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MINUTES OF THE MEETING OF THE FE D E RA L ADVISORY COUNCIL April 22, 1964 The second statutory meeting of the Federal Advisory Council for 1964 was con vened in Room 932 of the Mayflower Hotel, Washington, D. C., on April 22, 1964, at 9:30 A.M. Present: District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 Secretary Assistant Secretary Lawrence H. Martin William H. Moore William L. Day L. A. Stoner John F. Watlington, Jr. J. Finley McRae Edward B. Smith James P. Hickok Henry T. Rutledge, Alternate Maurice L. Breidenthal James W. Aston Ransom M. Cook Herbert V. Prochnow William J. Korsvik Absent: John A. Moorhead District No. 9 On motion duly made and seconded, the mimeographed notes of the meeting held on February 17-18, 1964, were approved. A complete list of the items on the Agenda for the meeting, and the conclusions of the Council are to be found in the C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f Governors o f t he F e d e r a l A d v i s o r y C o u n c i l , which follows on pages 17, 18 and 19. The meeting adjourned at 12:40 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J . KORSVIK Assistant Secretary 14. MINUTES O F T H E M E E T I N G O F T H E F E D E R A L ADVISORY COUNCIL April 22, 1964 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Mr. James W. Aston, Vice President; Messrs. Lawrence H. Martin, William H. Moore, William L . Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Henry T. Rutledge, Alternate for Mr. John A. Moorhead; Messrs. Maurice L . Breidenthal, and Ransom M. Cook. Absent: Mr. John A. Moorhead. Members of the Board’ s staff, Division of Research and Statistics, discussed current economic developments. An outline of the presentation was forwarded to each member of the Council. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 15. MINUTES OF THE MEETING OF THE FE D E RA L ADVISORY COUNCIL A p ril 22, 1964 At 8:30 P.M., the Federal Advisory Council reconvened in Room 932 of the May flower Hotel, Washington, D. C. Present: Mr. James W. Aston, Vice President; Messrs. Lawrence H. Martin, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Henry T. Rutledge, Alternate for Mr. John A. Moorhead; Messrs. Maurice L. Breidenthal, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. John A. Moorhead. The Council reviewed its conclusions regarding the items on the Agenda, and sent to the office of the Secretary of the Board of Governors the C o n f i d e n t i a l M e m o r a n d u m which follows on pages 17, 18 and 19, listing the Agenda items with the conclusions reached by the Council. The M e m o r a n d u m was delivered to the Federal Reserve Building at 11:15 P.M. on April 22, 1964. The meeting adjourned at 10:35 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 16. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FED ERA L ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON A PRIL 23, 1964 1. Economic conditions and prospects. A. What are the views of the Council on the economic outlook for the re mainder of this year? Have the members observed as yet any significant effects of the recently enacted tax cut on consumer spending and attitudes or on business fixed investment spending or plans? To what extent does it appear that the stimulative effect of the tax cut is likely to be offset by tax increases at the State and local levels? The Council anticipates that economic activity during the remainder of the year will continue to expand strongly. The members have not yet observed any significant effect, other than psychological, from the recently enacted tax cut. While consumer attitudes continue favorable, spending has not shown any unusual spurt. The members of the Council have likewise not detected a step-up in business fixed investment spending resulting from the tax cut, although there have been reports of some expansion in capital investment plans. Tax increases on the State and local levels will only slightly offset the stimulative effect of the tax cut. B. How does the Council view the prospects for continuing price stability? Are there signs of speculative tendencies in credit markets, land, common stocks, and other capital assets, or in commodities? The Council believes that some upward pressure on prices is developing. As a consequence, it is doubtful that the relative price stability of the past several years will continue. The outcome of the forthcoming wage negotiations will have an important bearing on these trends. Although there are no indications of widespread speculative tendencies, there are some evidences of speculative activity and the excessive use of credit, particularly in land and certain types of construction in various areas. C. Does ample capacity appear still to be available in most major industries? Are there indications of inventory overbuilding in anticipation of higher prices and/or supply interruptions because of strikes? The members of the Council believe there is capacity available in most major industries that w ill permit some additional increase in output, but probably only at higher 17. unit costs. The gap between output and capacity is narrowing. Other than the build-up of automobile inventories, the reasons for which are variously interpreted, the members of the Council so far have observed few signs of inventory overbuilding in anticipation of higher prices and/or interruptions because of strikes. However, an acceleration in the accumulation of inventories will occur if businessmen anticipate rising prices in the months immediately ahead. 2. Banking developments. A. What is the Council’s judgment regarding domestic and foreign loan demands over the rest of this year? Although the domestic loan demand is currently somewhat below expectations, the Council believes that future demand will reflect the rising level of business activity that is now anticipated. The demand for foreign loans continues strong, especially for loans with a maturity of 2 years and 11 months. With the expected expansion in domestic loan demand and with the reserve position of the commercial banks less easy than it was last year, the banks may find it more difficult to accommodate foreign borrowers. B. Have Council members observed any changes in customer demands for term loans, or in the willingness of banks to grant such loans? The demand for term loans continues. The members of the Council have not observed any change in the willingness of banks to grant such credits. In fact, some members report that the competition for these credits has become more intense with some tendency for rates and terms to soften. C. What are the Council's observations regarding the likely trend of interest rates during the rest of 1964? The members of the Council anticipate that interest rates will drift upward in the months ahead. However, if the tax cut does sharply stimulate consumer demand, inventory accumulation will be accelerated, production schedules stepped up, and capital investment expanded. In these circumstances, credit demand would increase sharply and the interest rate structure would be under upward pressure. D. Do Council members have comments on recent developments in regard to the issuance of negotiable certificates of deposit? Since the last meeting of the Board and the Council the interest rates paid on negotiable certificates of deposit are pressing the 4 per cent ceiling. Although there is 18. some concern about the impact on the volume of negotiable certificates of deposit if the yield on Treasury bills and other short-term interest rates should move up further, the consensus of the members of the Council is that the ceiling should not be raised at this time. 3. What is the current status of the exchange absorption problem? The members of the Council strongly favor a continuation of the Federal Reserve interpretation that the absorption of exchange charges is, in fact, a payment of interest on demand deposits and therefore should be prohibited. The Council is aware of the awkwardness of the present situation but believes abandonment by the Federal Reserve of its long-held position would not be in the best interests of the banking sys tem or of the public at large. 4. What are the Council’s views regarding the appropriateness of recent monetary and credit policy? The Council believes recent monetary and credit policy has been a major factor in the expansion of the economy to its present high level. However, in view of the current volume of business activity, and the anticipated additional stimulation from the tax cut, the possibility of a renewal of wage-cost increases, and the probable pressures on prices, the Council believes that monetary and credit policy should now move gradu ally in the direction of restraint. * * * * The Council believes that bankers generally favor the proposal of substituting a book-entry procedure for the procedure currently followed by the Reserve Banks in holding Government securities in safekeeping or as collateral. 19. MINUTES OF JOINT CONFERENCE OF THE FE D ER A L ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FE D E R A L RESERV E SYSTEM April 23, 1964 At 10:30 A.M., the Federal Advisory Council held a joint meeting with the Board of Governors of the Federal Reserve System in the Federal Reserve Building, Washing ton, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC. Martin, Jr.; Vice Chairman C. Canby Balderston; Governors A. L. Mills, Jr., J. L. Robertson, Chas. N. Shepardson, George W. Mitchell and J. Dewey Daane; also Mr. Merritt Sherman, Secretary, and Mr. Kenneth A. Kenyon, Assistant Secre tary, of the Board of Governors. Present: Members of the Federal Advisory Council. Mr. James W. Aston, Vice President; Messrs. Lawrence H. Martin, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Henry T. Rutledge, Alternate for Mr. John A. Moorhead; Messrs. Maurice L. Breidenthal, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. John A. Moorhead. Also present: Mr. Edward A. Wayne, President of the Federal Reserve Bank of Richmond, Virginia. Vice President Aston presided in the absence of President Moorhead. Vice President Aston stated, in response to an inquiry from the Board directed to the Council, that bankers generally favor the proposal of substituting a book entry pro cedure for the one currently followed by the reserve banks in holding government secu rities in safekeeping or as collateral. As extended discussion followed in which members of the Council indicated their approval and asked certain questions relating to the pro cedure. Mr. Wayne, as Chairman of the Committee on Fiscal Agency Operations of the Con ference of Presidents of the Federal Reserve Banks, addressed himself to the Council’s comments. Vice President Aston then read the items on the Agenda and the conclusions of the Council as expressed in the C o n f i d e n t i a l M e m o r a n d u m to t h e B o a r d o f Governors from the F e d e r a l A d v i s o r y C o u n c i l as printed on pages 17, 18 and 19. In the extended dis- 20. cussion which followed, the members of the Board of Governors directed questions, relating to the items on the Agenda, to the Council. Among these was one from Governor Balderston inquiring about the quality of credit. While the members of the Council did acknowledge that there had been some relaxation of quality standards, the consensus was that loan portfolios of the commercial banks were sound. Chairman Martin inquired whether there was an implication in the Council’s state ment that recent monetary and credit policy had been too easy. The Council indicated that this was not correct. The meeting adjourned at 12:45 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 21. NOTE: This t r a n s c r i p t of the S e c r e t a r y Ts n o t e s is n o t to be regarded as c o m p l e t e or n e c e s s a r i l y e n t i r e l y a c c u r a t e . The transcript is f o r the s o l e u s e of the m e m b e r s of t h e F e d e r a l Advisory Council. The concise official minutes for the entire y e a r a r e p r i n t e d a n d d i s t r i b u t e d l a t e r . H.V.P. W.J.K. The S e c r e t a r y Ts n o t e s of t h e m e e t i n g of the F e d e r a l A d v i s o r y Council on A p r i l 22, 1961;, at 9 : 3 0 A * M . in R o o m 932 of the M a y f l o w e r H o t e l , W a s h i n g t o n , D. C. A l l m e m b e r s of the F ederal A d v i s o r y C o u n c i l w e r e p r e s e n t e x c e p t Mr. M o o r h e a d . Mr. H e n r y T. R u t l e d g e , E x e c u t i v e V i c e P r e s i d e n t , N o r t h w e s t e r n N a t i o n a l B a n k , M i n n e a p o l i s , M i n n e s o t a , a t t e n d e d as A l t e r n a t e . The C o uncil a p p r o v e d the S e c r e t a r y 1s n o t e s February 1 7 - 1 8 , I 96 I4.. f o r the m e e t i n g of Mr* James W. A s t o n , V i c e P r e s i d e n t of the C o u n c i l , the absence of P r e s i d e n t M o o r h e a d . p r e s i d e d in Vice P r e s i d e n t A s t o n r e p o r t e d on a t e l e p h o n e c o n v e r s a t i o n between M e r r i t t S h e r m a n , S e c r e t a r y of t h e B o a r d of G o v e r n o r s , a n d the office of the S e c r e t a r y o f t h e C o u n c i l . Mr, S h e r m a n s t a t e d he had received i n q u i r e s f r o m m e m b e r s of t h e C o u n c i l r e g a r d i n g the distribution of the o u t l i n e or r e p o r t of t h e B o a r d ’s S t a f f p r e s e n tation, Mr. S h e r m a n e m p h a s i z e d t h a t t h e s e p r e s e n t a t i o n s are confidential a n d t h a t t h e r e p o r t s of t h e m are p r e p a r e d a n d d i s t r i b uted for the p e r s o n a l u s e of t h e m e m b e r s of the C o u n c i l . The same was true, Mr. S h e r m a n a d d e d , a b o u t the j o i n t m i n u t e s of the B o a r d and the Council, t h o u g h h e r e h e w a s s o m e w h a t l e s s a d a m a n t . The conversation t h e n t u r n e d to t h e d i s t r i b u t i o n of the C o u n c i l ' s Memorandum to the B o a r d o f G o v e r n o r s . T h e d i s t r i b u t i o n of the Memorandum w a s e n t i r e l y a m a t t e r of t h e C o u n c i l , a l t h o u g h Mr. Sherman s a i d h e u n d e r s t o o d t h a t t h e d i s t r i b u t i o n of the 'emorandum h a d b e e n l a r g e l y l i m i t e d to t h e m e m b e r s of the C o u n c i l . After an e x t e n d e d d i s c u s s i o n , it w a s c o n c l u d e d t h a t the Secretary of the C o u n c i l s h o u l d d i s c u s s t h i s m a t t e r at g r e a t e r ^ength w i t h the S e c r e t a r y o f the B o a r d of G o v e r n o r s a n d p r e p a r e a memorandum for d i s t r i b u t i o n to t h e m e m b e r s of the C o u n c i l in advance of the n e x t m e e t i n g . ITEM I A -conomic c o n d i t i o n s a n d p r o s p e c t s . A. WHAT AR E T H E V I E W S OF T H E C O U N C I L ON T H E ECONOMIC OUTLOOK FOR THE R E M A I N D E R OF T H I S Y E A R ? H A V E THE MEMBERS OBSERVED AS Y E T A N Y S I G N I F I C A N T E F F E C T S O F T H E R E C E N T L Y E N A C T E D T A X CUT? O N C O N S U M E R S P E N D I N G A N D A T T I T U D E S O R O N B U S I N E S S F I X E D INVESTMENT S P E N D I N G OR P ^ A N S ? T O W H A T E X T E N T D O E S IT A P P K A R T H A T T H E S T I M U L A T I V E E F F E C T O F T H E T A X C U T IS L I K E L Y TO B E O F F S E T B Y T A X I N C R E A S E S A T T H E S T A T E A N D L O C A L LEVELS? 2. Vice P r e s i d e n t A s t o n t h e n r e a d I t e m I A a n d i n v i t e d ^ the m e m ers 0f the Council to g i v e t h e i r v i e w s . An extended discussion followed. The m e m b e r s w e r e f a i r l y u n a n i m o u s in t h e i r j u d g m e n t that e c o n o m i c activity d u r i n g the r e m a i n d e r of the y e a r w i l l c o n t i n u e to e x p a n d strongly. S e v e r a l m e m b e r s s t a t e d that too l i t t l e time h a d p a s s e d since the e n a c t m e n t of t h e t a x cut f o r it to h a v e a n y o b s e r v a b l e effect other t h a n p s y c h o l o g i c a l . Thus, W h i l e the m e m b e r s r e p o r t e d that consumer a t t i t u d e s w e r e f a v o r a b l e , s p e n d i n g has n o t s h o w n a n y unusual spurt. L i k e w i s e , t h e y h a v e n o t d e t e c t e d any s t e p - u p in business f i x e d i n v e s t m e n t s p e n d i n g , a l t h o u g h s e v e r a l r e p o r t e d s o m e expansion in c a p i t a l i n v e s t m e n t plans. Tax i n c r e a s e s at the s t a t e a n d l o c a l l e v e l are w i d e s p r e a d . However, the m e m b e r s of the C o u n c i l fel t t h e s e w e r e n o t r e l a t e d to the red u c t i o n in f e d e r a l taxe s , b u t r a t h e r w e r e a c o n t i n u a t i o n of a trend that l o n g h a s b e e n u n d e r w a y . T h e y t h o u g h t that the i n c r e a s e s in state and l o c a l t a x e s w i l l o n l y s l i g h t l y o f f s e t the s t i m u l a t i v e effect of the tax cut. ITEM I B B. HOW DOES THE C O U N C I L V I E W THE PROSPECTS FOR CONTINUING PRICE STABILITY? A R E T H E R E S I G N S OF S P E C U L A T I V E T E N D E N C I E S IN C R E D I T M A R K E T S , L A N D , C O M M O N S T O C K S , A N D OTHER C A P I T A L ASSETS, OR IN C O M M O D I T I E S ? ____________________________ Vice P r e s i d e n t A s t o n r e a d I t e m I B . A d i s c u s s i o n f o l l o w e d in which”all m e m b e r s p a r t i c i p a t e d . T h e r e was some evidence, the Council c o n c l u d e d , of the d e v e l o p m e n t of u p w a r d p r e s s u r e s on prices. As a c o n s e q u e n c e , t h e m e m b e r s f e l t t h a t it was d oubtful that the r e l a t i v e p r i c e s t a b i l i t y of the p a s t s e v e r a l years w i l l continue. S e v e r a l m e m b e r s e m p h a s i z e d that the f o r t h c o m i n g wage negotiations w i l l h a v e a n i n f l u e n c e on t h e s e trends. The m e mbers reported l i t t l e or n o e v i d e n c e of a n y w i d e s p r e a d s p e c u l a t i v e tendencies, a l t h o u g h s e v e r a l m e n t i o n e d some s p e c u l a t i v e activity including the e x c e s s i v e u s e of c r e d i t in l a n d a n d c e r t a i n types of c onstruction in v a r i o u s a r e a s of the country. ITEM I C C. DOES A M P L E C A P A C I T Y A P P E A R S T I L L TO B E A V A I L A B L E IN M O S T MAJOR INDUSTRIES? A R E T H E R E I N D I C A T I O N S OF I N V E N T O R Y OVERBUILDING IN A N T I C I P A T I O N OP HI G H E R PRICES AND /O R SUPPLY I N T E R R U P T I O N S B E C A U S E OF S T R I K E S ? ____________ Vice P r e s i d e n t A s t o n r e a d I t e m I C. A b r i e f d i s c u s s i o n of this item fol l o w e d . T h e C o u n c i l t e n d e d to a g r e e w i t h the v i e w e x p r e s s e d by one m e m b e r t ha t c a p a c i t y w a s a d e q u a t e b u t n o t ample. Furthermore, while some a d d i t i o n a l i n c r e a s e s in o u t p u t w e r e possible, it w o u l d probably be at h i g h e r u n i t c o s t s as the r e m a i n i n g capacity was probably less e f f i c i e n t t h a n t h a t p r e s e n t l y in use. Other than the build-up of a u t o m o b i l e i n v e n t o r i e s , the r e a s o n s for w h i c h are variousl y i n t e r p r e t e d , the m e m b e r s of the C o u n c i l r e p o r t e d few signs of i n v e n t o r y o v e r - b u i l d i n g in a n t i c i p a t i o n of h i g h e r prices and/or inter r u p t i o n s by s t r i k e s . S o m e a c c e l e r a t i o n in the a c c u m u l a t i o n of inventories is p o s s i b l e , h o w e v e r , if it a p p e a r s that price rises are http://fraser.stlouisfed.org/ in the offing. Federal Reserve Bank of St. Louis 3. I T E M II A Banking d e v e l o p m e n t s . A. W H A T IS T H E C O U N T I L ’ S JUDGMENT REGARDING DOMESTIC AND FOREIGN L O A N D E M A N D S OVER T H E R E S T OF THIS YEAR? B. HAVE COUNCIL M E M B E R S OBS ERVED A N Y CHANGES IN CUSTOMER D E M A N D S F O R T E R M L O A N S , OR IN T H E W I L L I N G N E S S O F B A N K S T O GRANT S U C H L O ANS? Vice P r e s i d e n t A s t o n t h e n r e a d Ite m II A and B. There was g e n e r a l a g r e e m e n t t h a t the d o m e s t i c lo a n d e m a n d is strong, t h o u g h s o m e w h a t b e l o w e x p e c t a t i o n s . The m e m b e r s a n t i c i p a t e that future d e m a n d w i l l r e f l e c t the r i s i n g level of b u s i ness. The demand for f o r e i g n l o a n s c o n t i n u e s strong, e s p e c i a l l y for loans w i t h a matur i t y of 2 y e a r s a n d 11 m o n t h s . W h i l e the s i t u a t i o n w i l l v a r y from ba n k to b a n k , t h e m e m b e r s t e n d e d to b e l i e v e that the b a n k i n g system w i l l p r o b a b l y f i n d it m o r e d i f f i c u l t to a c c o m m o d a t e f o r e i g n borrowers this yea r . There w e r e v a r y i n g o p i n i o n s as to t h e s t r e n g t h of the d e m a n d for term loans. T h e m e m b e r s c o n c l u d e d , h o w e v e r , that they h a d observed no c h a n g e in t h e w i l l i n g n e s s of b a n k s to g rant such credits. As a m a t t e r of fact, b e c a u s e of the i n c r e a s i n g c o m p e t i t i o n b e t w e e n banks and o t h e r f i n a n c i a l i n s t i t u t i o n s f o r t h e s e credits, there has been some t e n d e n c y f o r r a t e s a n d t e r m s to soften. I T E M II C C. WHAT ARE THE C O U N C I L ’ S OBSERVATIONS REGARDING THE LIKELY T R E N D OF I N T E R E S T R A T E S D U R I N G T H E R E S T OF 1961;?___________ Vice P r e s i d e n t A s t o n r e a d I t e m II C. T h e r e w a s g e n e r a l a gree ment among the m e m b e r s of the C o u n c i l t h a t i n t e r e s t r a tes w i l l drift upward in the m o n t h s ahead. H o w e v e r , if the tax cut s h o u l d gr e a t l y stimulate e c o n o m i c a c t i v i t y , c r e d i t d e m a n d w o u l d i n c r e a s e s h a r p l y and interest r a t e s in t h e s e c i r c u m s t a n c e s w o u l d be u n d e r u p w a r d pressure. I T E M II D D. DO C O U N C I L M E M B E R S H A V E C O M M E N T S ON R E C E N T D E V E L O P M E N T S IN R E G A R D TO T H E I S S U A N C E OF N E G O T I A B L E C E R T I F I C A T E S OF DEPO S I T ? Vice P r e s i d e n t A s t o n t h e n r e a d I t e m II D. The i n t e r e s t rates paid on n e g o t i a b l e c e r t i f i c a t e s of d e p o s i t are p r e s s i n g the 1+ per cent ceiling. T h u s , t h e r e c o n t i n u e s to be c o n c e r n about the impact on the v o l u m e of s u c h c e r t i f i c a t e s if the y i e l d on T r e a s u r y bills and other s h o r t - t e r m i n t e r e s t r a t e s s h o u l d m o v e up further. The consensus of the m e m b e r s of the C o u n c i l , h o w e v e r , is that the ceiling s h o u l d n o t b e r a i s e d at this time. I T E M III W H A T IS T H E C U R R E N T S T A T U S OF T H E E X C H A N G E A B S O R P T I O N _______________________________________________________ PROBLEM? k. V ice P r e s i d e n t A s t o n r e a d I t e m III. The m e m b e r s f r o m D i s t r i c t s 5 and 9 r e p o r t e d at l e n g t h as m o s t of the n o n - p a r banks are l o c a t e d in these areas. The C o u n c i l s t r o n g l y f a v o r s a c o n t i n u a t i o n of the F e d e r a l Reserve i n t e r p r e t a t i o n t h a t the a b s o r p t i o n of e x c h a n g e c h a r g e s is, in fact, a p a y m e n t of i n t e r e s t on d e m a n d d e p o s i t s a n d t h e r e f o r e should be p r o h i b i t e d * S e v e r a l m e m b e r s p o i n t e d out the a w k w a r d n e s s of the p r e s e n t s i t u a t i o n . It w a s concl u d e d , h owever, that the abandonment b y the F e d e r a l R e s e r v e of its long h e l d p o s i t i o n w o u l d not be in the b e s t i n t e r e s t s of the b a n k i n g s y s t e m or of the p u b l i c at large. I T E M IV WHAT A R E THE C O U N C I L ’ S VIEWS REGARDING THE APPROPRIATENESS OF R E C E N T M O N E T A R Y A N D C R E D I T P O L I C Y ? Vice P r e s i d e n t A s t o n t h e n r e a d I t e m IV. In the d i s c u s s i o n of this item there w a s w i d e a g r e e m e n t t h a t the C o u n c i l should s u p p o r t Chairman M a r t i n in h i s c o n c e r n a b o u t d e v e l o p m e n t s in the credit markets and the p o s s i b l e e m e r g e n c e of i n f l a t i o n a r y pressures* Accordingly, it w a s d e c i d e d to s u g g e s t t h a t in v i e w of the current volume of b u s i n e s s a c t i v i t y , the a n t i c i p a t e d a d d i t i o n a l s t i m u l a t i o n from the tax cut, t h e p o s s i b i l i t y of a r e n e w a l of wag e cost increases, and the p r o b a b l e p r e s s u r e s on p r i c e s , that m o n e t a r y and credit p o l i c y s h o u l d n o w m o v e g r a d u a l l y in the d i r e c t i o n of restraint. There f o l l o w e d a b r i e f d i s c u s s i o n on the p r o p o s a l of s u b stituting a b o o k - e n t r y p r o c e d u r e f o r the p r o c e d u r e c u r r e n t l y followed b y the R e s e r v e B a n k s in h o l d i n g G o v e r n m e n t secur i t i e s in safekeeping or as c o l l a t e r a l . The m e m b e r s r e p o r t e d t h a t b a n k e r s g e n e r a l l y f a v o r the proposal, a l t h o u g h t h e r e w e r e some d e t a i l s that w o u l d r e q u i r e attention b e f o r e the p l a n w a s p u t into effect. A f t e r a b r i e f d i s c u s s i o n , it w a s t e n t a t i v e l y d e c i d e d that the ne x t m e e t i n g of the C o u n c i l w o u l d be S e p t e m b e r 21-22, 1961;. The m e e t i n g a d j o u r n e d a t 12:1;0 P . M . 5 T H E C O U N C I L C O N V E N E D I N T H E B O A R D R O O M OP T H E F E D E R A L R E S E R V E B U I L D I N G , W A S H I N G T O N , D. C . , A T 2 : 3 0 P.M. ON A P R I L 22, 1961;. There was a d i s c u s s i o n on c u r r e n t e c o n o m i c d e v e l o p m e n t s b y inembers of the B o a r d ’ s s t a f f , D i v i s i o n of R e s e a r c h and S t a t i s t i c s . An outline of the p r e s e n t a t i o n w i l l be f o r w a r d e d to the m e m b e r s of the Council u p o n its r e c e i p t f r o m the B o a r d of G o v e r n o r s . THE C O U N C I L R E C O N V E N E D A T 8 : 3 0 P.M. O N A P R I L 22, 1961;, IN R O O M 932 O F T H E M A Y F L O W E R HOTEL. A L L M E M B E R S OF THE C O U N C I L W E R E P R E S E N T E X C E P T MR. M O O R H E A D . MR. H E N R Y T. R U T L E D G E , E X E C U T I V E V I C E P R E S I D E N T , N O R T H W E S T E R N N ATIONAL BANK, M I N N E A P O L I S , M I N N E S O T A , A T T E N D E D AS A L T E R N A T E . The C o u n c i l p r e p a r e d a n d a p p r o v e d the a t t a c h e d Confid e n t i a l Memorandum to be s e n t to t h e B o a r d of G o v e r n o r s r e l a t i v e to the Agenda for the joint m e e t i n g of the C o u n c i l a n d the B o a r d on April 23, 1961;. T h e M e m o r a n d u m was d e l i v e r e d to the F e d e r a l Reserve B u i l d i n g at 1 1 : 1 5 P. M . on A p r i l 22, 1961;. The m e e t i n g a d j o u r n e d a t 1 0 : 3 5 P . M . CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON APRIL 23, 1964 1. Economic c o n d itio n s and p ro sp e c ts. A. What are the views o f the C o u n cil on the economic o u tlo o k fo r the rem ainder o f t h is year? Have the members observed as y et any s i g n i f i c a n t e ffe c ts o f the r e c e n tly enacted tax cut on consumer spending and a t t i t u d e s or on b u sine ss fix e d investm ent spending or p la n s ? To what ex ten t does i t appear t h a t the s t im u la t iv e e f f e c t o f the tax cu t is l i k e l y to be o f f s e t by tax in cre a se s a t the S ta te and lo c a l le v e ls ? The C o u n c il a n t ic ip a t e s t h a t economic a c t i v i t y d u rin g the remainder of the year w i l l c o n tin u e to expand s tr o n g ly . The members have not yet observed any s i g n i f i c a n t e f f e c t , o th e r th an p s y c h o lo g ic a l, from the r e c e n tly enacted tax c u t . W hile consumer a t t it u d e s c o n tin u e favorable, spending has n o t shown any u n u s u a l s p u r t. The members o f the Council have lik e w is e n o t d e te c te d a step-up in b u sine ss fix e d investment spending r e s u l t in g from the tax c u t , a lth o u g h th ere have been reports o f some exp ansio n in c a p it a l investm ent p la n s . Tax increases on the S ta te and lo c a l le v e ls w i l l o nly s l i g h t l y o f f s e t the stim u la tiv e e f f e c t o f the tax c u t. B. How does the C o u n c il view the p ro sp ects fo r con t in u in g p r ic e s t a b i l i t y ? Are th e re sig n s of s p e c u la tiv e te n d e n cie s in c r e d it m a rk ets, la n d , common s to c k s , and o th e r c a p it a l a s s e ts , or i n com m odities? The C o u n c il b e lie v e s t h a t some upward p ressure on p r ic e s is developing. As a consequence, i t is d o u b tfu l th a t the r e l a t iv e p r ic e s t a b ilit y o f the p a s t s e v e r a l years w i l l c o n tin u e . The outcome o f the forthcoming wage n e g o tia tio n s w i l l have an im p o rta n t b e a r in g on these trends. A ltho ug h th e re are no in d ic a t io n s o f w idespread s p e c u la tiv e tendencies, th ere are some evidences o f s p e c u la tiv e a c t i v i t y and the excessive use o f c r e d i t , p a r t i c u l a r l y in la n d and c e r t a in types o f construction i n v a r io u s a re a s . C. Does ample c a p a c ity appear s t i l l to be a v a ila b le in most m ajo r in d u s t r ie s ? Are th e re in d ic a t io n s o f in v e n to r y o v e r b u ild in g in a n t i c i p a t i o n o f h ig h e r p r ic e s a n d /o r su p p ly in t e r r u p t io n s because o f s tr ik e s ? -2The members o f the C ouncil b e lie v e there is ca p acity a v a i l able in most m ajor in d u s t r ie s th a t w i l l perm it seme a d d it io n a l increase in o utp ut, bu t p ro b ab ly o nly a t h ig h e r u n it co sts. The gap between output and c a p a c ity is narrow ing. Other than the build-up of au to mobile in v e n to r ie s , the reasons fo r which are v a r io u s ly in te r p r e te d , the members of the C o u n c il so fa r have observed few signs of inventory overbuilding in a n t i c ip a t i o n o f h ig h e r p ric e s and/or in te r r u p tio n s because of s t r ik e s . However, an a c c e le r a tio n in the accum ulation of inventories w i l l occur i f businessmen a n t ic ip a te r is in g p rice s in the months im m ediately ahead. 2. Banking developm ents. A. What is the C o u n c il’ s judgment regarding domestic and fo r e ig n lo a n demands over the re s t of th is year? A ltho ug h the dom estic lo an demand is c u r re n tly somewhat below expectations, the C o u n c il b e lie v e s th a t fu tu re demand w i l l r e f le c t the r is in g le v e l o f b u sin e ss a c t i v i t y th a t is now a n t ic ip a te d . The demand for fo re ig n loans c o n tin u e s s tr o n g , e s p e c ia lly fo r loans w ith a m a tu rity of 2 years and 11 months. W ith the expected expansion in domestic loan demand and w ith the reserve p o s it io n o f the commercial banks less easy than i t was l a s t y e a r, the banks may f in d i t more d i f f i c u l t to accom modate fo re ig n borrow ers. B. Have C o u n c il members observed any changes in customer demands fo r term lo a n s , or in the w i l l ingness o f banks to g ra n t such loans? The demand fo r term loans c o n tin u e s . The members of the Council have no t observed any change in the w illin g n e s s of banks to grant such c r e d it s . In f a c t , some members re p o rt th a t the co m petition for these c r e d it s has become more in te n s e w ith some tendency fo r rates and terms to s o fte n . C. What are the C o u n c il's observatio ns regarding the l i k e l y tre nd o f in t e r e s t rate s d u rin g the r e s t o f 1964? The members o f the C o u n c il a n t ic ip a t e th a t in t e r e s t rate s w ill d r i f t upward i n the months ahead. However, i f the tax cu t does sharply s tim u la te consumer demand, in v e n to ry accum ulatio n w i l l be ac ce le rate d , p r o d u c tio n schedules stepped u p , and c a p it a l investm ent expanded. In these c irc u m s ta n c e s , c r e d it demand would increase sh arp ly and the in t e r e s t r a te s tr u c tu r e would be under upward pressure. D. Do C o u n c il members have comments on recent develop ments in regard to the issuance of n e g o tia b le c e r t i f i c a t e s o f d e p o s it? -3Since the la s t m eeting o f the Board and the C ouncil the in t e r est rates p a id on n e g o tia b le c e r t if ic a t e s of deposit are pressing the 4 per cent c e il i n g . A lthough there is some concern about the impact on the volume of n e g o tia b le c e r t if ic a t e s of d e p o sit i f the y ie ld on Treasury b i l l s and other short-term in t e r e s t rates should move up fu r th e r , the consensus o f the members of the C ouncil is th a t the c e ilin g should not be raise d a t t h is tim e. 3. What is the c u rre n t s ta tu s of the exchange ab sorp tion problem? The members o f the C oun cil s tro n g ly favor a c o n tin u a tio n of the Federal Reserve in t e r p r e t a t io n th a t the ab so rp tio n of exchange charges i s , in f a c t , a payment o f in t e r e s t on demand deposits and therefore should be p r o h ib ite d . The C o u n c il is aware of the awkwardness of the present s itu a tio n but b e lie v e s abandonment by the Federal Reserve of i t s longheld p o s it io n would n o t be in the best in te r e s ts of the banking system or of the p u b lic a t la r g e . 4. What are the C o u n c il's views regarding the appropriateness of re c e n t monetary and c r e d it p o lic y ? The C o u n c il b e lie v e s recent monetary and c r e d it p o lic y has been a major fa c to r i n the expansion o f the economy to i t s present high le v e l. However, i n view o f the c u rre n t volume of business a c t i v i t y , and the a n tic ip a te d a d d it io n a l s t im u la t io n from the tax c u t , the p o s s i b i l it y of a renewal o f wage-cost in c r e a s e s , and the probable pressures on p r ic e s , the C ouncil b e lie v e s th a t monetary and c r e d it p o lic y should now move g ra d u a lly in the d ir e c t io n o f r e s t r a i n t . * * * * The C o u n c il b e lie v e s th a t bankers g e n e ra lly favor the proposal of s u b s t it u t in g a book-entry procedure fo r the procedure c u rre n tly follow ed by the Reserve Banks in h o ld in g Government s e c u r itie s in s a fe keeping or as c o l l a t e r a l . 6. ON A P R I L 23, 1961]., A T 1 0 : 3 0 A . M . , T H E F E D E R A L A D V I S O R Y CO U N C I L H E L D A J O I N T M E E T I N G W I T H T H E B O A R D OF G O V E R N O R S OF T H E F E D E R A L R E S E R V E S Y S T E M IN T H E F E D E R A L R E S E R V E B U I L D I N G , W A S H I N G T O N , D. C. A L L M E M B E R S OF T H E C O U N C I L W E R E P R E S E N T E X C E P T MR. M O O R H E A D . MR. H E N R Y T. RUTLEDGE, E X E C U T I V E V I C E P R E S I D E N T , N O R T H W E S T E R N N A T I O N A L BANK, M I N N E A P O L I S , M I N N E S O T A , A T T E N D E D AS A L T E R N A T E . THE F O L L O W I N G M E M B E R S O F T H E B O A R D OF G O V E R N O R S W E R E PRESENT: C H A I R M A N M A R T I N , V I C K C H A I R M A N B A L D E RSTON, G O V E R N O R S M I L L S , R O B E R T S O N , S H E P A R D S O N , M I T C H E L L AND D A A N E . MR. S H E R M A N , S E C R E T A R Y , A N D MR. K E N Y O N , A S S I S T A N T S E C R E T A R Y , O F T H E B O A R D OF G O V E R N O R S A L S O W E R E PRESENT. MR. E D W A R D A W A Y N E , P R E S I D E N T OF T H E F E D E R A L R E S E R V E B A N K OF R I C H M O N D , A L S O A T T E N D E D D U R I N G T H E D I S C U S S I O N OF T H E P R O P O S A L O F S U B S T I T U T I N G A B O O K - E N T R Y P R O C E D U R E F O R THE P R O C E D U R E C U R R E N T L Y F O L L O W E D B Y T H E R E S E R V E B A N K S IN H O L D I N G G O V E R N M E N T S E C U R I T I E S I N S A F E K E E P I N G OR AS COLLATERAL. The m i n u t e s o f t h e j o i n t m e e t i n g are b e i n g p r e p a r e d in the office of the S e c r e t a r y of t h e B o a r d of G o v e r n o r s of the F e d e r a l Reserve System. T h e i r c o n t e n t w i l l be c o m p a r e d w i t h the n o t e s of he S e c r e t a r y of t h e C o u n c i l . A s s u m i n g t h e y are in s u b s t a n t i a l greement, t h e y w i l l b e r e p r o d u c e d a n d d i s t r i b u t e d to the m e m b e r s of the Council. The m e e t i n g a d j o u r n e d at 1 2 : 14.5 P.M. The ne x t m e e t i n g of t h e September 2 1 - 2 2 , 1 9 6 ^ . C o u n c i l w a s t e n t a t i v e l y set for
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