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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 on Tuesday, March 5, 1963, at 9:30 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Bopp
Clay
Irons
King 1/
Mills
Mitchell
Robertson
Scanlon
Shepardson
Messrs. Fulton, Wayne, Shuford, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis, Bryan, and Deming, Presidents of the
Federal Reserve Banks of Boston, Atlanta, and
Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Eastburn, Furth, Garvy,
Green, Holland, and Koch, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Farrell, Director, Division of Bank Operations,
Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
1/
Withdrew from meeting at point indicated in minutes
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Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Messrs. Ratchford, Jones, and Parsons, Vice
Presidents of the Federal Reserve Banks
of Richmond, St. Louis, and Minneapolis,
respectively
Messrs. Brandt and Lynn, Assistant Vice
Presidents of the Federal Reserve Banks
of Atlanta and San Francisco, respectively
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Sternlight, Manager, Securities Department
Federal Reserve Bank of New York
Mr. Mann, Senior Economist, Federal Reserve
Bank of Cleveland
In the agenda for this meeting, the Secretary reported that
advice 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 commencing March 1, 1963, and that it appeared
such persons would be legally qualified to serve after they had executed
their oaths of office.
The elected members and alternates, all of whom had now executed
their oaths of office, 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 Edward A. Wayne, President of the
Federal Reserve Bank of Richmond, as alternate;
Charles J. Scanlon, President of the Federal Reserve Bank
of Chicago, with Wilbur D. Fulton, President of the
Federal Reserve Bank of Cleveland, as alternate;
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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;
Watrous H. Irons, President of the Federal Reserve Bank of
Dallas, with Harry A. Shuford, President of the Federal
Reserve Bank of St. Louis, as alternate.
Upon motion duly made and seconded,
and by unanimous vote, the following offi
cers 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 29, 1964, with the
understanding that in the event of the dis
continuance of their official connection 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
Ralph A. Young
Merritt Sherman
Kenneth A. Kenyon
Howard H. Hackley
David B. Hexter
Guy E. Noyes
Ernest T. Baughman, Daniel H. Brill,
David P. Eastburn, J. Herbert Furth,
George Garvy, Ralph T. Green,
Robert C. Holland, Albert R. Koch,
and Clarence W. Tow
Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and seconded,
and by unanimous vote, the Federal Reserve
Bank of New York was selected to execute
transactions for the System Open Market
Account until the adjournment of the first
meeting of the Federal Open Market Committee
after February 29, 1964.
Upon motion duly made and seconded,
and by unanimous vote, Robert W. Stone
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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 was sub
sequently received that Messrs. Stone and
Coombs were satisfactory to the Board of
Directors of the New York Reserve Bank for
service in the respective capacities
indicated.
In connection with the foregoing action, Mr. Hayes recalled
that at the meeting of the Federal Open Market Committee on April 17,
1962, he and Mr. Reed, Chairman of'the Federal Reserve Bank of New York,
had presented arguments against the proposal,
then under consideration,
to change the procedure whereby the Manager and Special Manager of the
System Open Market Account were selected by the Federal Reserve Bank
that was selected to execute transactions for the System Account,
subject to approval by the Open Market Committee.
As a possible
compromise, Mr. Hayes noted, he had suggested a process of joint
appointment of the Manager and Special Manager by the Open Market
Committee and the Reserve Bank.
Considerable sympathy had been
expressed with that suggestion, but in the end the Committee had voted
(with Mr. Hayes dissenting) to amend its By-Laws to provide for selection
by the Committee of a Manager and a Special Manager, both of whom were
3/5/63
-5
to be satisfactory to the Reserve Bank selected to execute transactions
for the System Account.
That decision having been made, Mr. Hayes said, he saw no
purpose in pursuing the matter further.
He merely would like to make
the comment for the record that although he would go along with the
current procedure, he did so with some reluctance.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com
mittee held on January 29 and February 12,
1963, were approved.
Consideration then was given to the continuing authorizations
of the Committee, according to the customary practice of reviewing such
matters at the first meeting in March of each year, and the actions set
forth hereinafter were taken.
Upon motion duly made and seconded,
it was voted, with Mr. Robertson abstaining,
to authorize and direct the Federal Reserve
Bank of New York, until otherwise directed
by the Committee, to execute transactions
in the System Open Market Account in accord
ance with the following continuing authority
directive relating to transactions in U. S.
Government securities 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 current economic policy directive adopted at
the most recent meeting of the Committee:
(a) To buy or sell United States 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
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prices and, for such Account, to exchange maturing United
States Government securities with the Treasury or allow
them to mature without replacement; provided that the
aggregate amount of such securities held in such Account
(including forward commitments, but not including such
special short-term certificates of indebtedness as may be
purchased from the Treasury under paragraph 2 hereof) shall
not be increased or decreased by more than $1 billion during
any period between meetings of the Committee;
(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 $75 million or 10 per cent of the total of bankers'
acceptances outstanding as shown in the most recent accept
ance survey conducted by the Federal Reserve Bank of New York;
(c) To buy United States Government securities with
maturities of 24 months or less at the time of purchase, and
prime bankers' acceptances with maturities of 6 months or
less at the time of purchase, from non-bank dealers for the
account of the Federal Reserve Bank of New York under agree
ments for repurchase of such securities or acceptances in 15
calendar days or less, at rates not less than (a) the discount
rate of the Federal Reserve Bank of New York at the time such
agreement is entered into, or (b) 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
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.
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 participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness as
may be necessary from time to time for the temporary accommoda
tion of the Treasury; provided that the rate charged on such
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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 $500 million.
In discussion that preceded the foregoing action, which continued
in effect the directive adopted by the Committee on March 6, 1962,
Mr. Mills commented that he would accept the directive because its
construction was susceptible of the kind of policy that he thought
it
was appropriate for the Committee to pursue, namely, a reversion to the
practice that called for transactions in the System
Account to be
limited to supplying and withdrawing reserves with, except in unusual
circumstances, the understanding that such transactions would be carried
out through the purchase and sale of Treasury bills rather than by
operations in other areas of the Government securities market.
This
was a reiteration, he noted, of views he had expressed on previous
occasions.
Mr. Robertson said it continued to be his view that the contin
uing authority directive was inadequate and lacked sufficient guidance
and restrictions, which view he had expressed at the meeting on March 6,
1962, and also in connection with the adoption of the continuing authority
directive on December 19, 1961.
In his opinion, the directive in its
present form served no purpose other than as window dressing.
he would abstain from voting on the directive.
Therefore,
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Upon motion duly made and seconded,
and by unanimous vote, the Authorization
Regarding Open Market Transactions in
Foreign Currencies (as amended November 13,
1962) and the Guidelines for System Foreign
Currency Operations (as amended November 13,
1962) were reaffirmed:
AUTHORIZATION REGARDING OPEN MARKET TRANSACTIONS IN
FOREIGN CURRENCIES
Pursuant to Section 12A of the Federal Reserve Act and in
accordance with Section 214.5 of Regulation N (as amended) of
the Board of Governors of the Federal Reserve System, the
Federal Open Market Committee takes the following action
governing open market operations incident to the opening and
maintenance by the Federal Reserve Bank of New York (hereafter
sometimes referred to as the New York Bank) of accounts with
foreign central banks.
I.
Role of Federal Reserve Bank of New York
The New York Bank shall execute all transactions pursuant
to this authorization (hereafter sometimes referred to as trans
actions in foreign currencies) for the System Open Market Account,
as defined in the Regulation of the Federal Open Market Committee.
II.
Basic Purposes of Operations
The basic purposes of System operations in and holdings of
foreign currencies are:
(1)
(2)
(3)
(4)
To help safeguard the value of the dollar in inter
national exchange markets;
To aid in making the existing system of international
payments more efficient and in avoiding disorderly
conditions in exchange markets;
To further monetary cooperation with central banks of
other countries maintaining convertible currencies,
with the International Monetary Fund, and with other
international payments institutions;
Together with these banks and institutions, to help
moderate temporary imbalances in international pay
ments that may adversely affect monetary reserve
positions; and
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(5)
In the long run, to make possible growth in the
liquid assets available to international money
markets in accordance with the needs of an ex
panding world economy.
III.
Specific Aims of Operations
Within the basic purposes set forth in Section II, the
transactions shall be conducted with a view to the following
specific aims:
(1) To offset or compensate, when appropriate, the
effects on U. S. gold reserves or dollar liabilities
of disequilibrating fluctuations in the international
flow of payments to or from the United States, and
especially those that are deemed to reflect temporary
forces or transitional market unsettlement;
(2)
(3)
(4)
IV.
To temper and smooth out abrupt changes in spot
exchange rates and moderate forward premiums and
discounts judged to be disequilibrating;
To supplement international exchange arrangements
such as those made through the International Monetary
Fund; and
In the long run, to provide a means whereby reciprocal
holdings of foreign currencies may contribute to
meeting needs for international liquidity as required
in terms of an expanding world economy.
Arrangements with Foreign Central Banks
In making operating arrangements with foreign central banks
on System holdings of foreign currencies, the New York Bank shall
not commit itself to maintain any specific balance, unless
authorized by the Federal Open Market Committee.
The Bank shall instruct foreign central banks regarding the
investment of such holdings in excess of minimum working balances
in accordance with Section 14(e) of the Federal Reserve Act.
The Bank shall consult with foreign central banks on
coordination of exchange operations.
Any agreements or understanding concerning the administration
of the accounts maintained by the New York Bank with the central
banks designated by the Board of Governors under Section 214.5 of
Regulation N (as amended) are to be referred for review and approval
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to the Committee, subject to the provision of Section VIII,
paragraph 1, below.
V.
Authorized Currencies
The New York Bank is authorized to conduct transactions for
System Account in such currencies and within the limits that the
Federal Open Market Committee may from time to time specify.
VI.
Methods of Acquiring and Selling Foreign Currencies
The New York Bank is authorized to purchase and sell 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 Stabilization Fund of the Secretary of the
Treasury established by Section 10 of the Gold Reserve Act of 1934
and with foreign monetary authorities.
Unless the Bank is otherwise authorized, all transactions
shall be at prevailing market rates.
VII.
Participation of'Federal Reserve Banks
All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with
paragraph 3 G (1) of the Board of Governors' Statement of
Procedure with Respect to Foreign Relationships of Federal Reserve
Banks dated January 1, 1944.
VIII.
Administrative Procedures
The Federal Open Market Committee authorizes 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)
to give instructions to the Special Manager, within the guidelines
issued by the Committee, in cases in which it is necessary to reach
a decision on operations before the Committee can be consulted.
All actions authorized under the preceding paragraph shall be
promptly reported to the Committee.
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3/5/63
The Committee authorizes 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:
(1) With the approval of the Committee, to enter into
any needed agreement or understanding with the
Secretary of the Treasury about the division of
responsibility for foreign currency operations
(2)
(3)
IX.
between the System and the Secretary;
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;
From time to time, to transmit appropriate reports
and information to the National Advisory Council on
International Monetary and Financial Problems.
Special Manager of System Open Market Account
A Special Manager of the Open Market Account for foreign
currency operations shall be selected in accordance with the
established procedures of the Federal Open Market Committee for
the selection of the Manager of the System Open Market Account.
The Special Manager shall direct that all transactions in
foreign currencies and the amounts of all holdings in each
authorized foreign currency be reported daily to designated
staff officials of the Committee, and shall regularly consult
with the designated staff officials of the Committee on current
tendencies in the flow of international payments and on current
developments in foreign exchange markets.
The Special Manager and the designated staff officials of
the Committee shall arrange for the prompt transmittal to the
Committee of all statistical and other information relating to
the transactions in and the amounts of holdings of foreign
currencies for review by the Committee as to conformity with
its instructions.
The Special Manager shall include in his reports to the
Committee a statement of bank balances and investments payable
in foreign currencies, a statement of net profit or loss on
transactions to date, and a summary of outstanding unmatured
contracts in foreign currencies.
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-12X.
Transmittal of Information to Treasury Department
The staff officials of the Federal Open Market Committee
shall transmit all pertinent information on System foreign
currency transactions to designated officials of the Treasury
Department.
XI.
Amendment of Authorization
The Federal Open Market Committee may at any time amend
or rescind this authorization.
GUIDELINES FOR SYSTEM FOREIGN CURRENCY OPERATIONS
1.
Holdings of Foreign Currencies
Until otherwise authorized, the System will limit its
holdings of foreign currencies to that amount necessary to
enable its operations to exert a market influence. Holdings
of larger amounts will be authorized only when the U. S.
balance of international payments attains a sufficient surplus
to permit the ready accumulation of holdings of major con
vertible currencies.
Holdings of a currency shall generally be kept sufficient
to meet forward contracts in that currency (exclusive of contracts
made under parallel arrangements with foreign monetary authorities
which provide their own cover) expected to mature in the following
three-week period.
Foreign currency holdings above a certain minimum shall be
invested as far as practicable in conformity with Section 14(e)
of the Federal Reserve Act.
2.
Exchange Transactions
System exchange transactions shall be geared to pressures of
payments flows so as to cushion or moderate disequilibrating
movements of funds and their destabilizing effects on U. S. and
foreign official reserves and on exchange markets.
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3/5/63
In general, these transactions shall be geared to pressures
connected with movements that are expected to be reversed in the
foreseeable future; when expressly authorized by the Federal Open
Market Committee, they may also be geared on a short-term basis
to pressures connected with other movements.
Subject to express authorization of the Committee, the
Federal Reserve Bank of New York may enter into reciprocal
arrangements with foreign central banks on exchange transactions
("swap" arrangements), which arrangements may be wholly or in
part on a standby basis.
The New York Bank shall, as a usual practice, purchase and
sell authorized currencies at prevailing market rates without
trying to establish rates that appear to be out of line with
underlying market forces.
If market offers to sell or buy intensify as System hold
ings increase or decline, this shall be regarded as a clear
signal for a review of the System's evaluation of international
payments flows. This review might suggest a temporary change in
System holdings of a particular convertible currency and possibly
direct exchange transactions with the foreign central bank involved
to be able to accommodate a larger demand or supply.
Starting operations at a time when the United States is not
experiencing a net inflow of any eligible foreign currency may
require that initial System holdings (apart from sums that night
be acquired from the Stabilization Fund) be purchased directly
from foreign central banks.
It shall be the practice to arrange with foreign central
banks for the coordination of foreign currency transactions in
order that System transactions do not conflict with those being
undertaken by foreign monetary authorities.
3.
Transactions in Spot Exchange
The guiding principle for transactions in spot exchange
shall be that, in general, market movements in exchange rates,
within the limits established in the International Monetary
Fund Agreement or by central bank practices, index affirmatively
the interaction of underlying economic forces and thus serve as
efficient guides to current financial decisions, private and
public.
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Temporary or transitional fluctuations in payments flows
may be cushioned or moderated whenever they occasion market
anxieties, or undesirable speculat:.ve activity in foreign ex
change transactions, or excessive leads and lags in international
payments.
Special factors making for exchange market instabilities
include (i) responses to short-run increases in international
political tension, (ii) differences in phasing of international
economic activity that give rise to unusually large interest
rate differentials between major markets, or (iii) market rumors
of a character likely to stimulate speculative transactions.
Whenever exchange market instability threatens to produce
disorderly conditions, System transactions are appropriate if
the Special Manager, in consultation with the Federal Open Market
Committee, or in an emergency with the members of the Committee
designated for that purpose, reaches a judgment that they may
help to re-establish supply and demand balance at a level more
consistent with the prevailing flow of underlying payments.
Whenever supply or demand persists in influencing exchange rates
in one direction, System transactions should be modified, cur
tailed, or eventually discontinued pending a re-assessment by
the Committee of supply and demand forces.
4.
Transactions in Forward Exchange
Occasion to engage in forward transactions will arise
mainly when forward premiums or discounts are inconsistent with
interest rate differentials and are giving rise to a dis
equilibrating movement of short-term funds, or when it is
deemed appropriate to supplement existing market facilities
for forward cover as a means of encouraging the retention or
accumulation of dollar holdings abroad.
Proposals of the Special Manager to initiate forward
operations shall be submitted to the Committee for advance
approval.
For such operations, the New York Bank may, where authorized,
take over from the Stabilization Fund outstanding contracts for
forward sales or purchases of authorized currencies.
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5.
Exchange Rates
Insofar as practicable, the New York Bank shall
a currency through spot transactions at or below its
and should lower the rate at which .t is prepared to
a currency as its holdings of that currency approach
purchase
par value,
purchase
the
established maximum.
The Bank shall also, where practicable, sell a currency
through spot transactions at rates at or above its par value,
and should raise the rate at which it is prepared to sell a
currency as its holdings of that currency approach zero.
Spot transactions at rates other than those set forth in
the preceding paragraphs shall be specially authorized by the
members of the Committee designated in Section VIII of the
Authorization for Open Market Transactions in Foreign Currencies,
In discussion preceding the foregoing action, Mr. Mills stated
that he accepted the Authorization and the Guidelines on the theory that
they envisaged continued experimentation with System foreign currency
operations, an experiment that in his judgment had not proven completely
successful Ln accomplishing its intended objectives.
He was apprehensive
about the difficulties that, according to press reports, were being
by U. S. authorities in financial negotiations with other
encountered
countries.
These reports served to heighten his feeling of apprehension
with regard to the whole approach currently being followed, which he
thought in a matter of time was likely to find the U. S. becoming a
handmaiden of assistance to a number of its foreign allies rather than
in their providing a first line of defense in time of difficulty.
Mr. Robertson stated that he concurred in the views expressed
by Mr. Mills.
His favorable vote on reaffirmation of the Authorization
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and Guidelines also was based on an understanding that the action
contemplated a continuation of experimental operations;
in other
words, that the authorization for further foreign currency operations
was regarded as merely a vehicle with which to carry on experimentation.
Chairman Martin commented that he thought it was generally
accepted that the program of System operations in foreign currencies
was of an experimental nature.
Mr. Mitchell noted that this under
standing had been reflected in the minutes of the Open Market Committee
when the program was instituted; he suggested that it would seem
desirable for this understanding also to be reflected in the minutes
in connection with the current action reaffirming the Authorization
and Guidelines.
Mr. Hayes commented that he could not conceive that
anyone would be unwilling to make such changes in the program as
might
appear at any time to be appropriate.
There followed a discussion during which reference was made to
provisions
in the Guidelines indicatng that System foreign currency
operations would be directed toward dealing with exchange market
instabilities that might be expected to be of a temporary nature
rather than fundamental disequilibria.
In this connection, Mr. Hayes
remarked that the limited use of foreign currencies under swap arrange
ments afforded an indication of the character of System operations.
Chairman Martin called attention to a second article on
Treasury and Federal Reserve foreign exchange operations that had been
3/5/63
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prepared by the Special Manager of the Open Market Account with a
view to publication in the March issues of the Federal Reserve
Bulletin and the Monthly Review of the Federal Reserve Bank of New
York.
This article, which was of a factual nature, would bring up
to date the information contained in the previous article, which had
been published in September 1962.
Chairman Martin commended the
article to the members of the Committee for study, adding that the
System program of foreign exchange operations should continue to be
reviewed carefully.
There had been distributed under date of February 26, 1963, a
memorandum from Messrs. Stone and Farrell submitting for consideration
suggested revisions in the procedures with respect to allocations of
the System Open Market Account.
It was noted that on January 29, 1963,
the Committee had amended such procedures so that adjustments of a
Reserve Bank's holdings because of a low reserve ratio would not be
made until the Bank's reserve ratio fell below 28 per cent.
It had
been mentioned at that time that informal staff groups from the Board
of Governors and New York Reserve Bank would make a further review of
the procedures.
The draft of proposed procedures submitted with the
February 26 memorandum incorporated changes recommended by the staff
groups,in which recommendations Messrs. Stone and Farrell concurred.
It was felt that adoption of the proposed changes would help to
prevent the reserve ratios of individual Reserve Banks from falling
3/5/63
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to urdesirably low levels, would reduce further the frequency of
interim adjustments in holdings of System Account securities, and
would also reduce the need for frequent adjustments between pledged
and unpledged gold certificates in order to maintain a 25 per cent
reserve against Federal Reserve notes and a 25 per cent reserve against
deposits.
The principal proposed changes were as follows:
reallocations in lieu of quarterly reallocations;
(1) monthly
(2) insertion of
language that would make the raising of a Bank's reserve ratio all the
way to the System average, in the course of a special adjustment,
discretionary rather than mandatory;
(3) elimination of the provision
concerning reversal of any adjustments made in a Bank's holdings
between reallocations;
(4) insertion of a provision in the procedures
that would give an additional participation to Banks having a relatively
high proportion of note liabilities to total note and deposit liabilities;
and (5) insertion of a provision that would permit allocating a Bank's
participation in purchases on any one day to other Banks if it were
anticipated that the Bank could not assume its participation in such
purchases without incurring a reserve deficiency.
In supplementation of the memorandum, Mr. Stone made the follow
ing statement:
The proposals before the Committee grew out of the work of
the two informal groups that were recently constituted within
I think all of us who
the Board and the New York Reserve Bank.
have been involved in these discussions would agree that while
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3/5/63
the present proposals would carry us some distance further than
the procedures now in effect, the useful life of the proposals
would be rather limited if reserve ratios continue to decline.
For this reason, the informal gcoups are continuing their work
in an effort to devise procedures that would be adequate to
circumstances in which reserve ratios push still closer to 25
per cent. If and when the ratios get to that point, of course,
the publication of a figure below 25 per cent will be unavoid
able.
I think I need comment upon only one specific point in the
present proposals.
That concerns the suggestion that the rais
ing of a Bank's reserve ratio all the way to the System average
during a special adjustment be made discretionary rather than
mandatory.
In the exercise of such discretion by the Manager
and the Bank concerned, it would be my suggestion to the Bank
that we go all the way to the System average if that could be
done without stripping the Bank of most or all of its unpledged
securities. If that could not be done, I would suggest to the
Bank that, if otherwise feasible, we raise its reserve ratio as
far as possible consistent with leaving some amount of unpledged
securities with the Bank and available for sale in case we had
to absorb reserves over the following day or two.
No question was raised, during a discussion of the matter, regard
ing the statement of proposed amended procedures.
However, there was
some discussion of a statement in the transmittal memorandum which
indicated that the fourth principal proposed change, as cited heretofore,
would have the effect of making additional gold certificates available
as reserve against deposits.
(It was subsequently clarified that the
intent of this statement was to say that the change in procedure would
have the effect of making additional gold certificates available "to
other Banks" as reserve against deposits.)
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
amended procedures with respect to alloca
tions of the System Open Market Account
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were approved, effective immediately.
The
procedures read as follows:
1. Securities in the System Open Market Account shall be
reallocated on the first business day of each month by means
of adjustments proportionate to the adjustments that would
have been required to equalize the average reserve ratios of
the 12 Federal Reserve Banks over the first 23 days of the
preceding month; provided, that the participation of each Bank,
after such reallocation, shall not be less than 80 per cent of
its outstanding Federal Reserve notes unless a smaller
participation is necessary in order to prevent its reserve
ratio from being less than 28 per cent. Any additional
allocation required by the foregoing proviso shall be taken
from the participations of the Banks having participations in
excess of their outstanding notes, in proportion to such
excesses.
2.
If a Bank's reserve ratio should fall below 28 per
cent on the next to the last business day (as observed by the
Agent Bank) of a statement week or month, its holdings as of
the close of business that day shall be adjusted by an amount
sufficient to raise its reserve ratio to the average reserve
ratio of the 12 Banks combined on the preceding day, or to
such point as the Manager of the System Account and the Bank
Such securities shall be
concerned consider feasible.
allocated to the Bank in a position to absorb the largest
additional amount without reducing its reserve ratio below
the ratio of the 12 Banks combined. If that Bank is unable
to take the entire amount, the excess shall be allocated to
the Bank which can absorb the next largest amount without
reducing its reserve ratio below the average for the System.
3. If a Bank's reserve ratio should fall below 28 per
cent on any other day, or if a Bank anticipates that its
reserve ratio will fall below that figure, it may arrange
with the Manager of the System Open Market Account for an
adjustment similar to those provided for in paragraph 2 so as
to increase the Bank's reserve ratio in any degree desired up
to the average of the 12 Banks combined.
4.
If purchases by the System Open Market Account on a
particular day would, in the opinion of a Reserve Bank, be
likely to reduce the ratio of that Bank's gold certificate
reserves to its note and deposit liabilities, either combined
or separately, below 25 per cent, the entire purchase shall
-21-
3/5/63
be allocated to other Banks.
Such allocation, having the
effect of a special adjustment increasing the participations
of the other Banks above normal proportions, shall be made
to those Banks having the largest amounts of excess gold
certificate reserves in relation to total note and deposit
liabilities.
5. The Account shall be apportioned during the ensu
ing month on the basis of the ratios determined in paragraph
1, after allowing for any adjustments as provided for in
paragraphs 2, 3, and 4.
6. 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.
Messrs. Hexter and Farrell withdrew from the meeting at this
point.
The authorization for distribution of periodic reports prepare:
by the Federal Reserve Bank of New York for the Federal Open Market
Committee,
as amended March 6, 1962, was presented for consideration
and certain suggested changes were mentioned.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
authorization was given for the follow
ing distribution:
1.
2.
3.
The Members of the Board of Governors.
The Presidents of the twelve Federal Reserve Banks.
Officers of the Federal Open Market Committee.
*4.
The Secretary and the Under Secretary of the Treasury.
*5.
The Under Secretary of the Treasury for Monetary
Affairs and the Deputy Under Secretary for Monetary
*6.
Affairs.
The Assistant to the Secretary of the Treasury working
on debt management problems.
*7.
The Fiscal Assistant Secretary of the Treasury.
* Weekly reports of open market operations only.
3/5/63
-228.
9.
10.
The Director of the Division of Bank Operations of the
Board of Governors.
The officer in charge of research at each of the Fed
eral Reserve Banks not represented by its President
on the Federal Open Market Committee.
The alternate member of the Federal Open Market Com
mittee from the Federal Reserve Bank of New York;
the Vice President and Senior Adviser of the Federal
Reserve Bank of New York; the Assistant Vice Presidents
of the Federal Reserve Bank of New York working under
the Manager of the System Account; the Managers of the
Securities Department of the New York Bank; the Vice
President of the Foreign Function having supervisory
responsibility for operations; the Senior Foreign
Exchange Officer of the Foreign Function; the Managers
of the Foreign Department; the officer in charge and
Assistant Vice President of the Research Department of
the New York Bank; the confidential files of the New
York Bank as the Bank selected to execute transactions
for the Federal Open Market Committee; and the Chief
Federal Reserve Examiner or members of his staff.
11.
With the approval of a member of the Federal Open Market
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.
The Committee reaffirmed by unanimous
vote 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 funct on.
The following resolution to provide
for the continued operation of the Federal
Open Market Committee during an emergency
was reaffirmed by unanimous vote:
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 Secre
tary or Acting Secretary of the Board of Governors of the
Federal Reserve System) certifies that as a result of the
emergency the available number of regular members and regular
alternates of the Federal Open Market Committee is less than
3/5/63
-23-
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 con
ditions.
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, sufficient to make a total of seven,
which shall be made up in the following order of priority
(1) each alternate at large (as
from those available:
defined below); (2) each President of a Federal Reserve
Bank not then either a regular member or an alternate;
(3) each First Vice 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 Com
mittee in the place of the person then on the Interim
Committee having the lowest priority. The Interim Commit
tee 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.
3/5/63
-24The following resolution authorizing
certain actions by the Federal Reserve
Banks during an emergency was reaffirmed
by unanimous vote:
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 in lieu of the Federal
Open Market Committee) or when the Federal Open Market Com
mittee (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 obliga
tions.
(2) In case any prospective seller of obligations of the
United States to a Federal Reserve Bsnk is unable to tender
the actual securities representing such obligations because
of conditions resulting from the emergency, such Federal
Reserve Bank may, in its discretion and subject to such safe
guards 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 delivered 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
3/5/63
-25-
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 above 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.
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 Civil and
Defense Mobilization Classified Loca
tion (High Point) on a rotating basis
to have access to the resolutions
(1) providing 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 2:, 1939, re
questing the Board of Governors to
cause its examining force to furnish the
Secretary of the Federal Cpen Market
Committee a report of each examination
of the System Open Market Account.
Reference was made to the procedure authorized at the meeting
of the Committee on March 2, 1955, and most recently reaffirmed on
March 6, 1962, 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
3/5/63
-26
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 by the
Secretary of the Committee.
The current lists were reported to be in
the custody of the Secretary, and it was noted that revisions 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 author
ized on March 2, 1955.
This concluded the consideration cf the continuing authoriza
tions of the Open Market Committee, and the Committee turned to a
review of operations during the period since the meeting of the Committee
on February 12, 1963.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account on operations in U. S. Government securities and bankers'
acceptances during the period February 12 through February 27, 1963,
and a supplemental report covering the period February 28 through March
4, 1963.
Copies of both reports have been placed in the files of the
Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
3/5/63
-27-
The highlight of the recent period has been the suc
cessful advance refunding of eight issues maturing out to
1966 into four new or reopened issues maturing from 1967
to 1980. In this unusually large and rather complex
operation--involving a potential exchange of about $29
billion of outstanding issues, with public holdings
amounting to about $20 billion--the market has given a
particularly good account of itself. Preliminary results,
which we understand the Treasury is announcing this morning,
point to an exchange of almost $8 billion of the eligible
issues, including about $325 million exchanged by various
Government trust fund accounts. Exchanges into each of the
longer issues were more than $1 billion.
The broad scope of the exchange encouraged an extra
ordinarily large volume of market activity, particularly
in the rights and new issues directly involved in the
exchange, but also in a variety of other securities. In
part, this arose as investors took advantage of the oppor
tunities for switching out of rights and moving into bills
or doing their own refunding in the market. In addition,
there were many reports of investors in various outstand
ing issues switching into the securities newly offered in
In short, the exchange was a massive
the exchange.
catalyst opening the way to an enormous variety of port
folio adjustments. Trading volume in the Government
securities market, which typically averages $1-1/2 to $2
billion a day, soared to $3 - $3-1/2 billion from February
21 (the day after the Treasury's announcement) through
February 28 (the day the subscription books closed for all
but individual investors).
On each of the three days from
February 26 to 28, market trading in rights and when-issued
securities alone exceeded $1.5 billion--which was far more
than in any previous advance refunding. Indeed, the volume
of trading in coupon-bearing issues on those days--which
took place against a background of relatively narrow price
movements--may well have been a record.
On the whole, the market atmosphere surrounding the
exchange has been favorable.
It has been less enthusiastic
than on some past occasions when prices actually strengthened
in the face of enlarged supplies of longer term issues, but
there has been an undertone of dealer and investor confidence
in the market. As of March 1, the net dealer position in the
four new or reopened issues was about $800 million.
This was
a sizable amount, but it did not appear to be too different
from professional holdings at comparable dates in earlier
advance refundings or regular refundings.
3/5/63
-28-
Subscription books for the advance refunding remain open
for individual subscribers through March 8, and delivery of
the new securities is to take place March 15. With that, the
Treasury will have completed the second part of the three
stage program it outlined last January 30. The third stage
is to be an auction of long-term bonds, now tentatively
scheduled for early April.
In the meantime, the Treasury is
also planning to announce, later this week, the auction on
March 14 of another $1 to $1-1/2 billion of June tax anticipa
tion bills. Near-term financing plans also include an
enlargement of the weekly bill offerings by $100 million for
a total of eight weeks starting March 28, and the addition of
$500 million to the offering of one-year bills to be sold
April 15 by replacing a $2 billion maturity with a new issue
of $2.5 billion.
Turning to System operations and money market develop
ments, there is little to say in addition to the reports
already distributed. System operations during the recent
interval helped to preserve a steady money market tone in
which Federal funds traded quite consistently at 3 per cent
and member bank borrowing hovered around $140 million. Treas
ury bill rates tended slightly lower over the period, as
outright market demand was augmented to some extent by demand
that stemmed from switches out of rights to the refunding.
With additional market supplies of bills in prospect as a
result of the Treasury financing plans noted above, and with
quarterly corporate liquidity needs now drawing close, it
would ordinarily be expected that bill rates would not move
much lower and indeed might tend upward over the period
ahead. On the other hand, these influences may be offset,
in whole or in part, by downward rate pressures flowing frcm
the reduction of the supply of short-term securities as a
result of the refunding. What the net of these influences
will be remains to be seen.
Chairman Martin commented that it should be borne in mind that
the advance refunding, which was highly successful, had removed roughly
$6 billion of securities from the short-term area.
This came at a
time when the Treasury was experiencing difficulty in obtaining an
extension of the present temporary debt ceiling; it now looked as
3/5/63
-29
though Congressional action was likely to be deferred until after
Easter.
This meant that the Treasury would be running close to the
debt ceiling during the period immediately ahead, and a responsibility
was placed on the Federal Reserve System to try to keep market
conditions as steady as possible during this period.
With further reference to the advance refunding,
noted that most people had felt
$4 billion
the results would be quite good if
of securities were refunded;
to twice that amount.
the Chairman
actually the figure was close
He had not felt that the 3-7/8s of 1974 would be
at all popular, but they had been taken to the extent of over $1 billion.
The importance of the changes that had occurred by virtue of the advance
refunding should not be underestimated.
Thereupon, upon motion duly made
and seconded, the transactions in U. S.
Government securities and bankers'
acceptances during the period February
12 through March 4, 1963, were approved,
ratified, and confirmed.
Before this meeting there had been distributed to the Committee
a report from the Special Manager of the System Open Market Account on
foreign exchange market conditions and on System Account and Treasury
operations in foreign currencies for the period February 12 through
February 27, 1963, together with a supplementary report covering the
period February 28 through March 4, 1963.
Copies of these reports
have been placed in the files of the Committee.
3/5/33
-30
In comments supplementing the written reports, Mr. Coombs
reviewed recent and prospective changes in
the U. S. gold stock,
summarized developments in the London gold market, and described the
results of operations of the gold pool during the month of February.
Mr. Coombs then discussed recent exchange rate developments,
with particular reference to the Canadian dollar and the French
franc, and noted that the enlarged Federal Reserve-Bank of France
swap arrangement in the amount of $100 million became effective
March 4, 1963.
In that connection, he referred to certain adverse
articles in the French press, apparently growing out of an erroneous
interpretation along lines that the U. S. was in the process, through
negotiation
of the enlarged swap arrangement,
$100 million from the French Government.
of trying to borrow
An official of the Bank of
France had called yesterday to express his regrets concerning the
press articles and to assure that the enlargement of the swap arrange
ment was thought of as providing evidence of continuing cooperation
between French and U. S. financial authorities.
Mr. Coombs went on to review recent developments with respect
to the pound sterling, which had been at times under substantial
pressure.
He continued to be hopeful that an enlarged Federal Reserve
Bank of England swap arrangement, the negotiation of which had been
authorized by the Open Market Committee, might be concluded at a
relatively early date.
-31
3/5/63
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
System Open Market Account transactions
in foreign currencies during the period
February 12 through March 4, 1963, were
approved, ratified, and confirmed.
Mr. Coombs pointed out that the existing $50 million swap
arrangement with the Netherlands Bank would mature March 13, 1963, and
that the $250 million swap arrangement with the Bank of Canada would
mature March 26, 1963.
He recommended renewal in each case for a
period of three months on a stand-by basis.
Renewal of the swap arrangements
with the Netherlands Bank and the
Bank of Canada, as recommended by
Mr. Coombs, was authorized.
Mr. Coombs then referred to a memorandum dated February 25,
1963, in which he had requested, for reasons stated, authority to
undertake forward purchases in any or all of the currencies authorized
for System operations up to a combined total of $25 million equivalent
for the purpose of allowing greater flexibility in covering commit
ments under swap arrangements.
The memorandum pointed out that the
Committee's Guidelines for System Foreign Currency Operations provided
that the Special Manager was to submit to the Committee, for advance
approval, proposals to initiate forward operations.
(Mr. Coombs had
mentioned this matter at the meeting of the Committee on February 12,
1963, at which time it was understood that a decision would be deferred
pending the availability of a memorandum on the subject.)
3/5/63
-32
In comments supplementing the memorandum, Mr. Coombs stated
that in another memorandum he would hope to put forward the case for
a similar authorization covering forward sales.
The present request,
however, extended only to forward purchases, on an experimental basis,
up to a maximum of $25 million.
In reply to questions, Mr. Coombs reiterated that the requestec
authorization contemplated that any forward purchases would be limited
to covering commitments under swap arrangements.
He would not
contemplate, without coming back to the Committee, buying forward to
augment outright holdings of foreign currencies.
The request envisaged
experimental operations; if they worked well, possibly he might suggest
at a later date an expansion of the authorization to provide for
acquiring outright currency holdings through buying forward.
At
present, though, he was seeking authorization only to cover outstanding
short positions in foreign currencies by purchasing these currencies
forward.
When the System drew on a swap, ne noted, it was short of
that particular currency and had to buy it back.
of a swap deal.
This was the nature
While the System could buy the currency back at
maturity date of the swap, it could also buy the currency back earlier,
and on occasion there might be advantageous opportunities to buy forward.
He felt confident that it would be possible to keep Federal Reserve
forward operations of this kind distinguished clearly from forward
operations of the Treasury.
3/5/63
-33
In reply to further questions, Mr. Coombs said that the $25
millior figure had been selected on an arbitrary basis.
intended to be modest.
It was
He had assumed that Committee members might
have some qualms about forward operations and that the Committee
would like to have early opportunities for review.
On certain
occasions the total short position of the System under swap arrange
ments had been much greater than $25 million.
However, it would
require a particular set of circumstances in which the foreign
currencies were at a discount to make forward operations advantageous.
Therefore, he did not anticipate extensive use of the requested
authorization, but at the same time he felt that it would be a useful
authorization to have available.
It might save money and contribute
to more efficient foreign currency operations.
If it should develop
that a number of useful opportunities for forward purchases presented
themselves over a period of time, he could envisage the possibility
of requesting that the $25 million limit be raised to, say, $50
million or $75 million.
He recognized that the important issue
involved was not the cost of foreign currency operations to the
Federal Reserve System; that was incidental and not the objective.
Aside from this, however, he felt that on certain occasions it might
be easier and more prudent to operate in the forward market than the
spot market.
It seemed important, therefore, to acquire some experi
ence with forward operations.
If they were carried out on a small scale,
the risk would be minimal, and the experience should be helpful.
3/5/63
-34
Mr. Robertson stated that he regarded this as a questionable
tinkering with market forces.
However, in view of the very limited
scope of the requested authorization, and since the authorization was
requested on an experimental basis, he would approve the experimenta
tion on this small scale.
Limited operations over a period of time
would tend to indicate whether his qualms were justified.
Reference was made to the provision of the Committee's
continuing authority directive for foreign currency operations
limiting to $1.3 billion the holdings of foreign currencies at any
one time, and question was raised as to the sufficiency of the limita
tion.
Mr. Coombs stated that he would consider this limitation as
providing adequate margin for the time being, even if the requested
authorization for forward purchases should be granted.
The limitation
would become inadequate only in the event that certain existing swap
arrangements were enlarged or new swap arrangements were concluded.
In that connection Mr. Coombs referred to certain swap possibilities
that might develop.
In reply to a further question, Mr. Coombs commented that the
Federal Reserve System had always consulted closely with the foreign
central banks concerned in undertaking any foreign currency operations.
This procedure of close consultation would also be followed insofar
as forward operations were concerned.
3/5/63
-35Thereupon, upon mction duly made
and seconded, and by unanimous vote,
the following continuing authority
directive to the Federal Reserve Bank
of New York with respect to foreign
currency operations was approved,
effective immediately:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations reaffirmed
by the Federal Open Market Committee on March 5, 1963:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
The Federal Reserve Bank of New York is also authorized
and directed to purchase, in accordance with the Guidelines
and for the purpose of allowing greater flexibility in cover
ing commitments under reciprocal currency agreements, any or
all of the foregoing currencies through forward transactions,
up to a combined total of $25 million equivalent.
Total foreign currencies held at any one time shall not
exceed $1.3 billion.
This concluded the discussion of System foreign currency opera
tions and related matters.
Accordingly, the Chairman called for
presentation of the usual staff economic and financial reports, and
Mr. Noyes presented the following statement on economic developments:
We are always harassed at this time of the year by
relatively large month-to-month changes in our basic data
3/5/63
-36-
that reflect normal seasonal swings rather than a fundamental
change in the tempo of economic activity. This year there
were 1.5 million fewer people actually employed in January
than in December. Actual production at factories and mines
declined almost 3 per cent from November to December, and then
rose a little from December to January. Retail trade declined
one-fourth from December to January. Yet in each of these
cases we have observed that there was no significant change
after allowance for seasonal factors.
There is no way of "correcting" data precisely for
seasonal variation. No matter how complex the methodology
employed, it must be based on the assumption that the seasonal
influence in the current year is an extension of the seasonal
pattern observed in past years. This is not a bad assumption,
but neither is it a perfect one. Many seasonal influencesthe weather being a good example--vary from year to year as
to intensity and timing, so that previous behavior provides
at best only an approximation of the month-to-month seasonal
change.
The possibilities of sizable month-to-month changes that
are in fact the result of seasonal influence appearing in
seasonally adjusted data are obviously greatest in those
months where seasonal influences are largest and, for most
series, these fall on each side of the year end, No matter
how skillfully and carefully the processing of the data to
adjust for seasonal influence is carried out, we shall always
have to exercise special care in evaluating the significance
of changes that appear in this season.
But these difficulties, real as they are, certainly do
not entitle us to take a four-month leave of absence each
winter from our scrutiny of economic developments. We have
no assurance that significant changes will not occur in this
period--in fact, we know from hindsight that they sometimes
have.
Our underlying statistics are essentially the facts on
the performance of the economy--how many people were at work,
how many tons of steel were produced, how many houses were
started, and how many dollars of bank credit were actually ex
tended. Our knowledge of these underlying facts is just as
accurate in January and February as it is in any other month.
It is simply a little harder to tell whether the changes that
the facts reveal are transitory or are of longer range
significance.
I apologize if it seems to you that I have labored this
point unduly, but it is relevant to my observations as to the
3/5/63
present state of the economy.
-37Despite the wide swings that
have occurred in the raw data, I think it can be said with
reasonable confidence that there has been no significant
improvement or deterioration in over-all economic activity
since November.
The percentage of the labor force unemployed has crept
up a little. The February figure, due to be released on
Thursday, will probably show some further increase--back to
the 6 per cent level.
In more concrete terms, there were
300,000 more people unemployed in February this year than
there were a year ago.
We really have no sound basis for estimating industrial
production in February as yet, but my own guess is that it
will not change much, either way.
We do have some basis for saying that there was probably
not much change in retail sales--the chances seem to favor
a small decline, if anything. The performance of retail sales
in January and February might be regarded as especially dis
appointing in view of the substantial addition to personal
income in January brought about by the accelerated payment
of VA insurance dividends. Some other figures--notably new
orders--were up, and some were down. A rather sizable decline
in the stock market appears to have been interrupted by a
7-point rise in the Dow-Jones industrial average yesterday.
But, taken altogether, it does seem to me that a fairly
clear picture of horizontal movement emerges from a careful
analysis of the rather wide fluctuations in the raw data on
economic activity in the last three months.
Unfortunately, one of the most significant bits of
forward-looking data--the Commerce-SEC survey of plant and
equipment expenditure plans--will not be available for a week
or so. We have, however, had a chance to look at the NICB
capital appropriations survey, due for publication next week,
and it suggests possible improvement in the outlook for
business investment as compared to the rather discouraging
picture shown by last fall's McGraw-Hill survey. This, by
itself, is certainly not a sufficient basis for assuming that
we will have a vigorous pick-up. It does offset to some
extent, however, the rather pessimistic view one might
derive from the behavior of the so-called leading indicators.
I can assure you that I am as tired of saying it as you
are of hearing it, but I find myself again unable to avoid
the conclusion that there not only has not been much change
in the economy, on balance, since the last meeting, but that
no very convincing signs have come to light to indicate the
direction the next move will take when it comes.
3/5/63
-38Mr. Brill presented the following statement on financial develop
ments:
Many economists were puzzled, last fall and early winter,
by a growing disparity in the behavior of measures of produc
tive activity on the one hand and measures of financial activity
on the other. While the production index was clinging to a
plateau, the unemployment rate was bobbling in a very narrow
but high range, and the average work week in manufacturing was
slipping, credit demands seemed exceptionally strong and rising.
In fact, our preliminary flow-of-funds measures indicate a
record for the total of borrowing by Governments, consumers,
and businesses in the fourth quarter of the year.
The banking system contributed substantially to this record
Bank credit rose by over $10 billion from
financing volume.
August through December, and more than a third of the rise was
in business and consumer loans. Reflecting the continued large
inflow of savings deposits, ancther third of the increase went
to real estate loans and municipal securities. There was a
substantial rise in bank financing of security dealers, but
banks' own portfolios of Governments were reduced somewhat.
All in all, it was a pace and pattern of bank credit growth
that in the past has been typical of vigorous economic expan
sion periods and the beginning of monetary restraint, rather
than of very mild growth and relative monetary ease.
Since the year end, however, there seems to be less
incongruity between developments in credit markets and measures
of economic activity. Productive activity has remained on a
plateau, and unemployment has edged up. While bank credit has
continued to expand--perhaps even more sharply last month than
at any time last fall--it has been responding more to Government
financing demands and to savings inflows, and less to any
burgeoning of private credit needs. Bank purchases of Govern
ment securities and loans to dealers accounted for fully half
of the bank credit expansion in January and February. Continued
growth in savings inflows has been reflected in continued
growth in real estate loans and municipal security holdings,
but combined business and consumer lending has fallen to only
a sixth of the total. The drop has been all in business loans,
which hardly increased in either January or February. With
the Government locking up some of the borrowing proceeds in
its own cash balances, and time and savings deposits still
rising, the privately held money supply showed no further growth
3/5/63
-39-
from January to February and required reserves against private
deposits have slipped further down toward the 3 per cent
guideline.
Obviously, two months' data does not make a cyclical
phase, particularly these two winter months. Nevertheless,
the marked drop-off in business loan demands, the relatively
light current and prospective business demands for longer
term funds, and--up to yesterday--an apparent pause in the
rise of stock prices suggest that we may now be in a period
when financial developments will more closely mirror the lack
luster performance in production and sales.
Consequences for the interest rate structure could be
troublesome. Treasury needs for new money are not expected
to be large over the balance of this fiscal year, and in the
absence of supplementary demands from the private sectors,
and with savings flows continuing large, we may once again be
addressing ourselves to the problem of propping the rate
structure for international capital flow purposes, but in
the context of a 6 per cent unemployment rate.
There are, of course, some possibilities of a resurgence
in activity that might be reflected in financial markets. As
Mr. Noyes has pointed out, in a few days we will be getting
a new reading on business plans for capital spending this
year. The last surveys on this subject were not optimistic,
but a rapid turnaround in business sentiment is not unprec
edented. Back in 1956, the March Commerce survey indicated
much stronger business spending plans than had been reported
in the previous fall's McGraw-Hill survey, and touched off a
scramble for capital market funds that resulted in a very
rapid rise in long-term interest rates. With wides:read
expectations of a large Federal deficit and cash borrowing
ahead--tax cut or no--a bullish report by the Department of
Commerce this month could touch off such a scramble again.
In the short-term area, General Motors' very publicly
announced intention to stockpile steel against strike possi
bilities might spark an upsurge in business loan demands
generally, and there doesn't seem to be any evidence fore
shadowing a slackening in consumer demands for new cars or
for the credit to finance these car purchases.
Such developments could provide an underpinning for the
current rate structure, but in their absence it is hard to
see what demand forces in the spring months would overcome
the depressing influence on rates of a continued very large
volume of savings. Perhaps once again it may be necessary
to depend on the Treasury to borrow nd build up its cash
-40-
3/5/63
balances in order to maintain the current level of short rates.
The Treasury will first have to persuade Congress to raise the
debt ceiling, however. The present ceiling leaves some margin
over actual cash needs this month, but becomes very restrictive
on April 1.
Over the very short term, market forces will likely
operate to keep rates up for a while. We may already have had
a large share of the adjustment in short-term rates likely to
stem from the Treasury's refunding, with "rights" switching
by dealers, corporations, and institutions largely completed
by the end of last week. Until about midmonth, corporate needs
for cash to make tax and dividend payments and dealer needs to
finance "rights" will help maintain money market pressures.
After midmonth, however, these pressures should moderate.
Present and still tentative Treasury financing plans would
replace the $3 billion March tax bill maturing on March 22 with
a June tax bill of $1-1/2 billion paid in on that date, plus an
increase in the weekly bill auctions beginning March 25 and an
increase in the one-year bill in mid-April. Whether the con
templated amount and timing of Treasury offerings will be
enough to sustain rate levels--after the switch out of about
$6 billion of short-term instruments in the refunding and in
the face of high corporate cash flows and reinvestment demands
stemming from the fairly large municipal calendar--is a matter
of fine judgment. The situation developing later in the
month--around the week beginning March 20--could be one of
renewed downward pressure on short rates. Moreover, this is
the period in which the demand for short bills generated by
the April 1 Cook County property tax reaches a maximum.
Mr. Furth presented the
following statement with respect to the
U. S. balance of payments:
Net transfers of gold, dollars, and other convertible
currencies to foreigners during February are tentatively
estimated at $100-$150 million, less than half the January
In view of the effects of the dock strike, however,
figure.
the January and February figures should be combined; this
gives a monthly average of perhaps $250 million--only
slightly lower than the monthly average for 1962. The gold
portion of these transfers, about $80 million a month, was
slightly higher than the monthly average for 1962.
The January-February average is consistent with recent
projections of the deficit for 1963. Deducting expected
3/5/63
-41-
further prepayments of European debts to the U. S. Govern
ment, the payments deficit for 1963 might be guessed at
about $2-1/2 billion. Although this actually would be a
modest improvement over 1962, the statistical adjustments
made last year would give the impression of a deterioraticn,
with possible repercussions in international financial
markets.
Even without such repercussions, the problem of cover
ing such a deficit by means other than gold will be
difficult to solve.
If the foreign payments surpluses that
must correspond to the U. S. deficit were to accrue to
Canada or to less developed nations, we could count on these
countries increasing their holdings of U. S. dollars. But
if the surpluses were again to be concentrated in Conti
nental Europe, we should be confronted with a decided
unwillingness of these nations to cooperate in protecting
our gold reserves, except perhaps by very temporary means
such as System swaps--means that should be preserved for
an emergency and not be used to finance a persistent deficit.
In this connection, it is intriguing to find that
virtually all Continental European nations project a decline
in their payments surplus for 1963. Unfortunately, similar
projections for earlier years have generally proven to be
exaggerated. This year they sound slightly less unrealistic,
in view of the continuing rise in European costs and prices
and in view of the uncertainties about the continuation of
the flow of U. S. capital to Europe created by the recent
Common Market difficulties. Should these projections for
once turn out to be correct, the international financial
position of the United States would be greatly eased even
if the total U. S. payments deficit were not affected. But
it would be rash at this time to pin great hopes on such a
development.
Mr. Young presented the following report based on his attendance
last week at a meeting in Paris of Working Party 3 of the Economic Policy
Committee of the Organization for Economic Cooperation and Development:
This meeting was largely directed to close scrutiny of
the U. S. payments deficit and the relation thereto of U. S.
monetary and debt management policy. The tone of the meeting
was highly critical of U. S. financial policy.
3/5/63
This critical tone no doubt reflected in part the dis
appointingly large size of the U. S. deficit for 1962 and
the inability of the European experts to foresee any sizable
reduction in our payments deficit for 1963.
It no doubt
reflected, too, some disillusionment on the European side
as to how soon the U. S. economy would benefit from and
respond to the stimulus of a tax cut, with resulting
possibilities for less easy U. S. monetary conditions and
I earlier reported
some rise in U. S. interest rate levels.
to you that they regard these developments as essential to
restoring U. S. payments equilibrium.
The central theme of the European attack was that the
continuing large U. S. payments deficit, whatever its other
contributing causes, is being aggravated and prolonged by a
net capital outflow that stems in part from excessive
domestic liquidity. While this high level of liquidity may
have resulted more from heavy financial savings flows than
from money creation by the central bank, the Europeans feel
that monetary policy is shirking its appropriate role of
absorbing excess liquidity.
Debt management, according to the Europeans, must also
take scme responsibility for continuing payments deficit.
It had been financing short a budget deficit in order to
support short-term interest rates. Thus, it had failed to
bid directly for long-term savings, and thereby had furtherec
conditions in long-term markets, including interest rate
levels, conducive to capital outflow :o foreign borrowers.
Since U. S. monetary and debt management policies,
according to this theme, were functioning in a way to permit
if not encourage, a sizable seepage or spill-over of U. S.
savings funds into international markets, European central
banks could hardly be expected to help the U. S. finance its
payments deficit. Correction of the situation was up to the
U. S. authorities. They should no longer delay. In fact,
avoidance of delay in action was crucial because of waning
confidence in the dollar.
The attack on U. S. policy was supported in varying
degree by all of the delegations of countries in payments
surplus. The only support for the U. S. position came from
two other countries with high unemployment and payments
deficit problems--the U. K. and Canada.
The delegations of these two countries gave the U. S.
their support on grounds that the U. S. was making progress
in meeting its payments deficit problem; that it needed time
to adjust its payments position; that domestic economic
3/5/63
-43-
factors in the U. S. did not justify restrictive monetary
and debt management action at this juncture; and that pros
pective world demands for goods and services were not so
buoyant that any dampening of the U. S. market via monetary
restriction could be regarded with equanimity. In addition,
the Canadians pointed out that Canadian borrowing in U. S.
markets was essential to cover Canada's current account
deficit and that Canada's own monetary policy was and had
to be geared accordingly.
The head of the U. S. delegation gave an extended
explanation of the main factors accounting for the U. S.
payments deficit and of the national policies that were
being pursued to achieve correction.
He laid particular
stress on the U. S. directing its policies at fundamental
forces of imbalance and eschewing policies that involved
direct governmental interference with market processes. To
lay the foundation for a better export performance, Govern
ment policies had been aimed at maintaining relative price
and wage cost stability, more widespread educational and
promotional efforts among potential exporters, and more
competitive export credit programs.
As to Government expenditures abroad, he underscored
the efforts being made to hold down military outlays, to
tie aid, and to control foreign expenditures of other
governmental agencies.
On capital movements and their sensitivity to higher
U. S. interest levels, the U. S. spokesman thought that the
domestic credit demands would be more responsive than
foreign demands would be, but he recognized the need for a
close relationship of U. S. short-tern rates with those in
other markets, arguing that maintenance of such a relation
ship was already a phase of U. S. policy and on the whole
a successful phase.
He further stressed that U. S. credit
ease this past year was more the result of a large increase
in financial savings by the public than of easy monetary
policy and that our money supply increase had been small
in comparison with increases experienced by most European
countries.
As the U. S. spokesman saw it, the tax program,
fundamentally, had the object of increasing domestic in
centives to invest, thereby stimulating domestic demands
for savings. Until this stimulus took hold, the U. S.
probably had to get along with some continuing net outflow
of capital, and an accompanying payments deficit. The U. S.
authorities hoped and believed that the deficit for 1963
3/5/63
-44-
would be significantly smaller than in 1962. Part of this
smaller deficit, he suggested, might be financed by U. S.
Government borrowing abroad, part by larger holdings of
dollars by some countries, and part by gold outflow.
The Chairman's summary at the close of the first day's
discussion, but not significantly modified the next day,
indicated that there was agreement that U. S. payments
equilibrium had to be reached soon, but without steps that
might interfere with domestic expansion or otherwise do
harm to the U. S. or the world economy. At the same time,
domestic U. S. expansion would not by itself bring external
payments equilibrium, and consequently monetary policy,
which up to now had been primarily domestically oriented,
might need soon to give greater attention to the correction
of external disequilibrium. The summary stressed the
differences of view as to whether monetary policy should be
adapted promptly or await enactment of the tax cut.
The Chairman gave his personal view that, while the
U. S. might be able to borrow surplus dollars from some
European central banks for interim balance of payments
purposes, such accommodation on any scale would not be
appropriate unless and until U. S. fiscal and monetary
policies were oriented in a way that would definitely foster
and help to produce a payments equilibrium. He observed
in conclusion that when a country's financial policies are
regarded as appropriate, its trading partners have an
obligation to assist in bridging the presumably short time
span necessary for such policies to bear fruit.
No official record is kept of the Working Part 3 dis
cussion, and therefore no minutes will be available as a
report of the meeting. Each delegation takes such notes as
it pleases, and this resume is therefore no more than a
summary of personal and other U. S. notes.
It was agreed
at the close of the meeting that no report of the discussion
about U. S. policy would be communicated by the Chairman to
any other OECD body.
The next meeting of Working Party 3 is scheduled for
late April.
The U. S. deficit problem will again be on the
agenda of that meeting, with a Secretariat paper on the U. S.
situation to be developed in the interim. The meeting will
also have on its agenda, however, a review of barriers to
foreign borrowing and capital outflow in such surplus
countries as France, Italy, and possibly Germany. This is
a subject that the U. S. delegation has long pressed for
agenda listing and discussion.
-45
3/5/63
In reply to a question, Mr. Young said that all of the
principal European countries were concerned about inflation and cost
increases.
They felt that in part these problems reflected their
balance of payments surpluses, which they ascribed in turn to the
U. S. balance of payments deficit.
They considered themselves
handicapped, primarily because of external influences, in going
forward with the kinds of policies called for by their own domestic
situations at the present time.
Although various countries had
sterilized their gold and dollar reserves to a degree, monetary
increases were occurring at annual rates of 10 or 12 per cent or
more.
They maintained that they did not have the same latitude in
this regard as the United States.
The Chairman then called for the usual go-around of comments
and views with respect to economic conditions and monetary policy
beginning with Mr. Hayes, who presented the following statement:
A number of current statistical indicators were on
the down side in January, emphasizing the hesitancy that
has been characteristic of the domestic business situa
tion. Such hesitancy is not, of course, unusual in the
early months of a new year, and especially bad weather
and strikes may have played a part in producing some of
these declines. Moreover, a number of other elements
continue to indicate a moderate degree of strength, such
as consumer spending on automobiles and consumer inten
tions to buy in the future. New orders for durables took
a turn for the better, fourth quarter plant and equipment
spending turned out to be a bit higher than expected, and
available fourth quarter profits reports look rather good.
On balance the outlook is probably still for a continued
moderate advance in over-all activity but, partly because
of disappointment and uncertainty as to the tax program,
3/5/63
-46-
business optimism has probably diminished a little in the
past month or two.
Recent bank loan data confirmed the earlier impression
that the loan run-offs in January largely offset the
unusually substantial loan expansion in December and that
the underlying strength of loan demands has not shown any
marked change for some months. Such net improvement as
has taken place since the beginning of December has
centered in security loans and loans to sales finance
companies, with business loans showing no real vigor. Data
for the first three weeks of February may possibly lend
themselves to the interpretation that a somewhat better
In general.
"tone" of loan demands is currently developing.
liquidity continues to be ample.
It may be worth noting in passing that there has been
a sizable increase in stock market customer credit since the
cut in margin requirements last July, the current level of
about $5.6 billion being 14 per cent above the level at that
time. I share the feeling of uneasiness that has been ex
pressed from time to time by the Chairman over the possibil
ity that easy credit availability may have given undue
impetus to speculative activities in the last year or so,
especially in the real estate area.
While there are only fragmentary data as yet on the
February balance of payments, they seem to point to a
continuing over-all deficit at roughly the same annual rate
as the last couple of years, which is certainly not good
enough. Another careful reappraisal of the 1963 outlook by
the Government's balance-of-payments technicians yielded a
set of forecasts anticipating a deficit ranging from $2.5
to $3.9 billion as compared with the $3.7 billion deficit
recorded in 1962 before taking into account certain special
I have found especially disturbing the
transactions.
tendency in the last six months or so toward a somewhat
weaker export position, when many had counted on stronger
exports as the principal key to payments equilibrium. This
situation suggests the vital need for strict control of
costs and lends weight to Per Jacobsson's recent proposal
that this country should try to achieve stability in money
wage rates rather than progressive wage increases geared to
average national productivity gains, in order to bring down
rather than merely to stabilize its cost structure.
The outflow of gold was resumed last week and the
prospect is for substantial gold sales during the coming
months.
No other results can be expected with the over-all
payments deficit at its present level.
Although there can
3/5/63
-47-
be no precise measure of what constitutes the danger point
for our gold stock in terms of the psychology of persons
and institutions, both here and abroad, capable of moving
large funds out of this country, we are clearly getting
closer to the danger point as the gold stock diminishes
while the balance of payments deficit continues unabated.
I remain convinced that diminished credit availability
and somewhat higher interest rates, particularly for short
term maturities, can make an important contribution to a
better balance of payments position, partly because of the
psychological effects that such tendencies might have on
thinking, both here and abroad, with respect to the outlook
for the dollar. In passing I might say that I do not share
Per Jacobsson's faith in a continuing downward trend of
interest rates in Europe, which he counts upon to make
easier the maintenance of low rates in this country. There
is no reason to believe that some of the European countries
will refrain from restrictive measures either to cope with
the danger of serious inflationary price and wage trends or
to prevent the development of appreciable drains on their
monetary reserves.
Already in France there has been a
start on such restrictive actions.
Admittedly a move toward lesser ease would involve
some risks with respect to the domestic economy, but I
believe they are minor risks in comparison with the growing
It would be
danger to the dollar's international standing.
highly desirable to have any decisive move toward less
ease on the part of the System receive the support of the
Administration. Also, having in mind that monetary policy
by itself cannot hope to cure a balance of payments deficit
of the magnitude in question, I would hope that such a
policy move would be accompanied by decisive actions in
other areas on the part of the Administration to reduce the
balance of payments deficit. But unless the System is pre
pared to play its part, it can hardly expect to see a
concerted and effective attack on what I believe to be our
most critical financial or economic problem.
As we are in the midst of the Treasury's advance
refunding, in which market participants have extended
maturities and dealers have acquired large positions that
need to be worked down, we must obviously avoid any policy
changes for the time being. However, shortly before the
next meeting of the Committee there might be an opportunity
for a start on open market operations designed to reduce
somewhat the current degree of monetary ease. There might
also be an opportunity late in the month for an increase in
3/5/63
-48
the discount rate, if the System were willing to give a
clear signal of its concern for our international position.
Alternatively, the latter half of April should provide a
"free period" when action of this kind might be consideredobviously with due consideration to any changes in under
lying conditions that may have occurred in the interim.
With respect to the directive, it would seem to be
appropriate to change the wording somewhat, even in the
absence of the slight change of policy I am proposing, if
for no other reasons than to demonstrate that the direc
tive's wording does not have the same "frozen" quality as
the former (b) clause.
In reply to inquiry by the Chairman as to whether he had specific
suggestions for modification of the current economic policy directive,
Mr. Hayes said that he would recommend irclusion in the first paragraph
of a sentence stating that the current policy of the Committee recognized
that achievement of a balance in the international accounts of the United
States was required to assure a sound continuing growth of the domestic
economy.
Such a sentence would give recognition in the directive to
what was in his opinion a most important consideration, namely, that
lack of balance in this country's international accounts was a great
shadow over the domestic economy and that the achievement of a balance
in such accounts was required to assure continuing domestic economic
growth.
Mr. Hayes also recommended changing the second paragraph of
the directive to specify that open market operations during the next
three weeks would, as soon as practicable consistent with Treasury
financing operations, be conducted with a view to maintaining a
slightly greater degree of firmness in the money market than in recent
weeks.
3/5/63
-49
Mr. Shuford observed that domestic business activity
apparently was continuing at about the same level that had pre
vailed for the past several months.
The broad measures of economic
performance did not seem to have broken out of the narrow range in
which they had moved since last summer.
A similar situation existed
in the Eighth District, where there had been no significant changes
from the levels of last fall and early winter.
Employment showed no
change since November, the level being slightly lower than last sum
mer but a little higher than a year ago.
Industrial use of electric
power and department store sales had changed little in the past nine
months, although each was somewhat higher than a year ago.
In the
financial area, preliminary figures indicated' that total deposits
were about unchanged from January to February.
Business loans
appeared to have declined somewhat.
Mr. Shuford commented that monetary developments in the
nation, as well as fiscal developments, had been expansionary during
the latter part of 1962.
The rates of increase in bank reserves,
bank credit, and the money supply were greater than appeared to be
desirable for any extended period of time.
Since December, however,
monetary developments had been less stimulative.
Reserves in support
of private demand deposits had declined, and the money supply had
risen at a reduced rate.
3/5/63
-50
Mr. Shuford went on to say that his uneasiness with regard
to the balarce of payments situation had increased during the period
since he began attending meetings of the Open Market Committee regu
larly several months ago.
There appeared to have been no significant
improvement in that situation, and it might be necessary at some
juncture to take steps of a more positive nature than any taken in
recent months.
It seemed to him, however, that corrective steps in
areas other than monetary policy were necessary if the fundamental
problem was going to be solved.
Monetary policy must play a part, and
at the appropriate time it might be necessary, as he had indicated,
to take more positive steps.
He hoped, however, that if actions were
not instituted in other areas first, at least they would be taken in
coordination with monetary policy actions.
As to monetary policy for the short-run future, Mr. Shuford
said he would favor no change.
He would like to see a continuation
of about the same degree of money market firmness that had prevailed
during the past several weeks.
count rate at this time.
He would favor no change in the di
(In this connection Mr. Shuford mentioned
that there had been a brief reference to the possibility of a discount
rate increase toward the end of the most recent meeting of the St.
Louis directors.
He did not know what conclusions the directors might
reach if the matter was explored more extensively.)
3/5/63
-51
Mr. Bryan said that the trend of Sixth District employment
figures had changed very little.
had increased somewhat.
On the other hand, personal income
Bank loans and investments were rising; the
financial series were strong.
He did not find evidence in the District
or in the nation that the economy had moved very much or that it was
clearly poised for a decisive move in either direction.
As he saw it, Mr. Bryan said, no change in policy was called
for at this time., The reserve picture struck him as quite appropriate.
The supply of reserves was above the guideline used by the Board's
staff and slightly above the guideline that he (Mr. Bryan) had been
using.
He would not change the discount rate at this time.
As to the balance of payments, Mr. Bryan said that he was
indeed concerned.
However, he would like to play on a team, so to
speak, and he would like to see more things done outside the area of
monetary policy,
If other corrections were made, he would favor the
use of monetary policy in a complementary way.
At present it appeared
to him that about the only thing monetary policy could seek to accom
plish would be to diminish capital outflows, which would require sub
stantial interest rate increases in order to be effective.
If foreign
aid and perhaps military expenditures could be reduced further, and if
American citizens were discouraged from excessive travel abroad, then
he would want to take action in the area of monetary policy.
Under
present circumstances, however, he thought it would be perilous for
3/5/63
-52-
the System to undertake the deflating of the domestic economy that in
his opinion would be necessary to reduce capital outflows sufficiently
to provide a solution to the balance of payments problem.
Mr. Bopp said that in advance of this meeting he had prepared
a statement for presentation.
However, he had been influenced by the
discussion that had taken place this morning.
Accordingly, instead of
the somewhat more stimulative monetary policy that he had intended to
advocate, he would now favor no change in policy for the next three
weeks.
At the same time, the paper that he had prepared suggested the
general tenor of his thinking, and he would like to read it.
Mr. Bopp
then presented the following statement:
As one looks at the economy in early March, it is hard
to distinguish the real situation from fluctuating moods and
sentiment. When it comes to business conditions in a Federal
Reserve District, we have the further complication of lagging
information. Business in the Third District probably worsened
in January, but there are some inconsistencies in the available
bag of indicators.
Although unemployment is up again and total
employment has not increased for some time, the demand for
labor (help wanted ads and average work week) may have strength
ened a little in December and January. Since January, unemploy
ment claims have decreased seasonally and steel production has
rebounded, indicating that February may have seen some slight
improvement in Third District economic activity.
This tentative possibility is supported by banking de
velopments. Loans turned up in the last two weeks, halting
the typical seasonal decline. This upturn, brief as it has
been so far, seems quicker and more sharply defined than in
comparable periods in recent years. Last year there was no
definite sign of loan expansion, following the seasonal re
ductions after the turn of the year, until at least March. In
Business
1961 there was no definite loan expansion until April.
loans, loans to sales finance companies, real estate loans,
and the "all other" category have climbed over the last two
weeks.
3/5/63
-53In short, changes in the level of activity in the Third
District have been modest and mixed, as has been true in the
country as a whole. Unfortunately, the general level at
which these changes are taking place remains at the inadequate
plateau reached last summer.
I agree that it would be appro
priate to stimulate aggregate demand by means of tax reduction.
What we have had, however, is considerable talk of tax reduc
tion accompanied by actual increases in Governmental revenues
via social security and higher postal rates, temporarily offset
in January by VA insurance dividends. To me this means that
until we secure actual relief from fiscal policy, monetary
policy will continue to have to bear a disproportionate share
of our total program to stimulate demand.
Our current directive is permissive of moderate growth
in bank credit and in reserves. Meanwhile, we have more than
adequate raw materials, plant, equipment, and manpower to sup
port expansion in real terms. Under these circumstances, it
seems to me we should stimulate the demand for credit rather
than accommodate the supply to autonomous increases in demand.
There is a risk in such a program, especially internation
ally. Some feel also that additional credit would go to wrong
uses. For my own part, I am willing to rely on the market to
distribute the credit, in the belief that lenders are sophisti
cated and desire repayment of principal as well as interest.
In conclusion, I am unhappy with our over-all economic
program. I wish the mix were different. I would support a
different monetary policy as part of an over-all program
directed toward both our domestic and our international prob
lems.
As of today, however, I do not see prompt development
of such an over-all program; and therefore reluctantly, come
to the conclusion that a somewhat more stimulative credit
policy is appropriate.
In conclusion, Mr, Bopp repeated that in light of the discus
sion thus far at this meeting he would recommend no change in policy
at the present time rather than the shift in policy recommended in
his prepared statement.
Mr. Fulton reported that business activity in the Fourth
District was perceptively on the upgrade in February despite continued
3/5/63
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harsh weather.
New auto sales ran above the January level; used car
sales also were satisfactory, with steady prices and reasonable in
ventories.
Department store sales sagged further on a seasonally
adjusted basis, with a five-week moving average standing at the lowest
level since last mid-July.
It was felt, however, that continued snow
and cold had been a major contributor to this situation.
Steel ingot production had expanded considerably in the
District, but not quite as much as nationally.
New orders had in
creased, indicating inventory building on the part of users.
The
mills themselves were producing some ingots for their own inventory,
to be finished later on order.
Discussions with businessmen revealed
hedge buying against a strike, which was likely to have an adverse
effect on production in the last half of the year.
Construction activity had moved up sharply in the District;
several large projects had increased the total for both commercial
and residential buildings.
Despite continued cold weather, the rate
of insured unemployment in the Dist -ict declined in all but one of
the major labor market areas during the first three weeks of February.
On a seasonally adjusted basis, the total was 5 per cent lower during
the week ended February 23 than it had been in any previous week this
year.
The greatest improvement occurred in the steel-producing areas.
The decline in loans thus far in 1963 had been slightly larger
than in previous years, reflecting a sharp drop in loans on securities
3/5/63
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and a smaller than usual increase in consumer loans.
Business loans
had declined at about the same rate as in the past two years.
The
decline in total deposits was less than in previous years due to
different patterns of public and time deposits.
As for monetary policy, Mr. Fulton felt that a continuation
of the level of free reserves and short-term interest rates that had
existed in the past three weeks would be appropriate for the coming
period.
He would not propose a change in the discount rate.
In the
directive, he would remove the phrase "and in view of the forthcoming
Treasury financing" in the first sentence of the second paragraph.
Otherwise, the directive seemed to him to be appropriate.
Mr. Mitchell said it seemed to him that the staff description
of the domestic economic situation was accurate.
There had been sub
stantial monetary expansion in the last quarter of 1962, but it had
not yet resulted in enough economic action to provide assurance that
the economy was definitely on the upturn.
In view of this uncertainty,
he did not believe a change in monetary policy at the present time
would be justified by domestic considerations.
On the balance of payments side, Mr. Mitchell said, he was
more optimistic than in a long time.
That was not due to anything
this country had done; instead, it reflected the difficulties of this
country's principal competitors.
He felt that the possibilities
mentioned by Mr. Furth had a chance of being realized this year.
The
3/5/63
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trading position of many countries was deteriorating, and Common Market
developments seemed to have had at least a psychological impact favor
able to the dollar.
Further, Americans might be having second thoughts
about investing abroad due to political and economic developments.
After comparing the restrictions in European capital markets
with the relatively free capital markets in this country, Mr. Mitchell
expressed the view that the maintenance of the short-term interest rate
was generating the kind of abnormalities in the U. S. economy that had
been generated by pegging the price of Government bonds prior to 1951.
The support of the short-term rate perhaps had not reached a critical
stage, but he felt it was an abnormality that had a worsening influence
on current problems.
With liquidity at a high level, it was desirable
and possible to achieve some funding if the gap between short- and
long-term rates could be widened.
Advice was being received from Europe that long-term rates
should be increased.
Obviously, however,
to the confidence of the American people.
that would come as a shock
If investors in this country
came to believe that the Federal Reserve was fixing interest rates all
along the maturity line, there would be serious
function and operations.
misunderstanding of its
The basic balance of payments problem was
certainly serious, but he would like to see action taken on other fronts.
He did not believe that too much was going to be accomplished just by
protecting the short-term rate.
Recently he had made certain suggestions
3/5/63
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about tax considerations, and since that time many people had been
talking to him in terms that tax considerations were important in
many fields.
They appeared to have a distinct bearing on decisions
as to where money would be placed in the world's markets.
If he thought the balance of payments problem really could
be corrected by the use of monetary policy, Mr. Mitchell said, he
would favor doing as much as possible, but he did not believe this
would provide a solution.
On the other hand, monetary policy could
be of some help in relation to the domestic situation.
At the present
moment he felt that monetary policy was doing enough in the latter
regard, but it might be called upon to do more before long, partly
due to the uncertainty about passage of the Administration's tax pro
posals and the question whether, in any event, such action would
provide too much or too little of a stimulative effect.
In substance,
monetary policy seemed to be about the only tool available to encourage
the domestic economy to expand.
As he had said, however, it was his
conclusion that at this particular time monetary policy need not be
changed.
He would be willing to modify the policy directive in
accordance with any of the suggestions that had been made except those
of Mr. Hayes.
Mr. King noted that he had been more or less out of touch with
economic developments during the past several weeks.
Therefore, he had
no particular recommendation as to monetary policy at the present time.
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With respect to the policy directive, it appeared that one or two of
the technical changes mentioned at this meeting might be appropriate.
Mr. Shepardson expressed the view that the economic situation
had been covered well in the staff reports at this meeting.
uncertainty as to future economic developments.
There was
There was also un
certainty as to what might be done by way of implementing some of the
suggested approaches to the balance of payments problem.
the outlook seemed rather unclear at this time.
Altogether,
Accordingly, he felt
that it would be appropriate to continue the present monetary policy
for the next three weeks.
Mr. Robertson stated that his views were very much in accord
with those expressed by Messrs. Bopp and Mitchell.
In exposition of
his thinking, he presented the following statement:
I have been somewhat heartened by the developments
since our last meeting. For one thing, the decline in
bill rates that has taken place was allowed to proceed
without strong counteraction by the Trading Desk to push
It is no secret that
it back up to its mid-February high.
I was concerned lest we fall into a "bill rate only"
dir ctive to the Manager of the Account that would require
him to oppose bill rate declines even at the expense of
restricting reserve availability and tightening general
money market conditions much more than was called for
by the larger aims of monetary policy. I was glad to see
the Manager refrain from any appreciable restrictive
action in the face of the bill rate decline of the last
three weeks, allowing the technical and expectational
factors that were peculiar to the bill market to ease
conditions slightly there, without altering the even-keel
position in other sectors of the money and credit markets.
I also take some encouragement from the apparent
pause, if not reversal, in the contraction in reserve
3/5/63
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utilization by the banking system that had seemed to be
developing around the time of our last meeting.
I continue
to think that our domestic business s:tuation is such as
to benefit from maintenance of a general atmosphere of
credit availability, with bank loan funds abundant and with
growth proceeding in the money supply as well as in time and
savings deposits. The current business climate, fraught
with uncertainties as to tax cut prospects, strike possi
bilities, and the strength of final demands in some key
markets, is not well braced to stand any additional un
certainty regarding possibly tighter money conditions.
If, in all these circumstances, businesses appear willing
to proceed with a high level of investment (as may be
learned in a few days from reports of survey results),
then the proper course for policy would seem to be to
accommodate and sustain such demands, rather than to take
any action that might restrain them.
Our international financial flows are giving us less
reason than at other times to curtail money and credit
availability. Those kinds of flows that might be deemed
most susceptible to moderate changes of monetary policy
are less troublesome currently, and the relevant bill rate
differentials are, if anything, mildly encouraging to a
flow in our direction. This is a good time, I think, to
reiterate two points concerning our capital flows. First,
rate relationships between U. S., Canadian, and U. K. bills
are such that any significant unilateral rise in the U. S.
bill rate might even lead to some inflow of funds from
Britain and Canada. In the current economic and political
circumstances of both countries, sizable reserve losses to
the U. S, are not, I submit, desirable--and certainly not
something that we should be taking deliberate action to
create. Second, capital outflows, for all their reserve
impact, are not an unmixed evil. Unlike trade deficits,
capital outflows have inherent in then some return flow
Interest and dividend earnings accrue, debts
prospects.
have to be repaid, and equity investments abroad are sold
from time to time. As time passes, the return flow of
funds to the U. S. is bound to rise, and it is very hard
to believe that such a rise will not more than keep pace
with gross new capital outflows, particularly with some
recipient countries uneasy about the size of foreign capital
investment.
Thus, in a real sense of the word, net capital
outflows can be eventually self-dampening.
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I do not assert that this characteristic of capital
flows permits us not to worry about them at all. My point
is that we do not have to set monetary policy as if it
were the only brake upon a potentially limitless and use
less outflow.
With all these considerations in mind, it seems to
me that the best course for monetary policy over the next
three weeks is to hold more or less a steady course. I
suggest that the resolution of doubts be on the side of
ease; but no greater policy change would seem practical
considering the current Treasury financing.
I am concerned, however, that our directive to the
Manager be such as to suggest the Committee's operational
intent fairly and as concretely as feasible. To that end,
I should like to suggest the following somewhat more ex
plicit language as a substitute for the second paragraph
in the present directive:
"To implement this policy, operations for the
System Open Market Account during the next three
weeks shall be conducted with a view to maintaining
marginal reserve availability at about the average
level thus far this year, fluctuating as necessary
to moderate marked swings in money market conditions
and to partly offset any tendency for aggregate re
serve expansion to deviate substantially from the
average rate for 1962 as a whole."
To give you a concrete idea of the reserve statistics
which this kind of directive would be asking the Desk to
keep in mind, let me report that thus far this year free
reserves have averaged about $330 million and borrowings
around $135 million, and that total reserve expansion for
the year 1962 as a whole averaged a shade over 3 per cent,
if you include the reserves freed by the reserve require
I would not want to include
ment reduction last fall.
these specific figures in any directive, because I would
not want either the Manager or the public to be led into
thinking that the Committee wished to achieve any precise
statistical objectives, or that it had any illusions that
the Manager could in fact hit such statistical targets
even if they were desired. Rather, I think the purpose
of our directive should be to suggest, in clearly objective
terms, the kind of money market and reserve climate that
the Desk should be seeking to achieve and the general way
in which the Desk should modify its operations if results
do not turn out as desired.
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Mr. Mills said that as he surveyed the areas for policy
determination by the Open Market Committee, it appeared that at present
they had been narrowed and were conditioned by Treasury operations.
The
success of the Treasury's advance refunding might have a darker side in
that, by removing a certain volume of relatively short maturities into
the longer term areas, there was the possibility of downward pressure
being exerted on the short-term interest rate.
If such a development
should occur, it would leave the Federal Reserve in the unenviable
position of choosing whether to support the short-term interest rate in
an effort to keep it at some particular level or whether to allow the
rate to fall to a level determined by market factors.
alternative would be his personal choice, because he
The second
felt that too
great a preoccupation with maintaining the interest rate structure would
be likely to put pressure on the money supply at a time when it should
be maintained or encouraged to increase.
Fortunately, the unwinding of
dealer positions in the refunding operation would produce a cushion
that might absorb additional demands for credit without undue tightness.
Mr. Mills reiterated the concern he had expressed on previous
occasions that a pegging of the short-term interest rate gave a false
picture of the state of the Government securities market and other
securities markets.
If it were abandoned, he felt that the sensitive
ness of a free market would produce a realistic short-term rate of
interest, one that would be found not to be out of line with balance
of payments considerations.
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As to the balance of payments, Mr. Mills said he was among those
who felt that monetary policy was not a panacea for correction of the
problem.
He thought that primary responsibility must rest with the
Treasury Department and that strong measures might be called for in the
near future, in which event monetary policy would be principally a
coordinate to the broader policies that would have to be adopted.
Referring to the remarks of Mr. Bopp, Mr. Mills expressed con
cern that the availability of credit be adequate to sustain the money
supply.
The uses of that credit could not, of course, be controlled by
the Federal Reserve System, acting within its present field of
responsibility; the System could not determine whether the credit would
This
seep into undesirable speculative areas, real estate or otherwise.
was a problem that might have to be faced through reconsideration, at
some rather remote time, of selective credit controls.
For the moment, Mr. Mills said, he would favor no change in
monetary policy.
Neither would he favor a change in the discount rate.
As to the policy directive, he found himself disillusioned.
The changes
in wording seemed to have become almost a matter of gamesmanship.
Various
changes were made, but when the movements in reserve statistics were
measured against the words of the directive, he found it difficult to see
a correlation.
Mr. Wayne reported that recent statistics and survey returns
suggested some general improvement in Fifth District business conditions.
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Seasonally adjusted bank debits, nonagricultural employment, and manu
facturing man-hours rose in January following December declines.
While
recognizing the limited significance of regional developments duri-g a
single month, it was interesting to note that factory man-hours rose
sharply counter to the national trend as broadly based increases reachec
substantial proportions in chemicals and several lines of durable goods
Recent developments reflected in the Reserve Bank's survey included a
small rise in optimism among businessmen generally and some improvement
in the demand for bituminous coal.
In the textile industry, however,
current operations continued to be hampered and the outlook remained
clouded by the enigma of what Government action, if any, would be taken
to eliminate the difference between domestic and export, cotton prices.
Textile orders had been light for several months and inventories,
although high at the mills, were said to be low in distributive channels.
A solution to the raw cotton price problem would eliminate most of the
current uncertainty, but prospects of reaching such a solution had
steadily worsened.
The national economy, Mr. Wayne observed, seemed to be continu
ing its general horizontal movement.
Since the first of the year there
had been moderate gains in several major sectors of the economy but, as
Mr. Noyes had already noted, in most sectors activity had been
fluctuating around levels first reached some six or eight months ago.
At the same time there had been a few substantial declines and an
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accumulation of small declines, which might raise a question as to the
strength of the present stability.
Also, the hope for a tax reduction,
which had been a sustaining element for several months, seemed to be
fading as prolonged discussion made it more and more apparent that
decisive action would be long delayed and would provide little
stimulus this year.
All of these considerations certainly did not
indicate that a precipitate decline was just around the corner, nor
did they suggest any breakout on the up side.
To him the prospects
were for a continuation of the game of plus and minus, but the Com
mittee should be alert to any increase in the number of minus signs.
In the policy area, Mr. Wayne noted that there was still little
room for maneuver.
With the Federal funds rate sticking closely and
firmly to the ceiling for almost a month and the bill rate not far
below it, except for a short period dominated by special developments,
there could be very little tightening without raising the question of
a hike in the discount rate.
To raise the discount rate or even to
create conditions that would generate widespread speculation about
such a raise would, he believed, be a serious mistake from all points
of view.
In the other direction there might be a little more elbow
room, but to utilize it would quite likely cause the System to forfeit
the slight improvement the dollar had accomplished in relation to the
Canadian dollar and the pound sterling in recent weeks.
Also, any
easing that could safely be tried would not be sufficient to have any
3/5/63
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appreciable effect on the domestic economy.
Since basic conditions had
not changed significantly since the previous Committee meeting, he
favored a continuation of present policy and renewal of the current
directive, except to eliminate the reference to "forthcoming Treasury
financing."
He would not change the discount rate, as his previous
remarks indicated.
(Mr. King withdrew from the meeting at this point.)
Mr. Clay reported that the recent trend of nonfarm economic
activity in the Tenth District presented a close parallel to the national
picture.
This similarity included the fact that substantial variation
existed among the various metropolitan areas.
Employment, after account
ing for seasonal movements, was being sustained at record levels.
As
had been the case nationally, Tenth District employment in Government
and in service and distribution industries was advancing, while manu
facturing and most other goods-related activities were experiencing
reduced employment levels.
The decline in manufacturing employment
since mid-1962, however, had been only about half the national rate.
Construction employment also was holding up better in the Tenth District
than across the country.
This was related, in turn, to the somewhat
stronger rate of contract-letting last year in the Tenth District, where
gains relative to the nation were notable in awards for nonresidential
construction and for public works and utilities.
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The volume of farm marketings in the Tenth District seemed
likely to remain high during 1963 because of an anticipated record
level of marketings of livestock.
Cattle numbers had increased 25
per cent in the District since 1957, compared with a 14 per cent
increase for the nation as a whole.
The outlook for crop production
was less favorable than a year ago because of deficient supplies of
surface moisture in a major part of the area.
With normal spring
rains, however, crops, along with pastures, could improve rapidly.
It now appeared that prices of most major farm commodities
produced in the Tenth District would be lower than in 1962.
Unless
crop production (a major proportion of which was subject to price
supports) should turn out to be unusually good, cash receipts from
farm marketings this year were expected to be somewhat less than in
1962.
Government payments to farmers, however, were likely to be
higher because of the certificate payments to be made to producers
cooperating with the wheat and feed grain programs.
Barring an
extensive drought, gross farm income in the Tenth District might
approach the 1962 record.
It would take unusually favorable condi
tions, however, for gross farm income to surpass last year's record.
So far as monetary policy was concerned, Mr. Clay noted that
the Committee continued to face the same kind of dual domestic and
international economic problems with which it had been struggling for
many months.
Perspective for the future was not very clear on either
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3/5/63
of these problems.
It was clear, however, that the domestic economy
remained sluggish in its performance and that this country's interna
tional balance of payments remained seriously adverse.
As perspective
became clearer, the resolution between alternatives might become more
apparent.
For the present, it would appear to him appropriate to
pursue essentially the same basic policy that had been the Committee's
goal in recent weeks.
Pursuit of this policy until the next meeting
of the Committee would, he suggested, have as targets 2.85 to 2.95 per
cent for the Treasury bill rate and 3 per cent or slightly less for
the Federal funds rate.
It would be the intent to supply member bank
reserves in sufficient amount to permit moderate bank credit expansion
on a seasonally adjusted basis.
rate would be contemplated.
No change in the Reserve Bank discount
While the general posture of policy would
be in line with the present directive, he felt that the directive
should be rewritten so as to avoid a cumulative restriction of bank
credit in view of the current reference to recent months, presumably
referring primarily to late 1962.
Mr. Scanlon reported that there had been little change in the
level of employment and retail trade in the Seventh District thus far
in 1963.
Steel output was continuing to increase as steel users began
to build inventories.
About 55 per cent of the purchasing agents of
Chicago who buy steel as a "major production item" intended to increase
steel holdings as a strike hedge, according to a recent survey.
The
3/5/63
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improved level of steel orders was reported by people in the industry
to be broadly based, with railroad car builders and structural steel
fabricators among the industries increasing their orders.
Auto output had begun to decline gradually despite a continu
ing high level of sales.
Inventories of new cars probably reached
about 1,050,000 at the end of February.
This was a record level for
the period and was surpassed only by a few months in the middle of
1960.
Manufacturers probably would not permit any further increase
of inventories, and production schedules would be set on the basis of daily
sales.
A number of capital goods producers had reported good order
trends in December and January.
This was true of railroad equipment,
farm and construction machinery, trucks, and some types of industrial
equipment.
There had been reports also of a sharp rise since November
in orders for gears, bearings, and hydraulic drives--items that are
used mainly in the manufacture of capital goods.
New orders of these
firms had tended to "lead" capital goods output in the past.
Developments at Seventh District weekly reporting banks indicated
there had been some slowing of credit demand by business and consumers
compared with the latter months of 1962.
Most of the growth in total
loans over the past month had been in dealer loans secured by U. S.
Governments, and reflected unusually large portfolios of such loans at
several District banks.
On the whole, reserve positions of the money
3/5/63
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market banks had been quite comfortable, and the major portion of
Federal funds purchases had been by one bank.
Borrowing at the dis
count window had been nominal.
With the usual increase in business needs for funds in March,
and possible further Treasury borrowing, Mr. Scanlon felt that it
should be possible to maintain short-term rates while obtaining some
further reserve expansion.
Therefore, the existing directive appeared
appropriate to him, except that he would change the reference to
timing of the Treasury financing.
He would not favor a change in the
discount rate at this time unless it were to be part of a package that
would include corrective balance of payments action in areas outside
monetary policy and would be a clear signal to the world of this
country's intent to defend the value of the dollar.
Mr. Deming reported that Ninth District economic activity had
held up well during the first two mon:hs of 1963 despite unusually
cold weather.
January personal income ran at a rate 7 per cent ahead
of a year earlier, and on a seasonally adjusted basis was almost 1 per
cent ahead of December, both gains better than those registered for the
country as a whole.
Nonagricultural employment in Minnesota in Febru
ary was 0.6 per cent larger than in January, seasonally adjusted, and
for the first two months of this year averaged 2.3 per cent higher than
in 1962.
Department store sales were running 3 per cent higher than
last year.
Manufacturing activity, particularly in durables, seemed
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to be fairly strong; construction, considering the weather, was
surprisingly strong.
The Reserve Bank's opinion survey taken late in February showed
little change in expectations from the survey taken five weeks earlier;
48 per cent foresaw improvement as probable or certain over the next
several weeks, 37 per cent foresaw continued stability, and 15 per cent
foresaw some decline.
The group foreseeing decline in the near future
was of about the same magnitude as in all surveys taken since early
last fall.
The shift in outlook since year end reflected a rise in
numbers seeing continued stability and a fall in those foreseeing
expansion.
Recent data on District banking indicated that the loan and
deposit weakness in January at city banks did not continue into Febru
ary.
Loan increases in the first three weeks of February pointed to a
new record for the month at those banks; the decline in investments was
smaller than usual (although larger than in 1961 and 1962) and total
deposits apparently would be up for the month, whereas they usually
decline.
Country bank data for the first half of February indicated
normal seasonal movements.
As to policy for the short run, Mr. Deming said he would be
inclined to "stay about where we are" during the next three weeks.
Conse
quently, he would not wish to change the policy directive to any
significant extent.
He was not even sure that it would be necessary to
3/5/63
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delete the reference to the "forthcoming Treasury financing," although
it was true that the language now in the directive was intended to
refer to Treasury financing different in scope from the prospective
financing during the next three weeks.
He would not recommend changing
the discount rate at this time.
Looking somewhat further ahead, Mr. Deming indicated that he
would like to associate himself almost completely with the comments of
Messrs. Mitchell and Robertson on the balance of payments. He was
particularly impressed by Mr. Robertson's comments about the U. S.
U. K.-Canadian triangle.
Money chasing itself within this triangle
would appear to have no real effect, except statistically, on the
U.S.
balance of payments.
Canadian borrowing in U. S. markets
in
February had evidently accounted for a substantial part of the U.S.
payments deficit in that month, He was glad that that had been pointed
out at the Working Party 3 meeting.
Mr. Deming noted that it was possible to advance a hypothesis
that there was "overly
excess
liquidity" in the American financial
system, leading to some spillover into foreign loans and investments
and hence into capital outflows.
Should this be the case, it might be
possible to follow a monetary policy aimed at mopping up some of the
overly excess liquidity without any appreciable affect upon the avail
ability of funds for the domestic economy or upon domestic interest
rates,
Such a policy, which he would not advocate for the time being,
3/5/63
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would be implemented by aiming at somewhat lower free reserve levelsand perhaps would result in somewhat higher member bank borrowing
levels--without attempting deliberately to aim at a higher interest
rate structure.
If such a program led to somewhat higher rates, they
would not be resisted strongly, but they would not be sought.
Mr. Swan reported that in January there was a drop in the over
all rate of civilian unemployment in the Pacific Coast States from 5.7
per cent to 5.4 per cent, which was the lowest rate since April 1960.
Increases in employment reflected substantial gains in construction,
services, and manufacturing.
The gains in manufacturing employment
occurred despite the fact that ordnance and aircraft, two defense
related industries, showed small declines.
However, in the electronics
group, which is also considered defense-related, there was a continuance
of the rapid growth of employment that had been experienced for some
time, with the January figure more than 12 per cent above the figure
for a year earlier.
Available data for February were, of course, extremely frag
mentary.
However, department store sales, which in January returned
to the previous high of November, apparently were well maintained in
February, while Western steel production increased in the first three
weeks of the month.
There still seemed to be plenty of funds seeking
investment in the real estate area.
Share accounts and real estate
loans at savings and loan associations increased more rapidly in the
3/5/63
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District than in the nation from December to January.
Both were about
24 per cent above January 1962, which again represented a somewhat
larger increase than for the country as a whole.
District weekly reporting banks showed a good loan increase in
the first three weeks of February.
In this period, they switched from
the status of net buyers of Federal funds to net sellers on a rather
substantial basis.
However, this did not seem to reflect any change
in their basic reserve position; instead, it reflected a shift of some
larger banks from Treasury bills to the Federal funds market in view of
the higher rates available.
In fact, District weekly reporting member
banks accounted for virtually the entire decline in holdings of Treasury
bills and of all Government securities at all weekly reporting banks in
the country in these three weeks.
Turning to national economic developments, Mr. Swan noted that
there was no indication of any significant change.
Evidence was lacking
of a more rapid rate of advance, and no one could anticipate what was
going to happen in the area of tax reduction.
In his opinion, a modest tightening of monetary policy would not
in itself have any significant effect on the balance of payments problem.
Also, the Treasury advance refunding would be in process for a few more
days, and there was in prospect an offering of short-term securities
around the middle of March.
In view of these factors, he would not
recommend any change in policy at this time.
Instead, he would argue
3/5/63
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for continuation of present policy for the forthcoming three-week period.
He would not recommend changing the discount rate.
As to the policy directive, Mr. Swan said his first reaction had
been that no change was needed.
However, he would support the suggestion
that had been made for removal of the reference to the "substantial
increases" in bank credit, money supply, and the reserve base in recent
months.
Two months had passed in 1963, and the substantial increases
occurred in the latter part of 1962.
He also felt that the reference
to forthcoming Treasury financing ought to be changed.
The financing
operations in prospect were not of the same magnitude as those that
had occasioned the inclusion of this language in the existing directive.
However, some reference to Treasury financing might be desirable.
Mr. Swan then referred to the remarks that had been made about
the possibility of substantial downward pressure on short-term rates
as an outgrowth of the advance refunding, due to the reduced volume of
short-term securities.
There was the possibility, he suggested, of
having two conflicting goals, one in terms of maintaining about the
same degree of firmness in the money market and the other in terms of
offsetting downward pressure on the bill rate.
Conceivably, the down
ward pressure could be so great that the only way to offset it would be
by increasing the degree of firmness in the money market.
He would not
like to see a precipitate drop in the bill rate, but neither would he
like to see a substantial firming in the money market solely out of
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consideration of the bill rate.
Perhaps, therefore, there would be
some advantage if the directive called for "cushioning" rather than
"offsetting" downward pressure on short-term rates.
Mr. Irons reported that there had been no noteworthy develop
ments in the Eleventh District.
Economic activity continued at about
the same level that had prevailed for some time.
He was somewhat
concerned about scattered conversational references to a possible
deterioration in the quality of bank credit, growing out of the desire
of banks to increase earnings to meet higher interest rate payments.
Also, the booming volume of construction activity, particularly of
office buildings and high-rise apartments in the major cities of the
District, might warrant some concern.
In most respects, however,
District trends did not seem greatly different from the national trends.
Among more knowledgeable businessmen he saw no particular lack of
confidence, but certainly confusion and uncertainty had increased with
respect to both domestic and foreign affairs.
might lead to some loss of confidence.
If this continued, it
People seemed more concerned
about the budget deficit, the balance of payments situation, and the
outflow of gold than they did about a tax cut.
For the forthcoming three-week period,
Mr.
maintenance of the status quo in terms of policy.
Irons recommended
He would seek to
avoid deviating from the degree of market firmness that had existed.
As he saw it, the System had been trying to get at the best of both
3/5/63
-76
worlds by following a moderate policy course, on the one hand trying
to provide reserves for domestic expansion--without going to excessand on the other hand trying to be firm enough to minimize capital
outflows.
He did not know whether the System could do much more until
it was found necessary to make some drastic move by shifting the
emphasis in one direction or the other depending upon whatever condi
tions might be present at the time of such decision.
He doubted that
much was going to be accomplished by minor shadings, such as changes
of a few basis points in the short-term rate.
Therefore, he would
continue the status quo for the time being.
As to the policy directive, Mr. Irons indicated that he tended
to agree with the comments of Mr. Mills.
He had recently reviewed and
compared all of the policy directives issued by the Committee since
June 1962, and it appeared to him that the Committee probably could
operate satisfactorily today under the directive issued on July 10,
1962.
He sensed a growing tendency to feel that the directive should
be changed at every meeting, even if only for reason of semantics.
When the directives were published, the large number of changes--aside
from necessary technical changes--might be confusing.
His inclination,
therefore, would be to continue the existing directive.
In conclusion, Mr. Irons said that he would not recommend
changing the discount rate at this time.
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3/5/63
Mr. Ellis commented that January statistics on unemployment,
length of work week, and consumer spending seemed to suggest some
slight improvement in New England economic conditions.
Basically,
however, the situation was unchanged.
Mr. Ellis then referred to three items of information that had
been of some interest to him.
The first had to do with a retraining
program in the Boston area to develop clerk-typists.
Some 3,500
persons from the list of job seekers were contacted, but only 243
responded.
After further screening only 11 were found to be interested
and eligible for retraining.
The second piece of information related
to the bankruptcy of the American Guarantee Company, which had caused
a number of banks to re-examine their lending policies with regard to
leasing companies.
The firm in question had, operated on a national
basis, leasing machinery and equipment.
It now turned out that the
company was extending credit to marginal risks that apparently could
not get credit elsewhere, and delinquencies had been covered by the
rewriting of leases.
As a third piece of information, Mr. Ellis reported
that the Boston Reserve Bank was in process of tabulating the results of
its regional survey of manufacturers' capital expenditure plans.
Pre
liminary results indicated that outlays in 1963 might be somewhat lower
than in 1962, although outlays of nonelectrical machine industries were
expected to rise substantially.
The survey also suggested that there
would be greater reliance on external sources of funds than in 1962.
3/5/63
-78
Mr. Ellis said it seemed to him that business conditions and
business sentiment were about as good as could have been expected
during the February-March period when the general outlook was tradi
tionally obscure.
The winter, he noted, had been severe in many areas.
Conditions continued to be strong enough to support an expansion of
the money supply in the face of the monetary policy adopted by the
Open Market Committee in December 1962.
As he understood the phrase
"overly excess liquidity" used by Mr. Deming, this was the same factor
that had motivated him (Mr. Ellis) to support the shift in policy in
December.
He would be prepared to push that policy further if the
economic trend became more clear and the economy demonstrated strength
in the spring.
As to the balance of payments, Mr. Ellis said that at the moment
he was much in sympathy with the comment of Mr. Bryan that he would like
to play on a team.
Monetary policy had an important role to play if a
strongly formulated and executed general policy for dealing with the
balance of payments problem was developed.
In fact, Mr. Ellis,said, he
would not be above seeing the Federal Reserve take some initiative in
promoting that idea.
However, he shared the concern of those who would
be apprehensive about vigorous action being taken in the form of monetary
policy alone.
For the moment, Mr. Ellis continued, he would support a position
of no change in policy.
As to the policy directive, he would favor
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-79
eliminating the reference to the "substantial" increase in bank credit,
money supply, and the reserve base in recent months.
He would also
eliminate or modify the reference to "forthcoming Treasury financing."
Mr. Ellis said that he would not favor a change in the discount
rate at this time.
Mr. Balderston commented that spring prospects seemed to him to
have improved, even if only because of prospective inventory hedging in
anticipation of a possible steel strike.
He supposed that a price would
be paid somewhat later, perhaps in the second half of the year, and that
there would continue to be worries emanating from wage negotiations.
Mr. Balderston went on to say that he had been impressed by the
comments at this meeting with regard to the balance of payments problem,
including those that suggested the possibility of a "package" approach.
Personally, he had been much concerned that: this country did not have
the wherewithal to continue spending, lending, and investing as it had
been doing throughout the world.
It seemed vital to world trade in the
future that this country's financial markets, which had been developed
over a long period of time, not be destroyed by the imposition of
selective controls.
He would hope that this country's money markets
might continue to be available to the world without restriction.
If
that was to be the case, however, it seemed important that Governmental
spending and lending be cut back.
The package approach seemed important,
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3/5/63
and it was important for the Federal Reserve System to play its proper
role.
Mr. Balderston then referred to the thought expressed by Mr.
Deming that once Treasury operations permitted the Open Market Com
mittee might test the effect on interest rates of some mopping up of
current liquidity.
It seemed to him that there were evidences of
"overly excess liquidity," perhaps in the stock market and in the
extent of short-term lending abroad.
He had no hope that a modest
change in the interest rate structure, short or long, would stop the
outflow of capital to other countries and the resultant drain on the
U. S. gold stock.
The rate differential seemed to be too wide.
To
the extent, however, that American banks were soliciting foreign
business, it appeared that some mopping up of liquidity might be worth
trying, for he felt fairly sure that there had been a good deal of
seepage.
Consequently, whenever there was an opportunity, he would
like to see an effort to mop up some of the liquidity that seemed to
be giving trouble.
Then, whenever the Government was prepared to move
forward with a package program, the System should be prepared to play
its full part.
Turning to the policy directive, Mr. Balderston said he would
be inclined to make only necessary changes at this time.
He would
withhold any overt policy move, such as a change in the discount rate,
until a payments crisis was at hand, for he would not want to use
ammunition prematurely.
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3/5/63
Chairman Martin commented that this was a relatively easy meet
ing to summarize.
It was clear that the majority of the Committee
favored no change in policy at this particular time.
He subscribed to
that view, but he would like to make certain observations.
He agreed, the Chairman said, with the comments that had been
made about the difficulty of obtaining clear perspective,both in terms
of the balance of payments and the domestic economy.
anything but clear.
The outlook was
With respect to the comments that had been made
about the short-term interest rate, he wished to say that he found
this a very confusing area.
What impressed him, however, was the
number of distortions that were involved when one talked about free
markets.
There was, for example, the matter of the 4-1/4 per cent
interest rate ceiling on financing the Federal debt and what that had
done to the debt structure.
The success of the Treasury's advance
refunding had exceeded his expectations, and it had changed the
composition of the Federal debt in a very short period of time.
How
ever, the Treasury was now confronted with political uncertainties in
regard to the debt ceiling in a peculiarly difficult period.
When one
used the phrase "free market," allowance had to be made for this kind
of distortion and dislocation.
Further, while it might be said that
there had been free markets, nevertheless there had been discretionary
monetary management for many years.
be taken into account.
These were all factors that must
3/5/63
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With respect to the balance of payments, Chairman Martin said
be continued to feel that conditions were gradually moving toward a
crisis of some sort.
It might not be near at hand; it might be a year
or two years in coming.
Nevertheless, it seemed to him that present
conditions could not continue indefinitely.
In his view, too much
attention probably was being paid to stimulating the domestic economy
through monetary policy and not enough to dealing with the balance of
payments.
He subscribed to the opinion that the balance of payments
problem had become the real shadow over the domestic business scene.
The Federal Reserve System, with the regulation of money and credit as
its primary responsibility, must evaluate as closely as possible what
was involved in the present situation both in respect to the domestic
economy and from the standpoint of the balance of payments.
The Open
Market Committee ought to concentrate on the problem and see if it
could not hammer out a policy that would be a little clearer.
There had been references at this meeting to team play and a
package deal, Chairman Martin noted.
In one sense this was an exc:llent
suggestion, and he would be in favor of it.
It should be borne in mind,
of course, that the President was more concerned about the balance of
payments than almost any other problem. There was no doubt where the
President stood, and it should be fully recognized that this problem had
been for some time a matter of major concern within the Administration.
If the Federal Reserve could mesh in with anything the Administration
3/5/63
-83
was doing, that would seem very desirable.
On the other hand, in talk
ing about team play, it should not be forgotten that most of the time
the Federal Reserve, in the field of money and credit, had been con
sidered off the team when it did not do everything that was wanted by
the Administration in power.
This was a matter of history.
Therefore,
one must be careful about approaching the idea of team play in the sense
of the Federal Reserve wanting to play a leading role or to become the
driving force.
One must be careful that the Federal Reserve did not
get itself into the position of trying to do more than monetary policy
should do.
As a matter of history, monetary policy had been asked to
do too much in the past in handling both inflation and deflation.
At
the present time, encouragement could be taken from the President's
attitude.
Everything possible should be done to determine the proper
role of the System, both as adviser and in terms of operations.
To that end, the Chairman commented, Mr. Young had put together
with the help of staff members of the Board, the New York Bank, and the
San Francisco Bank a group of papers that would be distributed today.
These papers presented conclusions of the individual authors as to the
impact on the domestic economy and on the balance of payments of certain
assumed policies, including what he would refer to as a less easy
monetary policy, an even less easy policy, and a drastically less easy
policy.
The papers were intended to be a kind of guide to the Committee
members in their thinking on the alternatives that would be available
3/5/63
-84
if the System was faced with the problem of an international payments
crisis.
The Chairman went on to observe that the System, if it did not
have the support of the Administration, would be defeated psycholog
ically almost at the start on certain moves that monetary policy could
make in relation to the balance of payments problem.
Administration's tacit support.
It needed the
Anything that was done at this
juncture ought to be, in that sense, part of a package deal, but the
problem should be thought through carefully.
For example, in the
group of papers that were to be distributed there was one by an
individual who took one point of view and another by a person who took
the opposite point of view regarding the impact on the balance of
payments of a certain move.
The papers should not be widely distributed,
but the time had come when the Committee should start concentrating on
the problem.
Perhaps other papers would be developed on the subject.
If the System wanted to become part of a team play, those within the
System must sharpen their thinking on the impact of various moves.
It
was with that in mind that the staff documentation had been prepared.
The staff papers referred to by Chairman Martin were then dis
tributed to the members of the Committee.
Turning to today's meeting and monetary policy for the period
immediately ahead, the Chairman expressed the view that it would be
unwise, from a procedural standpoint, to project shifts in policy within
3/5/63
-85
an ensuing three-week period even if all of the Committee members were
agreed.
In his opinion it would be better, if any shift in policy was
to be considered, to have another Committee meeting.
In other words,
it seemed to him undesirable to engineer even modest changes in policy
within the period prior to another scheduled meeting.
It would be pref
erable to have another meeting, if necessary, and consider the proposed
shift in policy.
Generally speaking, he felt that this was the best
way for the Committee to operate.
In view of the Treasury's problems, relating to both the debt
limit and current and prospective financing, the Chairman expressed the
view that the Committee would be pursuing the right course if it main
tained virtually the status quo during the next three weeks.
As some of the comments today suggested, Chairman Martin pointed
out, the members of the Committee must continue to work on the formula
tion of the policy directives.
As he had said several times, words mean
different things to different people around a table.
There could hardly
be a complete meeting of the minds when certain words were used.
As to
the formulation of the directive at this meeting, it would appear that
the minimum changes would be (1) to eliminate the reference to "substantial"
increases in bank credit, money supply, and the reserve base in recent
months, and (2) to refer to the implementation of policy "in a period
following a major Treasury financing" instead of referring to "the
coming Treasury financing."
forth
He inquired whether general agreement could
be reached on a directive incorporating those minor changes.
3/5/63
-86Mr. Bopp stated that he would go along with such a directive
if, in the light of the question raised earlier by Mr. Swan, the Account
Manager felt that it would be reasonable to call for operations with a
view to maintaining about the same degree of firmness in the money mar
ket and at the same time to offsetting downward pressures on short-term
interest rates.
Mr. Stone indicated that he felt it should be possible to
operate satisfactorily under such a directive.
Thereupon, upon motion duly made
and seconded, 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 fol
lowing current economic policy directive:
It is the Committee's current policy to accommodate
moderate growth in bank credit, while aiming at money market
conditions that would minimize capital outflows internation
ally. This policy takes into account the continuing adverse
United States balance of payments position and the increases
in bank credit, money supply and the reserve base in recent
months, but at the same time recognizes the limited progress
of the domestic economy, the continuing underutilization of
resources, and the absence of general inflationary pressures.
To implement this policy in a period following a major
Treasury financing, System open market operations during the
next three weeks shall be conducted with a view to maintaining
about the same degree of firmness in the money market that has
prevailed in recent weeks and to offsetting downward pressures
on short-term interest rates, while accommodating moderate
reserve expansion.
Messrs.
Votes for this action:
Martin, Hayes, Balderston, Bopp, Clay,
Irons, Mills, Mitchell, Robertson,
Scanlon, and Stepardson. Votes against
None.
this action:
3/5/63
-87
Chairman Martin noted that the Committee staff had prepared a
draft of possible current economic policy directive in the thought
that it might form a basis for discussion at this meeting.
He would
ask the Secretary to distribute copies of the draft directive to the
Committee members for their information and review, since it was
apparent that the Committee must continue
to work on the problem of
formulating its directives in the most effective manner.
In distributing copies of the draft directive, Mr. Young com
mented that whenever there were suggestions for changes in the directive,
it might be helpful if the proposed changes were sent to the Secretary
in advance of the Committee meeting so that copies of draft directives
incorporating such changes could be prepared for distribution to the
Committee.
In advance of
Secretary's Note:
this meeting there had been distri
buted to the Committee by the
Secretary a background statement of
current economic position, with the
understanding that the statement
would be included in the minutes of
this meeting. The statement read as
follows:
The domestic economic picture reflected several special
influences, such as unusually severe winter weather and strikes
in some key industries, which added to the low visibility of
the statistical readings on the performance of the economy.
Most changes in recent weeks, both favorable and unfavorable,
have been quite small.
Automobile production and sales remained very high again
in February. Retail sales other than automobiles, however,
apparently were slightly below their late 1962 record levels in
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January and February.
Personal income increased in January
owing to large veterans payments which more than offset a
sizable increase in employee contributions to social insur
ance and a decline in dividend payments from the unusually
high December rate. Aside from these changes, personal in
come was about the same as in December 1962.
The labor
market again showed little change, altnough the seasonally
adjusted rate of unemployment edged up in January and again
in February.
New orders received by durable goods producers rose
appreciably in January to a level slightly above the October
1962 high. Inventory holdings in manufacturing showed no
change in January and were only slightly above mid-June 1962.
The industrial production index in January was fractionally
lower but stayed in the 119 to 120 range it had been in since
July 1962.
Consumer prices in January rose ;ery slightly, return
ing to their November 1962 level; they were 1.4 per cent above
a year earlier with food and services mainly responsible.
Wholesale commodity prices continued to show little change
from the preceding month or from a year earlier.
Yields on corporate bonds showed little change in recent
weeks, while on municipal bonds they increased moderately in
Yields on
response to continuing heavy dealer inventories.
Treasury intermediate- and long-term issues also rose somewhat,
Treasury bill rates
reflecting Treasury refunding activities.
dropped slightly below mid-February levels. Yields on mort
gages declined a little. Stock market prices declined appre
ciably during the past two weeks after rising vigorously for
more than three months.
Capital market financing by corporations and State and
local governments was in moderate volume again in February
and is expected to continue moderate in March, especially in
the corporate area.
Bank credit rose substantially further in February on a
seasonally adjusted basis, reflecting chiefly increases in
financial loans and a much smaller than usual decline in hold
ings of U. S. Government securities. The seasonally adjusted
money supply in February apparently was maintained at the
daily average level of January, while time and savings deposits
increased substantially further. Total reserves and required
reserves behind private deposits declined about seasonally over
the past four weeks.
Free reserves averaged somewhat lower
and member bank borrowings higher.
3/5/63
-89
According to tentative preliminary estimates, the payments
deficit was much lower in February than in January. But in
view of the influence of the dock strike on trade figures, the
average for the past two or three months is more significant
than the individual monthly data, and this average shows only
a very modest improvement over 1962. The monthly decline in
U. S. gold reserves in both January and February was slightly
larger than the 1962 average. Exchange markets were generally
quiet since the February 12 meeting of the Committee.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, March 26, 1963.
Secretary
The meeting then adjourned.
@FedFRASER