CD's con
tinued to decline sharply and inflows of other time
and savings deposits slowed. Growth in the money supply
moderated as U.S. Government deposits rose considerably.
It appears that a sizable deficit reemerged in the U.S.
balance of payments on the liquidity basis in January
and February and, with Euro-dollar inflows moderating,
a deficit also reappeared in the balance on the official
settlements basis in February. In this situation, it
is the policy of the Federal Open Market Committee to
foster financial conditions conducive to the reduction
of inflationary pressures, with a view to encouraging
a more sustainable rate of economic growth and attaining
reasonable equilibrium in the country's balance of pay
ments.
To implement this policy, System open market
operations until the next meeting of the Committee shall
be conducted with a view to maintaining on balance about
the prevailing firm conditions in money and short-term
credit markets; provided, however, that operations shall
be modified if bank credit appears to be deviating sig
nificantly from current projections.
It was agreed that the next meeting of the Committee would
be held on Tuesday, April 1, 1969, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
Attachment A
CONFIDENTIAL (FR)
March 3, 1969
Draft of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on March 4, 1969
The information reviewed at this meeting suggests that ex
pansion in real economic activity has been moderating, but that upward
pressures on prices and costs are persisting. Prospects are for some
further slowing in economic expansion in the period ahead. Most market
interest rates have edged up on balance in recent weeks. In the first
two months of the year bank credit changed little on average, as the
outstanding volume of large-denomination CD's continued to decline
sharply and inflows of other time and savings deposits slowed. Growth
in the money supply moderated as U.S. Government deposits rose consid
erably. It appears that sizable deficits reemerged in the U.S. balance
of payments on the liquidity basis in January and February and, with
Euro-dollar inflows moderating, in the balance on the official settle
ments basis in February. In this situation, it is the policy of the
Federal Open Market Committee to foster financial conditions conducive
to the reduction of inflationary pressures, with a view to encouraging
a more sustainable rate of economic growth and attaining 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
maintaining on balance about the prevailing firm conditions in money
and short-term credit markets; provided, however, that operations
shall be modified if bank credit appears to be deviating significantly
from current projections.
@FedFRASER