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MINUTES OF THE MEETING OF THE F E D E R A L ADVISORY COUNCIL May 17, 1965 The second statutory meeting of the Federal Advisory Council for 1965 was convened in Room 932 of the Mayflower Hotel, Washington, D .C ., on May 17, 1965, at 9:40 A.M. Present: Lawrence H. Martin District No. 1 William H. Moore District No. 2 William L. Day District No. 3 L. A. Stoner District No. 4 John F. Watlington, Jr. District No. 5 Sam M. Fleming District No. 6 Edward B. Smith District No. 7 James P. Hickok District No. 8 John A. Moorhead District No. 9 Roger D. Knight, Jr. District No. 10 James W. Aston District No. 11 Ransom M. Cook District No. 12 Herbert V. Prochnow Secretary William J. Korsvik A ssistant Secretary On motion duly made and seconded, the mimeographed notes of the meeting held on February 15-16, 1965, 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 o f 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 15, 16, 17 and 18. The meeting adjourned at 12:10 P.M. H E R B E R T V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 13. MINUTES O F THE MEETING O F THE F E D E R A L ADV ISORY C O U N C IL May 17, 1965 At 2:30 P.M ., the Federal Advisory Council convened in the Board Room Federal Reserve B uilding , Washington, D .C . of the Present: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, William H. Moore, William L. Day, L . A. Stoner, John F. Watlington, Jr., Sam M. Flem ing, Edward B. Smith, Jam es P. H ickok, Roger D. K night, Jr., Jam es W. Aston, and Ransom M. Cook. Members of the B oard’ s staff, Guy E. Noyes, Adviser to the Board, Robert C. H olland, Associate Director, D iv isio n of Research and S tatistics, and A. B. Hersey, A dviser, D ivision of International Finance, spoke on business conditions and the balance of payments. H E R B E R T V. PROCHNOW Secretary WILLIAM J . KORSVIK A ssistant Secretary May 17, 1965 At 9:20 P.M ., the Federal Advisory C ouncil reconvened in Room 932 of the Mayflower Hotel, Washington, D .C . Present: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, William H. Moore, William L . Day, L . A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Edward B. Smith, Jam es P. H ickok, Roger D. Knight, Jr., Jam es W. Aston, Ransom M. Cook, Herbert V. Prochnow, Secretary, and W illiam J . Korsvik, A ssistant Secretary. The Council reviewed its conclusions the office of the Secretary of the Board of follows on pages 15, 16, 17 and 18, lis tin g by the Council. The M e m o r a n d u m was 11:45 P.M . on May 17, 1965. regarding the items on the Agenda, and sent to 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 the Agenda items with the conclusions reached delivered to the Federal Reserve B uilding at The meeting adjourned at 10:45 P.M. H E R B E R T V. PROCHNOW Secretary WILLIAM J. KORSVIK A ssistant Secretary 14. CO NFIDENTIAL MEMORANDUM TO T H E B O A R D O F G O V E R N O R S FROM T H E F E D E R A L A D V IS O R Y C O U N C IL R E L A T IV E TO THE A G E N D A F O R THE JO IN T MEETING ON MAY 18, 1965 1. Econom ic co nd ition s and prospects. A. How does the C o u n cil appraise the general outlook for the U.S. economy during the remainder of the current year? The C ou ncil believes the general outlook for the U.S. economy during the remainder of the current year is favorable. While some adjustm ents in steel and auto production and in the rate of inventory accu m u lation are probable, these are not likely to have a sig n ificant effect on bu sine ss a c tiv ity before the end of the year. B. What are the im p lic a tio n s of the extension of the steel labor contract for inventory accum ulation, in d u s tria l a c tiv ity , prices, and wage settlem ents in other in d u strie s? The fu ll im p lic a tio n s of the extension of the steel labor contract cannot be forecast. However, a number of members of the C o u n cil believe that some further inven tory accum ulation is lik e ly by those firms w hich were unable to accumulate the stocks they desired prior to May 1. Furthermore, as it is u n lik e ly that steel users w ill begin to pare down their previously accum ulated stocks u n til the threat of a strike is eliminated, a continuation of a high level of steel production and in d u strial activity in general is anticipated. T his chain of events enhances the prospects of some further strengthening of industrial prices. The C o u n cil is uncertain as to the im plicatio ns of the extension on wage settlements in other ind ustries. To the extent, however, that the decline in steel production, and possibly in d u strial a c tiv ity in general, is pushed into the future, wage settlements probably w ill be more generous than they might otherwise have been. C. Are businesses becom ing uncom fortable with present inventory le v e ls relative to sales? There is no evidence to date that busine sses are becoming uncomfortable with present inventory levels relative to s a le s. Although inventory accumulation has been substantial in recent months, the continued increase in sales has held down inventorysales ratios. 2. Banking developments. A. After expanding vigorously in the first quarter, business loans appear to have moved erratically in A pril. Does the C ou ncil 15. feel that the peak may have been reached for this year, or are demands likely to persist or even intensify? To what extent do recent credit demands represent temporary borrow ing for inventory needs, as contrasted with longer-run needs to finance plant and equip ment expenditures? In view of the probability that business activity will continue to rise, although less rapidly, the members of the Council believe that the peak in business loans for the year has not yet been reached. With expanding business activity, inventories and receiv ables are likely to continue to rise, requiring further increases in bank credit. Although the evidence is not conclusive, most members of the Council believe that recent credit demands have been broadly based. This has included borrowing to carry accounts receivable, term loan financing of plant and equipment, an expansion of con sumer credit, and borrowing for inventory needs. B. According to the March quarterly interest rate survey, bank lending rates were gener ally stable. However, another survey indicated considerable firming in lending policies and practices among larger banks, particularly with respect to interest rates and compensating balances. Would the Council care to comment on the reasons for this seeming inconsistency? Most members of the Council report little evidence of any firming of lending policies with respect to interest rates, terms and compensating balance requirements. There has been no firming of rates for prime customers, and an increasing number of them are finding it necessary to borrow. The few increases in rate that have occurred have been highly selective. In several districts members report some firming of lending policies and practices. C. The dollar volume of negotiable certificates of deposit outstandingat banks outside New York City has recently shown little net change. To what extent does this reflect inability to sell certificates under Regula tion 0 ceilings, and to what extent unwill ingness to issue them? The change the dollar volume of negotiable certificates of deposit outstanding at banks outside New York City reflects largely the unwillingness on the part of many banks to issue them at the present market, in view of current lending rates to prime borrowers, rather than to the ceilings imposed by Regulation Q. An additional factor is probably at work, namely, the increased hesitancy on the part of many corporate treasurers to place deposits in smaller banks. Other limitations are the 4 per cent interest ceilings in a number of states and the regulation restricting the amount of S & L C/D holdings in a single bank. 16. D. Does the recent trend in city bank mortgage acquisitions reflect more a reduced a v a ila bility of mortgages or a changed attitude toward mortgage loans? The members of the C ouncil believe that the recent trend in city bank mortgage acqui sitions reflects largely less w illin g n e ss on the part of banks because mortgage rates and terms are not as attractive as previously. E. To what extent has reduced bank liq u id ity associated with the s u b s ta n tia l reduction in Government security portfolios become a factor that might in h ib it accom m odation of future loan demand? The members of the C ou ncil believe that the reduced bank liq u id ity associated with substantial reduction in government security portfolios is becom ing a more important factor inh ib iting the accommodation of borrowers. However, th is may be a somewhat less lim iting factor than in the past, inasm uch as many com m ercial bankers feel they can continue to obtain funds to accommodate borrowing custom ers by use of the C /D and/or short-term notes. There is no evidence currently of any general increase in rates or of the rationing of credit. 3. How does the C ouncil appraise the results of the voluntary foreign credit restraint ef fort to date? Does it appear that the priority credit needs - for fin ancing exports and less-developed countries - are being rea sonably met? Are there any s u b s ta n tia l changes in the g uid e line s, either for banks or for nonbank fin a n c ia l in s titu tio n s , that the C ouncil would recommend? Is there any evidence that the program is having a s e ri ously detrimental effect on the a b ility of U.S. banks to attract or retain foreign de posits, or to perform other banking services for foreign c lie n ts ? Are there any other views or suggestions the C ou ncil w ould lik e to offer regarding the future adm inistratio n of the program? The members of the C ou ncil believe that the voluntary credit restraint program has tended to reduce the outflow of funds. It is doubtful that the priority credit needs for financing exports and less-developed countries — are being fully met because of prior commitments and the 105 per cent ce ilin g . A ccordingly, it is suggested that consideration be given to the problem of the financing of exports. As loans guaranteed by the Ertport-Import Bank or F C IA are exempt from the 105 per cent lim itation, some loans which would have been made w ithout such guarantees are being routed through these agencies with delays and higher costs to the purchasers of American goods. 17. In general, U.S. banks are retaining foreign deposits, although this may become more difficult as the program becomes increasingly effective. The Council believes it is inappropriate to request the banks to administer the revision of Guideline 13, circulated on April 29. The Council would welcome the opportu nity to discuss this matter with the Board. The Council would be interested in any comments the Board would care to make as to the steps that are being undertaken to meet the balance of payments problem after the voluntary restraint program ends. 4. What are the Council’s views on monetary and credit policy under current circum stances? In general, the Council believes that monetary and credit policy has been ap propriate under current circumstances, although there was some discussion about the continued rapid expansion of bank credit and the growth in required reserves. 18. MINUTES OF JOINT C O N FEREN CE OF THE F E D E R A L ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE F E D E R A L R E SE RV E SYSTEM May 18, 1965 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 C. Canby Balderston; Governors J. L. Robertson, Chas. N. Shepardson, J. Dewey Daane and Sherman J. Maisel; also Mr. Merritt Sherman, Secretary, and Mr. Kenneth A. Kenyon, A ssistant Secretary, of the Board of Governors. Present: Members of the Federal Advisory C ouncil: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Edward B. Smith, James P. Hickok, Roger D. Knight, Jr., James W. Aston, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, A ssistant Secretary. 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 as printed on pages 15, 16, 17 and 18. A brief discussion followed. The President of the Council then read the second item. An extended discus sion followed. In response to a query on the probable financing of the projected increase in plant and equipment expenditures, President Moorhead stated that the Council believed that banks were advancing a disproportionate amount of the funds required to finance plant and equipment. Governor Robertson inquired whether the time was not coming when there would no longer be a prime rate. Although the members of the Council did not agree, Governor Robertson said that in his opinion the prime rate concept had become obsolete. In the discussion on bank liquidity, President Moorhead reported that the Coun cil believes there are some bankers who are relying too heavily on their municipal port folios for liquidity. Vice Chairman Balderston observed that since 1962 commercial banks had taken about 80 per cent of the net addition to municipal securities outstanding. He asked whether the Council foresaw a significant problem deserving of study by the Board relating to the possibility of commercial banks having to sell m unicipals in quantity at some later date. Several members of the Council acknowledged that if there should be a very sub stantial increase in loan demand, some banks could have a serious liquidity problem. The third item and the C ouncil’s conclusions were then read by President Moorhead. 19. During the ensuing discussion, Mr. Moore observed that while he was com pletely in favor of the voluntary credit restraint program, he cautioned that it was unlikely to be as effective in the future as it had been thus far. In response to comments from several members of the Council as to the difficul ties of operating under the program, Governor Robertson stated that there could be no effective program if it did not pinch and create problems. It was necessary, he added, to look at the over-all picture to determine if the effort was worthwhile. He also emphasized that the voluntary program was not designed as a permanent solution to the balance of payment problem. It was a matter of “ buying time” during which other means could be devised to bring about equilibrium in the balance of payments. In response to a query about the public sector, Chairman Martin said that he could state categorically that President Johnson was acutely concerned about the balance of payments problem. President Moorhead then read the fourth item on the Agenda and the conclu sions of the C ouncil. A brief discussion followed. The meeting adjourned at 12:30 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 20. NOTE: Th i s t r a n s c r i p t of the S e c r e t a r y 1s notes is not to be 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. The t r a n s c r i p t is f o r the sole use of the members of the F e d e r a l A d v i s o r y C o u n c i l 0 The c o n c i s e o fficial 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 and d i s t r i b u t e d later. H „V „ P . W 0 J„K „ The S e c r e t a r y ' s n o t e s of the m e e t i n g of the Federal A d v i s o r y Co u n c i l on M a y 17, 1 9 6 5 , at 9slj-0 A 0M 0 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 e C 0 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 w e r e present,. The C o u n c i l a p p r o v e d t h e S e c r e t a r y ’s n o t e s for the m e e ting of February 15-16, 1 9 6 5 a ITEM I ECONOMIC C O N D I T I O N S A N D P R O S P E C T S 0 A. H O W D O E S T H E C O U N C I L A P P R A I S E T H E G E N E R A L O U T L O O K F O R THE U, S 0 E C O N O M Y D U R I N G T H E R E M A I N D E R OF T H E CURRENT YEAR? B. W H A T A R E T H E I M P L I C A T I O N S OF T H E E X T E N S I O N OF THE STEEL LABOR C O N T R A C T F O R I N V E N T O R Y ACCUMULA TIO N, INDUSTRIAL A C T I V I T Y , P R I C E S , A N D W A G E S E T T L E M E N T S IN OTHER INDUSTRIES? C. A R E B U S I N E S S E S B E C O M I N G U N C O M F O R T A B L E W I T H P R E S E N T INVENTORY ____ ________________ LEVELS R E L A T I V E TO SALES? 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 0 A n e x t e n d e d d i s c u s s i o n followed in which all m e m b e r s of the C o u n c i l p a r t i c i p a t e d a n d d e s c r i b e d c ondi tions in t h e i r r e s p e c t i v e d i s t r i c t s 0 It w a s g e n e r a l l y a g r e e d that the outlook f o r t h e U e So e c o n o m y d u r i n g the r e m a i n d e r of the current year was favorable,, W h i l e s o m e a d j u s t m e n t s in s t e e l and auto p r o d u c tion and in t h e r a t e of i n v e n t o r y a c c u m u l a t i o n are antici p a t e d , these sre not l i k e l y to h a v e a s i g n i f i c a n t e f f e c t on b u s i n e s s a c t i v i t y b e fore the e n d of t h e y e a r * The m e m b e r s of the C o u n c i l are u n c e r t a i n as to the f u l l i m p lica tions of the e x t e n s i o n of the s t e e l l a b o r c o n t r a c t „ S e v e r a l of them '^'ieve that s o m e f u r t h e r i n v e n t o r y a c c u m u l a t i o n is l i k e l y by those -irms w h i c h w e r e u n a b l e to a c q u i r e the stocks t h e y d e s i r e d prior to *7 1* F u r t h e r m o r e , it is u n l i k e l y that s t e e l u s e r s w i l l b egin to P'-re down t h e i r p r e v i o u s l y a c c u m u l a t e d stocks u n t i l the threat of a 2 >rike is e l i m i n a t e d . As a c o n s e q u e n c e , the C o u n c i l anticipates a 'ntinuation of a h i g h l e v e l of s t e e l p r o d u c t i o n and industrial ^tivifcy. T h e s e d e v e l o p m e n t s e n h a n c e the p r o s p e c t s of some further 3l e n g t h e n i n g of i n d u s t r i a l p r i c e s „ The i m p l i c a t i o n s of the exten3’ on of the s t e e l l a b o r c o n t r a c t on w a g e s e t t l e m e n t s in other i n d u s tries is u n c e r t a i n . To the e x t e n t * h o w e v e r , that the decline in steel p r o d u c t i o n a n d i n d u s t r i a l a c t i v i t y is postponed, wage settle „.ents in the i m m e d i a t e f u t u r e p r o b a b l y w i l l be m o r e g enerous than might o t h e r w i s e h a v e b e e n 0 A l t h o u g h i n v e n t o r y a c c u m u l a t i o n h a s b e e n s u b s t a n t i a l in recent months, the i n c r e a s e in s a l e s h a s h e l d down i n v e n t o r y sales ratios and there is n o e v i d e n c e t h a t b u s i n e s s m e n are b e c o m i n g u n c o m f o r t a b l e with present i n v e n t o r y levels,, I T E M II A BANKING- D E V E L O P M E N T S A. A F T E R E X P A N D I N G V I G O R O U S L Y IN T H E F I R S T Q UARTER, BUSINESS L O ANS A P P E A R TO H A V E M O V E D E R R A T I C A L L Y IN APRIL. DOES THE C O U N C I L F E E L T H A T T H E P E A K M A Y H A V E B E E N R E A C H E D FOR THIS YEAR, OR A R E D E M A N D S L I K E L Y TO P E R S I S T OR E V E N INTENSIFY? TO W H A T E X T E N T D O R E C E N T C R E D I T D E M A N D S R E P R E S E N T T E M P O R A R Y B O R R O W I N G F O R I N V E N T O R Y N E E D S , AS C O N T R A S T E D W I T H L O N G E R RUN N E E D S TO F I N A N C E P L A N T A N D E Q U I P M E N T E X P E N D I T U R 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 II A 0 In the d i s c u s s i o n w h i c h followed, the m e m b e r s of the C o u n c i l i n d i c a t e d that they b e l i e v e that the peak f o r b u s i n e s s l o a n s t h i s y e a r h a s n o t y e t b e e n reached. Wit h the a n t i c i p a t e d e x p a n s i o n in b u s i n e s s a c t i v i t y , inv e n t o r i e s and r e ceivables are l i k e l y to c o n t i n u e to r i s e * r e q u i r i n g further increases in bank c r edit* A l t h o u g h t h e e v i d e n c e is not conclusive, m o s t m e mbers of the C o u n c i l b e l i e v e t h a t r e c e n t c r e d i t demands have been broadly based. T h ese h a v e i n c l u d e d b o r r o w i n g s to c a r r y accounts receivable, term-loan f i n a n c i n g o f p l a n t a n d e q u i p m e n t , e x p a n s i o n of c onsumer credit, a n d b o r r o w i n g f o r i n v e n t o r y n e e d s , I T E M II B Bo A C C O R D I N G T O T H E M A R CEL.Q U A R T E R L Y I N T E R E S T R A T E SURVEY, BANK L E N D I N G RATES.-WERE G E N E R A L L Y S T A B L E . HOWEVER, ANOTHER SURVEY I N D I C A T E D C O N S I D E R A B L E F I R M I N G IN L E N D I N G POLI C I E S AND P R A C T I C E S A M O N G L A R G E R B A NK S , P A R T I C U L A R L Y W I T H R E S P E C T TO INTEREST RATES A N D COMPENSATING BALANCES. W O U L D THE COUNCIL C A R E TO C O M M E N T O N THE.. R E A S O N S F O R THIS S E E M I N G INCONSISTENCY? P r e s i d e n t M o o r h e a d t h e n r e a d I t e m II Bo An e x t e n d e d d i s c u s s i o n f o l l o w e d . S e v e r a l m e m b e r s of the Council stated that t h e y a r e m a k i n g a c o n s c i e n c i o u s e f f o r t to f i r m their l e n d ing p ol i c i e s w i t h r e s p e c t to i n t e r e s t rates, terms and compen s a t i n g balances. The s u c c e s s of t h e s e e f f o r t s h a v e b e e n s omewhat obscured 9-S an i n c r e a s i n g n u m b e r of p r i m e c u s t o m e r s are fi n d i n g it n e c e s s a r y to borrow. T h e r e w a s u n a n i m o u s o p i n i o n that th e r e has bee n no f i r m ing of rates f o r p r i m e c u s t o m e r s . The m e m b e r s of the Council f r o m the larger m o n e y c e n t e r s r e p o r t e d l i t t l e e v i d e n c e of any firming of lending p o l i c i e s a n d p r a c t i c e s . I T E M II C C. THE D O L L A R V O L U M E OP 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 O U T S T A N D I N G A T B A N K S O U T S I D E N E W Y O R K C I T Y HAS R E C E N T L Y S H O W N L I T T L E N E T C H A N G E. TO W H A T E X T E N T D O E S THIS R E F L E C T I N A B I L I T Y TO S E L L C E R T I F I C A T E S U N D E R R E G U L A T I O N Q CEILINGS, AND TO W H A T E X T E N T U N W I L L I N G N E S S TO I S S U E T HEM? The P r e s i d e n t of the C o u n c i l then r e a d I t e m II C. In the d i s c u s s i o n w h i c h f o l l o w e d , it was c o n c l u d e d that the change in the d o l l a r v o l u m 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 Deposit o u tstanding at banks o u t s i d e N e w Y o r k C i t y l a r g e l y r e f l e c t s the u n w i l l ingness of many banks to i s s u e t h e m r a t h e r t h a n to the c e iling imposed by R e g u l a tion 0. It w a s a c k n o w l e d g e d t h a t an a d d i t i o n a l f a c t o r prob a b l y was the i n c r e a s e d h e s i t a n c y on t he p a r t of m a n y c o r p orate treasurers to place d e p o s i t s in s m a l l e r b a n k s * A 1|. per cent interest ceiling in a number of s t a t e s a n d the r e g u l a t i o n r e s t r i c t i n g the amount of C / D !s a S and L m a y h a v e in a s i n g l e b a n k a l s o a re l i m i t i n g factors. I T E M II D D. DOES T H E R E C E N T TREND. IN C I T Y B A N K M O R T G A G E A C Q U I S I T I O N S R E F L E C T M O R E A R E D U C E D A V A I L A B I L I T Y OF M O R T G A G E S OR A CHANGED ATTITUDE TOWARD MORTGAGE LOANS? 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 II D. The m e m b e r s of t h e C o u n c i l i n d i c a t e d in their discussion that the recent t r e n d in c i t y b a n k m o r t g a g e a c q u i s i t i o n s reflects a changed a t t i t u d e t o w a r d m o r t g a g e l o a n s as r a t e s and terms are not as attractive as p r e v i o u s l y . I T E M II E E. TO W H A T E X T E N T H A S R E D U C E D B A N K L I Q U I D I T Y A S S O C I A T E D WITH THE S U B S T A N T I A L R E D U C T I O N I N G O V E R N M E N T S E C U R I T Y PORTF O L I O S B E C O M E A F A C T O R T H A T M I G H T I N H I B I T A C C O M M O D A T I O N OF FUTURE LOAN D E M A N D ? __________________ ___________________________________ The P r e s i d e n t of t h e C o u n c i l r e a d I t e m II E. In the b r i e f d i s c u s s i o n w h i c h f o l l o w e d the m e m b e r s s t a t e d that the r e d u c t i o n in b a n k l i q u i d i t y as a r e s u l t of the s u b s t a n t i a l decline in g o v e r n m e n t s e c u r i t y h o l d i n g s is b e c o m i n g a more important factor inhibiting t h e a c c o m m o d a t i o n of b o r r o w e r s . S e v e r a l members indicated, however, t h a t t h e y b e l i e v e t h i s w o u l d b e a some w h a t less l i m i t i n g factor t h a n in t h e p a s t i n a s m u c h as m a n y c o m m e r c i a l bankers feel they can continue to o b t a i n f u n d s to a c c o m m o d a t e b o r r o w i n g customers by '^se of the c/D a n d / o r s h o r t - t e r m notes. I T E M III HOW DOES T H E C O U N C I L A P P R A I S E T H E R E S U L T S OP T H E V O L U N T A R Y F O R E I G N CREDIT R E S T R A I N T E F F O R T T O D A T E ? DOES IT A P P E A R THA T THE P R I O R I T Y CREDIT N E E D S — FOR F I N A N C I N G E X P O R T S A N D L E S S - D E V E L O P E D C O U N T R I E S — A R E B E I N G R E A S O N A B L Y M E T ? A R E T H E R E A N Y S U B S T A N T I A L CHANGES IN THE G U I D E L I N E S , E I T H E R F O R B A N K S OR F O R N O N - B A N K F I N A N C I A L INSTIT U T I O N S , T H A T T H E C O U N C I L W O U L D R E C O M M E N D ? IS T H E R E A N Y EVIDENCE T H A T T H E P R O G R A M IS H A V I N G A S E R I O U S L Y D E T R I M E N T A L E F F E C T ON THE A B I L I T Y OF U. S. B A N K S TO A T T R A C T OR R E T A I N F O R E I G N DEPOSITS, OR TO P E R F O R M O T H E R B A N K I N G S E R V I C E S FOR F O R E I G N CLIENTS? ARE T H E R E A N Y O T H E R V I E W S OR S U G G E S T I O N S THE C O U N C I L W O U L D L I K E TO OFFER R E G A R D I N G T H E F U T U R E A D M I N I S T R A T I O N OF T H E PROG R A M ? The P r e s i d e n t r e a d I t e m III. It was a c k n o w l e d g e d in the d i s c u s s i o n that the v o l u n t a r y cre d i t restraint p r o g r a m h a s t e n d e d to r e d u c e the o u t f l o w of funds. Doubts were e x p r e s s e d , h o w e v e r , th a t the p r i o r i t y c r e d i t needs — for f i n a n c i n g exports and l e s s d e v e l o p e d c o u n t r i e s -- are b e i n g f u l l y met b e c a u s e of prior c o m m i t m e n t s a n d t h e 1 0 $ p e r c e n t ceiling* Se v e r a l m e m b e r s said they b e l i e v e s o m e l o a n s w h i c h w o u l d h a v e been m a d e w i t h o u t E x p o r t Import B a n k or F C I A g u a r a n t e e s a r e b e i n g r o u t e d t h r o u g h these agencies as such loans are e x e m p t f r o m the 1 0 $ per cent limitation. A c c o r d i n g l y , the Council s u g g e s t e d t h a t c o n s i d e r a t i o n s h o u l d be given to the p r o b l e m of fi n a n c i n g e x p o r t s * W h i l e U 0 S* b a n k s a r e r e t a i n i n g f o r e i g n deposits, several me m b e r s stated th a t t h e y f e l t t h i s w o u l d be m o r e di f f i c u l t to do in the future as the p r o g r a m b e c o m e s i n c r e a s i n g l y e f f e c t i v e . There f o l l o w e d a s o m e what e x t e n d e d d i s c u s s i o n on t h e r e v i s i o n of G u i d e l i n e 13. Several members f e l t v e r y s t r o n g l y t h a t it is i n a p p r o p r i a t e to request the banks to a d m i n i s t e r t h e G u i d e l i n e as r e v i s e d A p r i l 29. It was agreed to invite c o m m e n t s f r o m the B o a r d a b o u t the steps being u n d e r t a k e n n o w to meet the b a l a n c e of p a y m e n t s d e f i c i t a f t e r the vol u n t a r y restraint program ends. ITEM IV WH A T A R E T H E C O U N C I L ' S V I E W 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 UNDER CU RRENT C I R C U M S T A N C E S ? _______________________________________________ P r e s i d e n t M o o r h e a d t h e n r e a d I t e m IV. The d i s c u s s i o n d i s c l o s e d that in g e n e r a l the C o u ncil believes that m o n e t a r y a n d c r e d i t p o l i c y has b e e n a p p r o p r i a t e a l t h o u g h the continued r a p i d e x p a n s i o n of b a n k c r e d i t and the g r o w t h in required reserves w e r e m e n t i o n e d s e v e r a l times. The m e e t i n g a d j o u r n e d at 1 2 : 1 0 P.M. TH E C O U N C I L C O N V E N E D IN T H E B O A R D R O O M OF T H E F E DERAL RESERVE B U I L D I N G , W A S H I N G T O N , D. C., AT 2:30 P.M., ON M A Y 17, 1965. 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 PRESENT, Me m b e r s of the B o a r d * s staff, G u y E. Noyes, A d v i s e r to the Board, R o b e r t C. H o l l a n d , A s s o c i a t e Dir e c t o r , 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 , a n d A, B. H e r s e y , Adviser, D i v i s i o n of International Finance, s p o k e on b u s i n e s s c o n d i t i o n s a n d the b a l a n c e of payments. T H E C O U N C I L R E C O N V E N E D A T 9:20 P.M. ON M A Y 17, 1965, IN R O O M 9 3 2 OF T H E M A Y F L O W E R H O T E L . A L L M E M B E R S OF THE COUNCIL WERE PRESENT. 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 Confidential Memorandum to b e sent to the B o a r d of G o v e r n o r s relative to the Agenda for the joint m e e t i n g of the C o u n c i l and the Board on May 18, 1965• 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 Federal Reserve Building at 11:14-5 P.M . on M a y 17, 1965. The m e e t i n g a d j o u r n e d at 1 0 :i|5 P.M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON MAY 18, 1965 1. Economic conditions and prospects. A. How does the Council appraise the general outlook for the U.S. economy during the remainder of the current year? The Council believes the general outlook for the U.S. economy during the remainder of the current year is favorable. While some adjustments in steel and auto production and in the rate of inventory accumulation are probable, these are not likely to have a significant effect on business activity before the end of the year. B. What are the implications of the extension of the steel labor contract for inventory accumulation, industrial activity, prices, and wage settlements in other industries? The full implications of the extension of the steel labor contract cannot be forecast. However, a number of members of the Council believe that some further inventory accumulation is likely by those firms which were unable to accumulate the stocks they desired prior to May 1. Furthermore, as it is unlikely that steel users will begin to pare down their previously accumu lated stocks until the threat of a strike is eliminated, a continuation of a high level of steel production and industrial -2- activity in general is anticipated. This chain of events enhances the prospects of some further strengthening of industrial prices. The Council is uncertain as to the implications of the extension on wage settlements in other industries. To the extent, however, that the decline in steel production, and possibly industrial activity in general, is pushed into the future, wage settlements probably will be more generous than they might otherwise have been. C. Are businesses becoming uncomfortable with present inventory levels relative to sales? There is no evidence to date that businesses are becoming uncomfortable with present inventory levels relative to sales. Although inventory accumulation has been substantial in recent months, the continued increase in sales has held down inventorysales ratios. 2. Banking developments. A. After expanding vigorously in the first quar ter, business loans appear to have moved erratically in April. Does the Council feel that the peak may have been reached for this year, or are demands likely to persist or even intensify? To what extent do recent credit demands represent temporary borrowing for inventory needs, as contrasted with longer-run needs to finance plant and equipment expenditures? In view of the probability that business activity will continue to rise, although less rapidly, the members of the Council -3- believe that the peak in business loans for the year has not yet been reached. With expanding business activity, inventories and receivables are likely to continue to rise, requiring further increases in bank credit. Although the evidence is not conclusive, most members of the Council believe that recent credit demands have been broadly based. This has included borrowing to carry accounts receivable, term loan financing of plant and equipment, an expansion of consumer credit, and borrowing for inventory needs. B. According to the March quarterly interest rate survey, bank lending rates were generally stable. However, another survey indicated considerable firming in lending policies and practices among larger banks, particularly with respect to interest rates and compensating balances. Would the Council care to comment on the reasons for this seeming inconsistency? Most members of the Council report little evidence of any firming of lending policies with respect to interest rates, terms and compensating balance requirements. There has been no firming of rates for prime customers, and an increasing number of them are finding it necessary to borrow. The few increases in rate that have occurred have been highly selective. In several districts members report some firming of lending policies and practices. C. The dollar volume of negotiable certificates of deposit outstanding at banks outside New York City has recently shown little net change. To what extent does this reflect -4- inability to sell certificates under Regu lation Q ceilings, and to what extent un willingness to issue them? The change the dollar volume of negotiable certificates of deposit outstanding at banks outside New York City reflects largely the unwillingness on the part of many banks to issue them at the present market, in view of current lending rates to prime borrowers, rather than to the ceilings imposed by Regu lation Q. An additional factor is probably at work, namely, the increased hesitancy on the part of many corporate treasurers to place deposits in smaller banks. Other limitations are the 4 per cent interest ceilings in a number of states and the regula tion restricting the amount of S & L C/D holdings in a single bank. D. Does the recent trend in city bank mortgage acquisitions reflect more a reduced availa bility of mortgages or a changed attitude toward mortgage loans? The members of the Council believe that the recent trend in city bank mortgage acquisitions reflects largely less willing ness on the part of banks because mortgage rates and terms are not as attractive as previously. E. To what extent has reduced bank liquidity associated with the substantial reduction in Government security portfolios become a factor that might inhibit accommodation of future loan demand? -5- The members of the Council believe that the reduced bank liquidity associated with the substantial reduction in government security portfolios is becoming a more important factor inhibiting the accommodation of borrowers. However, this may be a somewhat less limiting factor than in the past, inasmuch as many commercial bankers feel they can continue to obtain funds to accommodate borrowing customers by use of the C/D and/or short-term notes. There i s or o f the no e v i d e n c e ration in g 3. cu rren tly of increase in rates cred it, How does the Council appraise the results of the voluntary foreign credit restraint effort to date? Does it appear that the priority credit needs--for financing exports and lessdeveloped countries--are being reasonably met? Are there any substantial changes in the guidelines, either for banks or for nonbank financial institutions, that the Council would recommend? Is there any evidence that the program is having a seriously detrimental effect on the ability of U.S. banks to attract or retain foreign deposits, or to perform other banking services for foreign clients? Are there any other views or suggestions the Council would like to offer regarding the future administration of the program? The m e m b e r s cred it o f any g e n e r a l restrain t of the C ouncil b e lie v e program has tended to reduce that the the volu n tary ou tflo w of funds. It is doubtful that the priority credit needs--for financing exports and less-developed countries--are being fully met because of prior commitments and the 105 per cent ceiling. Accordingly, it is suggested that consideration be given to the problem of the financing of e x p o rts. -6- As loans guaranteed by the Export-Import Bank or FCIA are exempt from the 105 per cent limitation, some loans which would have been made without such guarantees are being routed through these agencies with delays and higher costs to the purchasers of American goods. In general, U.S. banks are retaining foreign deposits, although this may become more difficult as the program becomes increasingly effective. The Council believes it is inappropriate to request the banks to administer the revision of Guideline 13, circulated on April 29. The Council would welcome the opportunity to discuss this matter with the Board. The Council would be interested in any comments the Board would care to make as to the steps that are being undertaken to meet the balance of payments problem after the voluntary restraint program ends. 4. What are the Council's views on monetary and credit policy under current circumstances? In general, the Council believes that monetary and credit policy has been appropriate under current circumstances, although there was some discussion about the continued rapid expansion of bank credit and the growth in required reserves. ON M A Y 18, 1 9 6 5 , 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 COUNCIL H E L D A J O I N T M E E T I N G W I T H THE 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 S Y S T E M IN T H E F E D E R A L R E S E R V E 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 PRESENT, THE F O L L O W I N G M E M B E R S OF T H E B O A R D OF GOV E R N O R S W E R E PRESENT: CHAIRMAN MARTIN, V I C E CHAIRMAN BALDERSTON, GOVERNORS ROBERT SON, S H E P A R D S O N , D A A N E A N D M A I S E L . MR. SHERMAN, SECRETARY, 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 , OF T H E B O A R D OF G O V E RNORS ALSO W E R E PRESENT, The m i n u t e s of the joint 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 offic of the S e c r e t a r y of the B o a r d of G o v e r n o r s of the Federal 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 notes of the S e c r e tary of the 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 agreement, they wil 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 me 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 : 3 0 P,M, 1965. The n e x t m e e t i n g of the C o u n c i l w i l l be h e l d on September 20-21,
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