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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL June 20, 1966 The second statutory meeting of the Federal Advisory Council for 1966 was convened in Executive Chamber #2 of The Madison, Washington, D.C., on June 20, 1966, at 9:30 A.M. Present: District No. John Simmen William H. Moore William L. Day L. A. Stoner John F. Watlington, Jr. Sam M. Fleming Henry T. Bodman 1 District No. 2 District District District District No. No. No. No. 3 4 5 6 District No. 7 A. M. Brinkley, Jr. John A. Moorhead Roger D. Knight, Jr. District No. 8 District No. 9 District No. 10 Robert H. Stewart, III District No. 11 District No. 12 Secretary Assistant Secretary Frank L. King, Alternate Herbert V. Prochnow William J. Korsvik Absent: Ransom M. Cook District No. 12 On motion duly made and seconded, the mimeographed notes of the meeting held on February 14-15, 1966, 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 G o v e r n o r s f r o m t h e 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 14, 15, 16, and 17. The meeting adjourned at 12:20 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 12. MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL June 20, 1966 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, and Frank L. King, Alternate for Mr. Ransom M. Cook. Absent: Mr. Ransom M. Cook Members of the Board’s staff participated in an audio-visual presentation on domestic and international economic conditions. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary June 20, 1966 At 5:30 P.M., the Federal Advisory Council reconvened in Executive Chamber #2 of The Madison, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, Frank L. King, Alternate for Mr. Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. Ransom M. Cook 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 14, 15, 16 and 17, 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 9:30 P.M. on June 20, 1966. The meeting adjourned at 7:00 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 13. CONFIDENT IAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FE D ER A L ADVISORY COUNCIL RELA T IV E TO THE AGENDA FOR THE JOINT MEETING ON J UNE 21, 1966 1. Economic conditions and prospects. A. How does the Council appraise prospects for consumer spending and for c o n s u m e r and industrial prices at mid-1966? The Council anticipates that consumer spending w ill continue to r i s e , re flecting present high levels of employment and the continued upward trend of personal income. There is evidence that the rate of rise has moderated slightly from the very rapid pace that characterized the early part of the year. While numerous factors may be con tributing to this development, it is possible that the increase in the Social Security tax that became effective January 1, together with the reimposition of excise taxes, and the accelerated tax collection program effective May 1, may have caused some reappraisal of consumer savings-spending patterns. Although consumer prices probably w ill continue to edge up, the rise may be affected somewhat by lower food prices at the retail level. Food prices at the wholesale level showed a modest decline between February and May. Most members of the Council anticipate that industrial prices w ill be under increasing upward pressure. B. Have Council members observed any s ig n ifi cant recent changes in business plans for c a p i t a l expenditures in r e s p o n s e to the President’s request or in response to tighter conditions in m a r k e t s for labor, materials, and credit? Have there been any significant changes in inventory policies? The members of the Council have not observed any significant change in business expenditures in response to the President’s request.-There is some fragmentary evidence that tighter conditions in the markets for labor, materials, and credit and the resulting increases in costs may tend to slow the rate of rise in capital expenditures. It is difficult to detect any important change in inventory policies. On the other hand, the recent s l i g h t decline in retail sales and, in particular, automobiles, may cause businessmen to be less aggressive in building inventories. 14. 2. Banking developments. A. What does the Council anticipate as to nearterm business demands for bank credit? Do the members expect banks to have difficulty in meeting such demands? The members of the Council anticipate a continued strong demand for bank credit. To an increasing extent, banks have been rationing credit in recent months and will have difficulty in meeting the expected strong demand for credit in the remaining months of the year. B. How much tightening of bank lending policies has taken place since last winter? Has the ABA checklist to guide selection of loans been effective in this regard? Bank lending policies are considerably tighter than they were last winter. The ABA checklist has been helpful. Moreover, because the period of tight money and higher interest rates has continued for several months, some would-be borrowers may have been discouraged from making ioan requests other than those which they believed would receive favorable consideration. C. How have recent developments affected the ability and willingness of banks to attract funds t h r o u g h issuance of large-denomination negotiable CD’s? Through issuance of small-denomination consumer-type CD’s? Despite the pressures in the credit markets, the banks in the money centers have been able to attract a slowly rising volume of funds through the issuance of negoti able CD’s. To obtain the funds, however, banks have had to step-up the rates and/or shorten the maturities. Members of the Council believe that the small-denomination con sumer-type CD’s have been helpful in enabling the banks to attract and retain bank pass book-type savings funds. There has been only a relatively small increase in total con sumer savings. D. What are the views of Council members reg a r d i n g the desirability, and the possible effects, of various r e c e n t legislative pro posals for limiting CD issuance by reducing time deposit interest rate ceilings applicable to certificates below c e r t a i n maturities or denominations? 15. The Members of the Council do not look with favor on recent legislative proposals for limiting the issuance of C D ’s by reducing i n t e r e s t rate ceilings. The Council knows of no persuasive evidence that a substantial volume of savings has flowed into the commercial banks from other financial institutions. On the contrary, there are indications that savings have been attracted to equities and higher yielding, fixed income obligations such as those issued by the Federal agencies. E. How would the Council appraise the current state of the m o r t g a g e and consumer credit markets? The Council believes that restrictive monetary policy, with the resulting rise in interest rates, has had an important impact on the mortgage credit markets. There is less indication so far of any significant direct affect on consumer credit markets. How ever, recent increases in instalment credit rates may have a more far-reaching impact on consumer credit markets. To the extent that demand has moderated as a result of these developments, and the pressures on the relatively limited supply of resources eased, monetary policy will succeed in achieving one of its objectives. 3. Balance of Payments A. Does the Council believe that the reduction in foreign lending by U.S. banks is due mainly to (a) general monetary conditions, (b) the voluntary foreign credit restraint program, or (c) other factors? The Council believes that the reduction in foreign lending by U.S. banks largely reflects general monetary conditions including the pressure of domestic demand, and to some extent, the voluntary foreign credit restraint program. The slowing in the pace of economic activity in japan, for example, was one of the other factors accounting for some reduction in foreign lending by U.S. banks. B. Does the Council believe that any significant amount of export financing is being refused because of the voluntary f o r e i g n credit re straint program or because of general monetary conditions? 16. The m embers of the Council are not aware that any significant amount of export financing is being refused either because of the voluntary foreign credit restraint program or Decause of general monetary conditions. C. by Danks 4. What is the C ouncil’s view regarding the out look for foreign lending by banks during the remainder of 1966? The Council does not anticipate any substantial increase in foreign lending during the remainder of 1966. What are the Council’s views on monetary and credit policy under current c irc u m sta n c e s? The members of the Council believe that the gradually increasing restraint that has characterized credit and monetary policy in the recent past should be continued. Although there are indications that economic activity seems to have moderated somewhat from the pace of the early months of the year, it is not clear that demand has slowed sufficiently to moderate the pressures on resources and on the price level in general. Accordingly, a continuation of the policy of gradually increasing restraint is warranted. However, the approaching July 1 savings interest period may be marked by unusual acti vity and shifts of funds requiring temporary policy adjustments over this period. To deal effectively with inflationary pressures in an economy, it is necessary to pursue a policy not only of monetary restraint but also of fiscal restraint. 17. MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM June 21, 1966 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, Wash ington, D.C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC. Martin, Jr.; Vice Chairman, J. L. Robertson; Governors Sherman J. Maisel and Andrew F. Brimmer; also Mr. Merritt Sherman, Secretary, and Mr. Karl E. Bakke, Assistant Secretary, of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman. A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, Frank L. King, Alternate for Mr. Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. Ransom M. Cook President Moorhead read the first item 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 t o t h e B o a r d o f G o v e r n o r s f r o m t h e F e d e r a l A d v i s o r y C o u n c i l asprinted on pages 14, 15, 16andl7. A brief discussion followed. The President of the Council then read the second item on the Agenda. A long dis cussion followed. President Moorhead added that in his opinion banks had generally reached levels close to reasonable utilization limits and that the demand for more credit could be accommodated only with great difficulty. Chairman Martin observed that the real problem facing the nation was that demand for credit was substantially in excess of aggregate savings of business and individuals. If the Federal Reserve were to create money so that demand might be fully accommodated, it would only accelerate price rises. The third item and the Council’s conclusions were then read by President Moorhead. President Moorhead then read the fourth item on the Agenda and the conclusions of the Council. There followed a brief discussion in which the administration of the dis count window in the various districts was briefly discussed. 18. C h a ir m a n p o lic y s h o u ld M a r t in be s u g g e s te d d is c u s s e d th a t fr a n k ly q u e s tio n s w ith th e w h ic h m em ber b ank s had P r e s id e n ts of th e lo c a l a b o u t d is c o u n t F e d e ra l R e serve banks. T he m e e t i n g a d j o u r n e d a t 1 2 :2 0 P .M HERBERT V. P R O C H N O W S e c re ta ry W IL L IA M J . K O R S V IK A s s is t a n t S e c re ta ry 19. NOTE: T h i s t r a n s c r i p t of the S e c r e t a r y ’ s n o t e s is n o t to b e r e g a r d e d 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 accurate* T h e t r a n s c r i p t 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 A d v i s o r y C o u n c i l , The concise oi i i c i a l m i n u t e s f o r t h e e n t i r e y e a r are p r i n t e d a n d distributed later. H.V.P. ¥ . J.K. T h e S e c r e t a r y ' s n o t e s o f the m e e t i n g of t h e F e d e r a l A d v i s o r y C o u n c i l o n J u n e 20, 1 9 6 6 , at 9 : 3 0 A . M . in E x e c u t i v e C h a m b e r # 2 of The M a d i s o n , 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 e d e r a l A d v i s o r y C o u n c i l were p r e s e n t e x c e p t Mr, Cook. M r . F r a n k L. K i n g , C h a i r m a n of the B o a r d , U n i t e d C a l i f o r n i a B a n k , L o s A n g e l e s , C a l i f o r n i a , a t t e n d e d as an A l t e r n a t e f o r Mr. Cook. The C o u n c i l a p p r o v e d the S e c r e t a r y ' s n o t e s F e b r u a r y II4.-I5?, 1 9 6 6 . f o r the m e e t i n g of T h e C o u n c i l a m e n d e d i t s a c t i o n t a k e n at the m e e t i n g on Fe b r u a ry 1L|_, 1 9 6 6 as f o l l o w s : 1. T h e s a l a r y o f t h e S e c r e t a r y w a s f i x e d at $ 3 , 0 0 0 a n n u a l l y , and t h a t of t h e A s s i s t a n t S e c r e t a r y at $ 2 , 0 0 0 a n n u a l l y , as in p r e vious y e a r s , 2, The d r a w i n g u p o n e a c h F e d e r a l R e s e r v e B ank for secretarial and i n c i d e n t a l e x p e n s e s of t h e F e d e r a l A d v i s o r y C o u n c i l f o r the year 1 9 6 6 w a s r e d u c e d to $ 1+50 as in p r e v i o u s y e a r s . ITEM I ECONOMIC C O N D I T I O N S AND P R O S P E C T S . A. HOW DOES THE C O U N C I L A P P R A I S E PROSPECTS FOR CONSUMER SPEND I N G A N D F O R C O N S U M E R AND. I N D U S T R I A L P R I C E S A T MID-1966<? B. H A V E C O U N C I L M E M B E R S O B S E R V E D A N Y S I G N I F I C A N T RECENT CHANGES IN B U S I N E S S P L A N S F O R C A P I T A L E X P E N D I T U R E S I N R E S P O N S E T O THE P R E S I D E N T ’ S R E Q U E S T O R I N R E S P O N S E TO. T I G H T E R C O N D I T I O N S IN M A R K E T S F O R L A B O R , M A T E R I A L S , A N D C R E D I T ? HA V E THERE B E E N A N Y S I G N I F I C A N T CH A N G E S I N I N V E N T O R Y P O L I C I E S ? _____________ P r e s i d e n t M o o r h e a d r e a d I t e m I a n d a s k e d the v a r i o u s m e m b e r s of "he C o u n c i l to c o m m e n t . In the e x t e n d e d d i s c u s s i o n w h i c h followed, ^ e r e w as g e n e r a l a g r e e m e n t t h a t c o n s u m e r s p e n d i n g w i l l c o n t i n u e to ri3e, r e f l e c t i n g p r e s e n t h i g h l e v e l s o f e m p l o y m e n t a n d the c o n t i n u e d upward t r e n d of p e r s o n a l i n c o m e . S e v e r a l m e m b e r s m e n t i o n e d t h a t there were some I n d i c a t i o n s t h a t t h e r a t e of r i s e h a d m o d e r a t e d s l i g h t l y :roir, the v e r y r a p i d p a c e t h a t h a d c h a r a c t e r i z e d the e a r l y p a r t of the 7ear. In g e n e r a l , it w a s b e l i e v e d t h a t c o n s u m e r p r i c e s p r o b a b l y w i l l edge up f u r t h e r , a l t h o u g h t h e r i s e m a y b e m o d e r a t e d s o m e w h a t by lower f o o d p r i c e s . M o s t m e m b e r s of the C o u n c i l a n t i c i p a t e that in dustrial prices w i l l be u n d e r increasing upward pressure. The members of the C o u n c i l r e p o r t e d t h a t t h e y h a d n o t o b s e r v e d any s i g n i f i c a n t c h a n g e in b u s i n e s s e x p e n d i t u r e s in r e s p o n s e to the P r e s i d e n t s request. They did acknowledge, however, that tighter condi tions in the m a r k e t s f o r l a b o r , m a t e r i a l s , a n d c r e d i t , a n d the r e sulting i n c r e a s e in c o s t s , a p p a r e n t l y h a s b e g u n to s l o w the r a t e of rise in c a p i t a l e x p e n d i t u r e s . N o one w a s a b l e to r e p o r t any important c h a n g e i n i n v e n t o r y p o l i c i e s . I T E M II BANKING D E V E L O P M E N T S A. WHAT D OES T H E C O U N C I L A N T I C I P A T E AS TO N E A R - T E R M BUSINESS DEMANDS FOR BANK CREDIT? DO THE MEMBERS EXPECT BANKS TO HAVE D I F F I C U L T Y IN M E E T I N G SUCH DEMANDS? B. HOW MU C H T I G H T E N I N G OF B A N K LE N D I N G POLICIES HAS TAKEN PLACE SINCE LAST WINTER? HAS THE A B A CHECKLIST TO GUIDE SELECTION OF L O A N S BE E N E F F E C T I V E IN THIS REGARD? C. HOW HAVE RECENT DEVELOPMENTS AFFECTED W I L L I N G N E S S OF B A N K S TO A T T R A C T FUNDS T HE A B I L I T Y AND THROUGH ISSUANCE OF LARGE-DENOMINATION NEGOTIABLE C/D'S? THROUGH ISSUANCE OF SMALL-DENOMINATION CONSUMER-TYPE C/D'S? D. WHAT ARE THE VIEWS OF THE COUNCIL MEMBERS REGARDING THE DESIRABILITY, AND THE POSSIBLE EFFECTS, OF VARIOUS RECENT LEGISLATIVE PROPOSALS FOR LIMITING C/D ISSUANCE BY RE DUCING TIME DEPOSIT INTEREST RATE CEILINGS APPLICABLE TO CERTIFICATES BELOW CERTAIN MATURITIES OR DENOMINATIONS? E. HOW WO'TLD THE COUNCIL APPRAISE THE CURRENT STATE OF THE MORTGAGE AND CONSUMER CREDIT MARKETS? P r e s id e n t M oorhead th e n re a d Ite m I I . I n th e d is c u s s io n w h ich f l o w e d , i t was p o i n t e d o u t t h a t as a consequence o f th e a n t ic ip a t e d tner r is e i n b u s in e s s a c t i v i t y , a c o n tin u e d s tr o n g demand f o r h an k Cr><3dit is e x p e c te d . S e v e r a l members a rg u e d t h a t banks have been C l o n i n g c r e d i t i n r e c e n t m onths and a c c o r d in g ly w i l l have d i f f i c u l t y fleeting the in c r e a s e d demand f o r fu n d s i n th e r e m a in in g m onths o f je a r . There was w ide a g re e m e n t t h a t bank le n d in g p o l i c i e s are con^ le r a b ly t i g h t e r t h a n th e y were l a s t w in t e r * S e v e r a l members s a id the ABA c h e c k l i s t h a d b e e n h e l p f u l and t h a t some w ould-be l o w e r s may have b e e n d is c o u r a g e d fro m m akin g lo a n r e q u e s t s . - s c a is e o f t h e demand f o r c r e d i t , th e b a n k s i n th e money c e n te r s a g g r e s s iv e ly s o u g h t f u n d s i n th e n e g o t i a b l e C/D m a rk e t* They f a c t , s u c c e e d e d i n a t t r a c t i n g a s lo w ly r i s i n g volum e by 2; h ig h e r r a t e s and by s h o r t e n in g m a t u r i t i e s . A lth o u g h th e n a t i o n v a r i e d r e g i o n a l l y , s e v e r a l members f e l t t h a t th e s m a ll d e n o m i n a t i o n c o n s u m e r - t y p e C / D ' s h a v e b e e n h e l p f u l to b a n k s b y e n a b l i n g t h e m to a t t r a c t a n d r e t a i n b a n k p a s s b o o k - t y p e s a v i n g s . T h e m e m b e r s of the C o u n c i l do n o t l o o k w i t h f a v o r on r e c e n t l e g i s l a t i v e p r o p o s a l s f o r l i m i t i n g the i s s u a n c e of C / D * s b y r e d u cing i n t e r e s t r a t e c e i l i n g s . S e v e r a l m e n t i o n e d that e quity i n v e s t m e n t s a n d h i g h e r y i e l d i n g f i x e d i n c o m e o b l i g a t i o n s , s u c h as those i s s u e d b y the f e d e r a l a g e n c i e s , h a d s u c c e e d e d in a t t r a c t i n g s avings f u n d s . T h e s i t u a t i o n in the m o r t g a g e m a r k e t a l s o v a r i e d r e g i o n a l l y t h o u g h it w a s g e n e r a l l y a g r e e d t h a t r e s t r i c t i v e m o n e t a r y p o l i c y a n d t h e r i s e in i n t e r e s t r a t e s h a d h a d an i m p a c t in this m arket. T h e r e is l e s s e v i d e n c e t h a t t h e v o l u m e of c o n s u m e r c r e d i t has b e e n a f f e c t e d . I T E M III B ALANCE OF P A Y M E N T S A. D O E S T H E C O U N C I L B E L I E V E T H A T T H E R E D U C T I O N IN F O R E I G N L E N D I N G B Y U . S . B A N K S IS D U E M A I N L Y T O (A) G E N E R A L M O N E T A R Y C O N D I T I O N S , (B) T H E V O L U N T A R Y F O R E I G N C R E D I T R E S T R A I N T P R O G R A M , OR (C) O T H E R F A C T O R S ? B. D O E S T H E C O U N C I L B E L I E V E T H A T A N Y S I G N I F I C A N T A M O U N T OF E X P O R T F I N A N C I N G I S B E I N G R E F U S E D B E C A U S E OF T H E V O L U N T A R Y F O R E I G N C R E D I T R E S T R A I N T P R O G R A M OR B E C A U S E OF G E N E R A L M O N E T A R Y CONDITIONS? C. W H A T IS T H E C O U N C I L ’ S V I E W R E G A R D I N G THE OUTLOOK FOR FOREIGN L E N D I N G B Y B A N K S D U R I N G T H E R E M A I N D E R OF 1966? T he P r e s i d e n t of t h e C o u n c i l t h e n r e a d I t e m III. A brief dis cussion f o l l o w e d . I t d i s c l o s e d a g r e e m e n t a m o n g t h e m e m b e r s t h a t the reduction in f o r e i g n l e n d i n g b y U . S . b a n k s l a r g e l y r e f l e c t s g e n e r a l monetary c o n d i t i o n s , I n c l u d i n g t h e p r e s s u r e of d o m e s t i c d e m a n d , and, to a l e e s e r e x t e n t , t h e v o l u n t a r y f o r e i g n c r e d i t r e s t r a i n t p r o g r a m . The s l o w i n g in t h e p a c e of e c o n o m i c a c t i v i t y in s o m e f o r e i g n c o u n t r i e s probably w a s a n a d d i t i o n a l f a c t o r a c c o u n t i n g f o r t h e r e d u c t i o n . Accordingly, the m e m b e r s of t h e C o u n c i l do n o t a n t i c i p a t e a n y s u b s t a n tial i n c r e a s e in f o r e i g n l e n d i n g b y b a n k s d u r i n g t h e r e m a i n d e r of 1966. Iney are n o t a w a r e of t h e r e f u s a l of a n y s u b s t a n t i a l v o l u m e of e x p o r t financing, ITEM IV '■•/HAT A R E T H E C O U N C I L ’ S VIEWS CURRENT C I R C U M S T A N C E S ? ON M O N E T A R Y A N D C R E D I T P O L I C Y U N D E R President M o o r h e a d read Item IV and a long discussion followed -ring w h i c h t h e C o u n c i l r e v i e w e d its p r e v i o u s c o m m e n t s on m o n e t a r y ’ -cy. T h e m e m b e r s of t h e C o u n c i l b e l i e v e tha t the g r a d u a l l y inCr*e£j.3ing r e s t r a i n t t h a t h a s c h a r a c t e r i z e d c r e d i t a n d m o n e t a r y p o l i c y in the r e c e n t p a s t s h o u l d be c o n t i n u e d . However, the approaching July 1 s a v i n g s i n t e r e s t p e r i o d m a y b e m a r k e d b y u n u s u a l a c t i v i t y and s h i f t s of f u n d s r e q u i r i n g t e m p o r a r y p o l i c y a d j u s t m e n t s ove r this period. T h e r e w a s a s t r o n g f e e l i n g a m o n g the m e m b e r s of the C o u n c i l of the n e e d f o r f i s c a l r e s t r a i n t if i n f l a t i o n a r y p r e s s u r e s are to be effectively curbed. T h e m e e t i n g a d j o u r n e d at 1 2 : 2 0 P*M. s. 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 J U N E 20, 1 9 6 6 . A L L M E M B E R S OF T H E COUNCIL W E R E PRESENT E X C E P T MR. COOK. M R . F R A N K L. K I N G , C H A I R M A N OF T H E BOARD, U N I T E D C A L I F O R N I A BANK, L O S ANGELES, CALIFORNIA, A T T E N D E D A S A N A L T E R N A T E F O R MR. COOK. M e m b e r s of the B o a r d ’s s t a f f p a r t i c i p a t e d in an a u d i o - v i s u a l presentation on domestic and international economic conditions. An o u t l i n e of t h e p r e s e n t a t i o n is b e i n g p r e p a r e d b y t h e s t a f f f o r d i s t r i b u t i o n to t h e m e m b e r s of t h e C o u n c i l . T H E C O U N C I L R E C O N V E N E D A T 5 : 3 0 P . M . , ON J U N E 20, 1966, IN E X E C U T I V E C H A M B E R # 2 O F T H E M A D I S O N . ALL MEMBERS 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. C O O K . MR. FRA N K L. K I N G , C H A I R M A N O F T H E B O A R D , U N I T E D C A L I F O R N I A B A N K , L O S A N G E L E S , C A L I F O R N I A , A T T E N D E D AS AN A L T E R N A T E F O R MR. C O O K . The C o u n c i l p r e p a r e d and a p p r o v e d the a t t a c h e d C o n f i d e n t i a l M e m o r a n d u m to b e 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 f o r t h e j o i n t m e e t i n g of t h e C o u n c i l a n d t h e B o a r d on June 21, 1 9 6 6 . T h e M e m o r a n d u m w a s d e l i v e r e d to the F e d e r a l R e s e r v e B u i l d i n g at 9 : 3 0 P . M . The m e e tin g a d jo u r n e d a t 7 P.M . CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON JUNE 21, 1966 1. Economic conditions and prospects: A. How does the Council appraise prospects for consumer spending and for consumer and industrial prices at mid-1966? The Council anticipates that consumer spending will continue to rise, reflecting present high levels of employment and the continued upward trend of personal income. There is evidence that the rate of rise has moderated slightly from the very rapid pace that characterized the early part of the year. While numerous factors may be contributing to this development, it is possible that the increase in the Social Security tax that became effective January 1, together with the reimposition of excise taxes, and the accelerated tax collection program effective May 1, may have caused some reappraisal of consumer savings-spending patterns. Although consumer prices probably will continue to edge up, the rise may be affected somewhat by lower food prices at the retail level. Food prices at the wholesale level showed a modest decline between February and May. Most members of the Council anticipate that industrial prices will be under increasing upward pressure. B. Have Council members observed any significant recent changes in business plans for capital expenditures in response to the President's request or in response to tighter conditions in markets for labor, materials, and credit? Have there been any significant changes in inventory policies? The members of the Council have not observed any significant change in business expenditures in response to the President's request. There is some fragmentary evidence that tighter conditions in the markets for labor, materials, and credit and the resulting increases in costs may tend to slow the rate of rise in capital expenditures. It is difficult to detect any important change in inventory policies. On the other hand, the recent slight decline in retail sales and, in particular, automobiles, may cause businessmen to be less aggressive in building inventories. -22. B a nking developments. A. What does the Council anticipate as to near-term business demands for bank credit? Do the members expect banks to have diffi culty in meeting such demands? The members of the Council anticipate a continued strong demand for bank credit. To an increasing extent, banks have been rationing credit in recent months and will have difficulty in meeting the expected strong demand for credit in the remaining months of the year. B. How much tightening of bank lending policies has taken place since last winter? Has the ABA checklist to guide selection of loans been effective in this regard? Bank lending policies are considerably tighter than they were last winter. The ABA checklist has been helpful. Moreover, because the period of tight money and higher interest rates has continued for several months, some would-be borrowers may have been discouraged from making loan requests other than those which they believed would receive favorable consideration. C. How have recent developments affected the ability and willingness of banks to attract funds through issuance of large-denomination negotiable CD's? Through issuance of smalldenomination consumer-type CD’ s? Despite the pressures in the credit markets, the banks in the money centers have been able to attract a slowly rising volume of funds through the issuance of negotiable CD's, To obtain the funds, however, banks have had to step-up the rates and/or shorten the maturities. Members of the Council believe that the smalldenomination consumer-type CD's have been helpful in enabling the banks to attract and retain bank passbook-type savings funds. There has been only a relatively small increase in total consumer savings. D. What are the views of Council members regarding the desirability, and the possible effects, of various recent legislative proposals for limiting CD issuance by reducing time deposit interest rate ceilings applicable to certificates below certain maturities or denominations? -3- The members of the Council do not look with favor on recent legislative proposals for limiting the issuance of CD's by reducing interest rate ceilings. The Council knows of no persuasive evidence that a substantial volume of savings has flowed into the commercial banks from other financial institutions. On the contrary, there are indications that savings have been attracted to equities and higher yielding, fixed income obligations such as those issued by the Federal agencies. E. How would the Council appraise the current state of the mortgage and consumer credit markets? The Council believes that restrictive monetary policy, with the resulting rise in interest rates, has had an important impact on the mortgage credit markets. There is less indication so far of any significant direct affect on consumer credit markets. However, recent increases in instalment credit rates may have a more far-reaching impact on consumer credit markets. To the extent that demand has moderated as a result of these developments, and the pressures on the relatively limited supply of resources eased, monetary policy will succeed in achieving one of its objectives. 3. Balance of Payments. A. Does the Council believe that the reduction in foreign lending by U.S. banks is due mainly to (a) general monetary conditions, (b) the voluntary foreign credit restraint program, or (c) other factors? The Council believes that the reduction in foreign lending by U.S. banks largely reflects general monetary conditions including the pressure of domestic demand, and to some extent, the voluntary foreign credit restraint program? The slowing in the pace of economic activity in Japan, for example, was one of the other factors accounting for some reduction in foreign lending by U.S. banks. B. Does the Council believe that any significant amount of export financing is being refused because of the voluntary foreign credit restraint program or because of general monetary conditions? -4- The members of the Council are not aware that any significant amount of export financing is being refused either because of the voluntary foreign credit restraint program or because of general monetary conditions. C. What is the Council’ s view regarding the outlook for foreign lending by banks during the remainder of 1966? The Council does not anticipate any substantial increase in foreign lending by banks during the remainder of 1966. 4. What are the Council's views on monetary and credit policy under current circumstances? The members of the Council believe that the gradually increasing restraint that has characterized credit and monetary policy in the recent past should be continued. Although there are indications that economic activity seems to have moderated somewhat from the pace of the early months of the year, it is not clear that demand has slowed sufficiently to moderate the pressures on resources and on the price level in general. Accordingly, a continuation of the policy of gradually increasing restraint is warranted. However, the approaching July 1 savings interest period may be marked by unusual activity and shifts of funds requiring temporary policy adjustments over this period. To deal effectively with inflationary pressures in an economy, it is necessary to pursue a policy not only of monetary restraint but also of fiscal restraint. ON J U N E 21, 1 9 6 6 , 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 C O 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 THE FEDERAL RESERVE BUILDING, 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. C O O K . M R . F R A N K L. K I N G , C H A I R M A N OF T H E B O A R D , U N I T E D C A L I F O R N I A B A N K , L O S A N G E L E S , C A L I F O R N I A , A T T E N D E D AS AN A L T E R N A T E F O R MR. COOK. T H E 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 P R E S E N T : CHAIRMAN MARTIN, VICE CHAIRMAN ROBERTSON, GOVERNORS MAISEL AND BRIMMER. M R . S H E R M A N , S E C R E T A R Y , A N D MR. B A K K E , A S S I S T A N T S E C R E T A R Y , OF T H E B O A R D OF G O V E RNO RS ALS O W E R E PRESENT. T h e m i n u t e s o f t h e j o i n t m e e t i n g a r e b e i n g p r e p a r e d in the o f f i c e of the 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 of the F e d e r a l R e s e r v e System. T h e i r c o n t e n t w i l l b e c o m p a r e d w i t h the n o t e s of the S e c r e tary of t h e C o u n c i l . A s s u m i n g t h e y a r e in s u b s t a n t i a l a g r e e m e n t , they w i l l be 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 C o u n c i l . The m e e t i n g a d j o u r n e d at 1 2 : 2 0 P.M. The n e x t m e e tin g o f th e C o u n c il w i l l be h e ld on September 19-20, 1966.
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