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Annua( Report



-'6L +









Reduced System holdings of U.S. Government securi

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

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

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

early June

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

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

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

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

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

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

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

ulatory requirements applicable to bank deposits.




Early June

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

To continue to restrain bank credit expansion while

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

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


Lowered from 5

to 5 per cent the maximum rate pay

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

to 4 per

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

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

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


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

member depositary institutions and to safeguard

stitutions, including mutual savings banks and savings

against the possibility of additional pressures on mort

and loan associations. No lending was necessary

gage and securities markets resulting from such ex

under this authority.

ceptional withdrawals.

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

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

To exert a tempering influence on the issuance of cer

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

about $450 million.


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

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

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

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

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

late Novem

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

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

Late Novem

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

To relax monetary restraint somewhat in the light of


lion in repurchase agreements. Average member bank

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

borrowings declined to $550 million.


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

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

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

To eliminate discount arrangements that were no longer

curtail their business loan expansion.

untary effort to restrain the outflow of private capital.

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



authorization for System foreign currency operations to read as

The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account with the following
foreign banks, which are among those designated by the Board of Gov
ernors of the Federal Reserve System under Section 214.5 of Regulation
N, Relations with Foreign Banks and Bankers, and with the approval of
the Committee to renew such arrangements on maturity:

Amount of
Foreign bank

period of

(millions of arrangement
dollars equivalent) (months)

Austrian National Bank
National Bank of Belgium
Bank of Canada
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Netherlands Bank
Bank of Sweden
Swiss National Bank
Bank for International Settlements
(System drawings in Swiss francs)
Bank for International Settlements
(System drawings in authorized European
currencies other than Swiss francs)


Votes for ratification of this action: Messrs.
Martin, Hayes, Bopp, Brimmer, Clay, Daane,
Hickman, Irons, Maisel, Mitchell, and Shep
ardson. Votes against ratification of this
action: None.

This action increased the authorized amounts of the System's
swap arrangements with most of the foreign banks with which
such arrangements were maintained, for the purpose of provid
ing a broader margin of safety for the stability of the interna
tional monetary system. The increases raised the aggregate size
of the network to $4.5 billion from $2.8 billion.
At its preceding meeting the Committee had authorized the
Special Manager of the System Open Market Account to under
take negotiations looking toward an enlargement of the swap
network, subject to notification by the Secretary of the Treasury
to the Chairman or Acting Chairman of the Board that the
proposed program was fully consistent with U.S. international
financial policy at this time. Following receipt of such notifica
tion by the Acting Chairman of the Board and advice from the
Special Manager that preliminary discussions had been com
pleted with the foreign banks involved, Committee members ap
proved the amendment to the authorization. In addition to the
revisions of the dollar amounts of individual arrangements,
shown in the second column of the table contained in the af
fected paragraph, the caption to the third column was modified
by adding the word "maximum" before the words "period of
arrangement." This change was made to permit different ma
turities, not exceeding those indicated, to be employed for differ
ent portions of individual arrangements.

October 4, 1966
Authority to effect transactions in System Account.

GNP rose more in the third quarter than in the second, ac
cording to tentative staff estimates, as defense expenditures ac
celerated sharply. About half of the third-quarter rise in GNP
apparently reflected higher prices. Further sizable increases in
both defense spending and business capital outlays appeared


probable in the fourth quarter-suggesting another large gain in
GNP and continuing pressures on available manpower and plant
resources. Wage rates were advancing more rapidly than earlier,
and rising costs seemed likely to reinforce the effects of strong
demands on prices.
While business activity continued to expand vigorously, senti
ment appeared less ebullient than earlier, and signs of growing
economic imbalance raised some uncertainties about the longer
run outlook. Average prices of common stocks, which had rallied
in early September, later declined again. Residential construction
activity continued to contract in August as the supply of mort
gage funds remained highly limited; private nonresidential build
ing also had declined appreciably in recent months. Some of an
unusually large increase in manufacturers' inventories in July
and August was probably involuntary; stock-sales ratios rose
abruptly, and a Commerce Department survey of anticipations
suggested a sharp drop in the growth of inventories in the fourth
The money supply, which had declined in July and August,
was estimated to have risen at an annual rate of about 7 per cent
in September. Total time and savings deposits of commercial
banks increased much less than in preceding months as a sub
stantial run-off occurred in negotiable CD's outstanding. Esti
mates indicated that growth in business loans was smaller than
expected and considerably below the average rate of recent
months-perhaps because of both restrictive lending policies of
banks and lighter demands than anticipated. Daily-average
figures on member bank deposits implied little change in total
bank credit in September, and required reserves appeared to
have declined slightly.
Business loan demand was expected to be strong in October,
partly because cash needs would again be increased by acceler
ated payments of withheld Federal taxes. Reflecting this expecta
tion, staff projections suggested resumed growth in daily-average
member bank deposits-the "bank credit proxy"-at an annual
rate of perhaps 5 or 6 per cent, and a more rapid increase in


required reserves. The projections allowed for a rise in Govern
ment and private demand deposits, the former as a result of an
anticipated Treasury financing. Little or no increase was antici
pated in total time and savings deposits, however, partly because
further substantial run-offs of negotiable CD's were expected.
Also, it appeared that banks would be in a slightly less favorable
position than formerly in competing for other time deposits under
the new ceiling rates that had been established for various de
positary institutions in late September, following enactment of
new legislation.
The strains evident in short-term financial markets at the time
of the preceding meeting of the Committee continued through
the mid-September tax and dividend dates, and the yield on
3-month Treasury bills rose by about 30 basis points further to a
peak of 5.59 per cent. Subsequently, however, the atmosphere
improved considerably, and the 3-month bill yield fell below 5.35
per cent. Federal funds rates and posted rates on dealer loans
also moved down.
Yields on long-term securities had fluctuated widely in recent
weeks, first rising and then declining in response chiefly to shift
ing expectations regarding fiscal and monetary policy and chang
ing assessments of the buoyancy of the economy and the pros
pects for peace in Vietnam. On the whole, however, long-term
yields remained significantly below their late-August levels and
showed little net change over the interval. The volume of new
corporate bond flotations in September was somewhat lower
than had been anticipated, and the calendar for October was
smaller than offerings in September, although larger than those
of October 1965. On the other hand, the Treasury was expected
to be making heavy demands on capital markets over the rest of
the year, with gross new borrowings of perhaps $8 billion. An
announcement of an auction of $3 billion to $3 1/2billion in
tax-anticipation bills, to be held around mid-October, was
anticipated shortly; and the terms of the Treasury's November
refunding, in which some new money probably also would be
raised, were expected to be announced near the end of October.


System open market operations over most of the recent period
were directed toward absorbing reserves supplied by movements
in market factors, but day-to-day operations were conditioned
by the shifting market atmosphere. Thus, only a moderate
amount of reserves was absorbed early in the period, when short
term markets were under strain, but reserve absorption was
stepped up later when market conditions became more com
fortable. As a result, weekly-average figures for net borrowed
reserves fluctuated over a wide range-from about $190 million
to $570 million-with the bulk of the fluctuation occurring in
excess reserve positions of country banks. For September as a
whole, net borrowed reserves averaged about $375 million, a
little less than the August average; member bank borrowings, at
$765 million, were slightly above those of August.
The U.S. balance of payments in the third quarter was tenta
tively estimated to have been in deficit at a seasonally adjusted
annual rate of about $2 billion on the "liquidity" basis of calcu
lation. However, a substantial surplus was recorded on the "of
ficial reserve transactions" basis. The divergence in the two
measures was a consequence primarily of the substantial inflows
of liquid funds through foreign branches of U.S. banks. The
surplus on merchandise trade, which had declined markedly in
the second quarter, fell further in the third quarter as imports
increased more rapidly than exports.
Committee members differed somewhat in their assessments of
the various elements in the economic outlook. Some stressed the
implications of rising defense expenditures for the course of
over-all developments and the persistence of inflationary pres
sures, while others placed greater emphasis on the evidences of
recent and prospective weakening in the expansion of aggregate
private demands.
The Committee agreed, however, that no change in policy
should be made at this time, both because the economic situa
tion at present did not appear to warrant an overt move in
either direction and because Treasury financing activity was im-


minent. The desirability of encouraging moderate expansion in
bank credit was noted, and it was agreed that account should
be taken in open market operations of any apparently significant
deviations of bank credit growth from current expectations.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting indi
cate that over-all domestic economic activity is expanding vigorously,
despite the substantial weakening in residential construction, uncertainties
in equity markets, and a sharp increase in business inventories. Inflationary
pressures are persisting and aggregate credit demands still remain strong.
The balance of payments continues to show a sizable liquidity deficit. In
this situation, and in light of the new fiscal program announced by the
President, it is the Federal Open Market Committee's policy to resist
inflationary pressures and to continue efforts to restore reasonable
equilibrium in the country's balance of payments.
To implement this policy, and taking account of forthcoming Treasury
financings, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining firm but orderly
conditions in the money market; provided, however, that operations shall
be modified in the light of unusual liquidity pressures or of any apparently
significant deviations of bank credit from current expectations.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hick
man, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.

November 1, 1966
1. Authority to effect transactions in System Account.

Reports at this meeting indicated that economic activity was
continuing to expand under the stimulus of rising defense ex
penditures, although moderating tendencies were appearing in
some sectors of the private economy. The outlook was clouded
by uncertainties relating to Vietnam and to prospects for fiscal
policy actions in addition to the temporary suspension, approved