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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 15, 1965 The fourth statutory meeting of the Federal Advisory Council for 1965 was convened in the Board Room of The Madison, Washington, D.C. on November 15, 1965, 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. Sam M. Fleming Edward B. Smith James P. Hickok John A. Moorhead Roger D. Knight, Jr. James W. Aston Ransom M. Cook Herbert V. Prochnow William J. Korsvik On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on September 21-22, 1965, copies of which had been sent previously to the members of the Council, were approved. A complete list of the items on the Agenda 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 32, 33, and 34 of these minutes. The meeting adjourned at 12:30 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 30. MINUTES OF THE MEETING OF THE F E D E R A L ADVISORY COUNCIL November 15, 1965 At 2:30 P.M., the Federal Advisory C ouncil convened in the Board Room of the Fed eral Reserve B uilding, 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., Edward B. Smith, James P. Hickok, Roger D. Knight, Jr., Jam es W. Aston and Ransom M. Cook. Absent: Mr. Sam M. Fleming Members of the Board’s staff participated in an audio-visual presentation on domestic and international business conditions. H E R B E R T V. PROCHNOW Secretary W ILLIAM J. KORSVIK A ssistant Secretary November 15, 1965 At 8:10 P.M., the Federal Advisory C ouncil reconvened in the Board Room of The Madison, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, William H. Moore, William L. Day, L. A. Stoner, John F. W atlington, Jr., Edward B. Smith, James P. Hickok, Roger D. Knight, Jr., Jam es W. Aston, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, A ssistant Secretary. Absent: Mr. Sam M. Fleming. 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 32, 33 and 34, lis tin g the Agenda items with conclusions reached by the Council. The M e m o r a n d u m was delivered to the Federal Reserve B uilding at 10:15 P.M. on November 15, 1965. The meeting adjourned at 9:05 P.M. H E R B E R T V. PROCHNOW Secretary WILLIAM J. KORSVIK A ssistant Secretary 31. C O N F I D E N T I AL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FED ERA L ADVISORY COUNCIL R ELA TIV E TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 16, 1965 1. Economic conditions and prospects: A. How does the Council appraise prospects for the U.S. economy during the remainder of this year and the first part of 1966? The Council anticipates that the U.S. economy during the remainder of this year and the first part of 1966 w ill continue favorable. Businessmen, investors and consumers appear to be generally optimistic. Employment, incomes, production, sales and profits are at high levels. With the exeption of steel, plant capacity in major industries is at, or is approaching, optimum utilization levels. There is also increasing evidence of labor shortages, especially of skilled workers. B. What are the Council’s expectations with respect to business fixed capital outlays in 1966? Is it anticipated that over-capacity will result in any important industries? The members of the Council expect that business.fixed capital outlays in 1966 w ill be higher than they were this year, although the percentage increase may be less in 1966 than in 1965. The Council sees no evidence at present that capital outlays in 1966 w ill result in over-capacity in any important industries. C. Does the Council anticipate that price increases will continue to be selective in character or become more general? The Council believes that price increases will continue to be selective in char acter, although such increases are likely to become more widespread and include a greater number of products and services. D. How are business expectations being reflected in inventory policies? Despite the rather optimistic expectations that prevail in the business commu nity, additions to inventories do not appear excessive in relation to sales. However, the present high inventory totals assume a continuation of current sales trends. 32. E. What are the prospects for business profits in 1966? If changes from this year’s experience are foreseen, are they likely to be significant from the standpoint of need for outside capital and credit and from the standpoint of their effect on the course of business investments? The Council anticipates that the increase in business profits in 1966 will be less than in 1965. This change, together with the decline in corporate liquidity, indicates an increased need for outside capital and credit to finance the anticipated investment spending. It is doubtful that the expected change in profits w ill have any marked impact on the course of business investment. 2. Banking developments. A. What does the Council anticipate as to year-end business demands for bank credit in relation to usual seasonal needs? Most members of the Council expect that year-end business demands for bank credit will be somewhat above the usual seasonal pattern. B. To what extent have selected increases occurred in rates charged to various classes of business loan customers, and have there been other sig nificant changes in loan terms? How have customers reacted to such increases; for example, have plans to finance in the longer-term capital markets been accelerated? The Council believes that the increases in the interest rate on business loans to various borrowers have been highly selective and practically negligible in their effect. Although other changes in loan terms have not been significant, there is some limited indication of an increased tendency to finance in the longer-term capital markets. C. How have recent developments affected the ability of banks to attract funds in the CD mar ket or through the issuance of short-term promis sory notes? As a result of recent developments, banks have been obliged to pay higher rates and generally to shorten maturities on CDs and short-term promissory notes in an attempt to attract the funds necessary to meet their borrowing customers’ requirements. Banks are now finding it difficult to replace maturing CDs or to attract new funds at ceiling rates established by Regulation Q. D. How does the Council evaluate the recent slow down in bank acquisition of m unicipals? The demand for funds by business borrowers has been so strong that banks have been obliged to reduce their acquisition of municipal obligations. 33. 3. Balance of payments. A. How does the Council appraise the strength of foreign demand for U.S. bank funds? In the Council’s judgment, foreign demand for U.S. bank funds is strong and exceeds the available supply. As the voluntary restraint program continues, the pent-up demand probably will increase. B. Have the Council's views on the effectiveness of the voluntary foreign credit restraint program changed materially since the Council met with the Board in September? The Council believes that the voluntary foreign credit restraint program conti nues to be a helpful temporary measure and that there has been no lessening in its effec tiveness since the Council met with the Board in September. C. Are there any changes that the Council would recommend in the details of the voluntary re straint program for banks in 1966? If it becomes imperative that the voluntary restraint program for banks must be continued in 1966, the Council would urge that the base, or the allowable percentage, or both, be raised in the long-term interests of the economy. 4. What are the Council’s views on monetary and credit policy under current circumstances? The productive resources of the nation — plant, equipment, labor force, and capital - are approaching maximum utilization. In these circumstances, an expansion of bank credit at the rate that has prevailed in the recent past will tend to bring about in creasingly upward pressure on prices without a commensurate increase in production. The Council therefore wishes to reaffirm the following statement from its September Memorandum: “ The Council is concerned with the increasing evidence of the development of inflationary pressures, the continued strong demand for bank loans with the reliance on CDs to meet this demand, and the underlying difficulties with the balance of payments. Consequently, we believe the Board should be prepared to move in the direction of further restraint including a tightening of reserves and an increase in the discount rate.” 34. MINUTES OF JOINT CONFERENCE OF THE FE D E R A L ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE F E D E R A L RESERVE SYSTEM November 16, 1965 At 10:30 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, 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 George W. Mitchell, J. Dewey Daane and Sherman J. Maisel; also Mr. Merritt Sherman, Secretary, and Mr. Kenneth A. Kenyon, Assistant Secretary, of the Board of Governors. Present: Members of the Federal Advisory Council: 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, Assistant Secretary. President Moorhead read the first item on the Agenda and the conclusions of the Council as given 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 32, 33 and 34. A brief Discussion followed. President Moorhead then read the second item of the Agenda and the Council’s conclusions. Governor Mitchell inquired whether there appeared to be a significant amount of anticipatory borrowing from banks. There was no uniformity in the replies from the members of the Council, the responses differing from district to district. The President of the Council then read the third item and the conclusions of the Council. There followed some discussion on the possible impact of the restraint program on the volume of U.S. exports. Chairman Martin reported that the Federal Reserve had been diligent in fol lowing up cases where it was alleged that the voluntary program may have had a detrimen tal effect. To date there was no evidence indicating that exports had been adversely affected. The fourth item and the conclusions of the Council were then read by President Moorhead. An extended discussion followed in which there was wide participation by the members of the Board and the Council. The meeting adjourned at 12:25 P.M. HERBERT V. PROCHNOW Secretary 35. WILLIAM J. KORSVIK Assistant Secretary 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 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 for the sole use of the members of the Federal Advisory Council, The concise official minutes for the 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.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 C o u n c i l on N o v e m b e r 15, 1965, at 9:30 A«Mo in the B o a r d R o o m of The M a d i s o n , Wash i n g t o n , D. C » All m e m b e r s of the F e d e r a l A d v i s o r y Council wer e present * 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 notes for the m e e t i n g of September 21-22, 1 9 6 5 . It w a s s u gge s t e d , however, that the printed minutes for the y e a r i n c l u d e a n o t a t i o n that the Council met i n f o r m a l l y in C h i c a g o o n O c t o b e r l\., 19 6 5 d u r i n g the ABA Convention* The d i s c u s s i o n at t h e m e e t i n g w a s l i m i t e d to a r e v i e w of m o n e t a r y policy d e v e l o p m e n t s . A d i n n e r m e e t i n g at t h e W h i t e H o u s e on Oc t o b e r 5* 1965, at which a n u m b e r of m e m b e r s of the C o u n c i l w e r e present, was reviewed* Mr, Martin b r i e f l y o u t l i n e d the s t a t e m e n t he m a d e at the d i n n e r „ Messrs, W a t l i n g t o n , D a y a n d S t oner, w h o also w e r e present at the dinner, c o m m e n t e d b r i e f l y . 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 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 P R O S P E C T S FOR THE U, S. ECONOMY D U R I N G T H E R E M A I N D E R OF T H I S Y E A R A N D THE F I R S T PART OF 1966? B. W H A T A R E T H E C O U N C I L TS E X P E C T A T I O N S W I T H R E S P E C T TO BUSINESS F I X E D C A P I T A L O U T L A Y S IN 1966? IS IT A N T I C I P A T E D THAT OVE R C A P A C I T Y W I L L R E S U L T IN A N Y I M P O R T A N T INDU S T R I E S ? C. D O E S T H E C O U N C I L A N T I C I P A T E T H A T P R I C E INCREASES W I L L CONTINUE TO B E S E L E C T I V E IN C H A R A C T E R OR B E C O M E M O R E GENERAL? H O W A R E B U S I N E S S E X P E C T A T I O N S B E I N G R E F L E C T E D IN I N V E N T O R Y POLICIES? E. W H A T A R E T H E P R O S P E C T S F O R B U S I N E S S P R O F I T S IN 1966? IF C H A N G E S F R O M T H I S Y E A R 1S E X P E R I E N C E A R E FORESEEN, A R E THEY L I K E L Y T O B E S I G N I F I C A N T F R O M T H E S T A N D P O I N T OF N E E D FOR OUT S I D E C A P I T A L A N D C R E D I T A N D F R O M T H E S T A N D P O I N T OF THEIR E F F E C T ON T H E C O U R S E OF B U S I N E S S I N V E S T M E N T ? ___________________ _ 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» An e x t e n d e d d i s c u s s i o n followed n 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 . There was unanimous ag**9ement t h a t the U , S . e c o n o m y d u r i n g the r e m a i n d e r of this year and t]10 first p a r t of 1 9 6 6 w i l l c o n t i n u e f a v o r a b l y . Businessmen, investors and c o n s u m e r s a r e g e n e r a l l y o p t i m i s t i c , w i t h e m p l o y m e n t , incomes, p r o duction, sa l e s , a n d p r o f i t s at h i g h l e v e l s v A n u m b e r of m e m b e r s c i t e d the fact t h a t o u t p u t in m a n y i n d u s t r i e s is a p p r o a c h i n g o p t i m u m u t i l i z a tion leve l s * T h e r e w e r e s e v e r a l r e f e r e n c e s to t h e i n c r e a s i n g l y t i g h t -abor s i t u a t i o n a n d to t h e s h o r t a g e s of s k i l l e d w o r k e r s * The m e m b e r s of t h e C o u n c i l e x p e c t th a t the f i x e d c a p i t a l o u t l a y s in 1966 w i l l r i s e f u r t h e r , t h o u g h the i n c r e a s e m a y be less tha n this year. T h e r e is n o e v i d e n c e at p r e s e n t t h a t c a p i t a l o u t l a y s in 1966 will r e s u l t in o v e r - c a p a c i t y in a n y i m p o r t a n t i n d u s t r y . W h i l e the members of t h e C o u n c i l e x p e c t p r i c e i n c r e a s e s to c o n t i n u e to be selective in c h a r a c t e r , t h e y a n t i c i p a t e t h a t s u c h i n c r e a s e s w i l l b e come mo r e w i d e s p r e a d a n d i n c l u d e a g r e a t e r n u m b e r of p r o d u c t s a n d s e r vices. I n v e n t o r i e s , it w a s r e p o r t e d , do n o t a p p e a r e x c e s s i v e in r e l a tion to s a l e s * S e v e r a l m e m b e r s c a u t i o n e d , h o w e v e r , that this c o u l d change q u i c k l y if t h e r i s i n g s a l e s t r e n d s h o u l d slow* The C o u n c i l expects b u s i n e s s p r o f i t s in 1 9 6 6 to i n c r e a s e less t h a n in 1965This development, t o g e t h e r w i t h the d e c l i n e in c o r p o r a t e l i q u i d i t y , i n d i cates an i n c r e a s e d n e e d f o r o u t s i d e c a p i t a l a n d c r e d i t to f i n a n c e i n vestment s p e n d i n g o T h e a n t i c i p a t e d c h a n g e in p r o f i t s „ h o w e v e r , is not likely to h a v e a m a r k e d i m p a c t on b u s i n e s s i n v e s t m e n t * I T E M II BANKING D E V E L O P M E N T S A. WHAT DOES T HE C O U N C I L A N T I C I P A T E AS TO Y E AR-END BUSINESS DEMANDS FOR B A N K C R E D I T I N R E L A T I O N TO U S U A L S E A S O N A L NEEDS? B. TO W H A T E X T E N T H A V E S E L E C T E D I N C R E A S E S O C C U R R E D IN TO V A R I O U S C L A S S E S O F B U S I N E S S L O A N C U S T O M E R S , A N D B E E N O T H E R S I G N I F I C A N T C H A N G E S IN L O A N TER M S ? HOW R E A C T E D TQ._SUCH I N C R E A S E S : F O R E X A M P L E , H A V E PLANS THE L O N G E R - T E R M C A P I T A L M A R K E T S B E E N A C C E L E R A T E D ? C. D. R A TES C H A R G E D H A V E TH E R E H A V E CUS T O M E R S TO F I N A N C E IN H O W H A V E R E C E N T D E V E L O P M E N T S A F F E C T E D T H E A B I L I T Y OF BANKS TO A T T R A C T F U N D S I N T H E C / D M A R K E T OR T H R O U G H THE I SSUANCE OF SHORT-TERM PROMISSORY NOTES? H O W D O E S T H E C O U N C I L E V A L U A T E T H E R E C E N T S L O W D O W N IN BANK A C Q U I S I T I O N OF M U N I C I P A L 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 II and i n v i t e d comments from the ^ouncil m e m b e r s . Most m e m b e r s e x p e c t t h a t y e a r - e n d d e m a n d s for b a n k credit will be somewhat a b o v e t h e u s u a l s e a s o n a l p a t t e r n . T h e r e was some comment; however, w h i c h i n d i c a t e d t h a t l o a n d e m a n d m a y not be as strong in some districts a n d t h a t b u s i n e s s l o a n s m a y h a v e a l r e a d y re a c h e d their peak the y e a r , T h e r e f o l l o w e d an e x t e n d e d d i s c u s s i o n on the recent attempt to i n c r e a s e i n t e r e s t r a t e s on b u s i n e s s loans on a selective iv8-2is. it w a s c o n c l u d e d th a t t h e s e w e r e p r a c t i c a l l y n e g l i g i b l e in their effect. O t h e r c h a n g e s in l o a n terms h a v e not b e e n significant, although some m e m b e r s f e l t that there we r e l i m i t e d indications of an I n c r e a s e d t e n d e n c y to f i n a n c e in the l o n g e r - t e r m capital markets, A discussion of the e x p e r i e n c e of b a n k s w i t h c / D !s dis c l o s e d that higher rates h a v e b e e n o f f e r e d and m a t u r i t i e s g e n e r a l l y have b e e n shortened. It w a s r e p o r t e d that b anks are n o w f i n d i n g it difficult to replace m a t u r i n g c / D Ts or to at t r a c t n e w funds at the ceiling rates established b y R e g u l a t i o n P. B e c a u s e of the strong demand for funds by business b o r r o w e r s , b a n k s h a v e b e e n o b l i g e d to reduce their a c q u i s i tion of m u n i c i p a l o b l i g a t i o n s . I T E M III BALANCE OP P A Y M E N T S 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 S T R E N G T H OP FOREIGN DEMAND FOR U. S. B A N K F U N D S ? B. H A V E T H E C O U N C I L fS V I E W S ON T H E E F F E C T I V E N E S S OP THE 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 C H A N G E D M A T E R I A L L Y S I N C E THE C O U N C I L M E T W I T H T H E B O A R D IN S E P T E M B E R ? C. A R E T H E R E A N Y C H A N G E S T H A T THE C O U N C I L W O U L D R E C O MMEND IN THE D E T A I L S OP T H E V O L U N T A R Y R E S T R A I N T P R O G R A M FOR BANKS IN 1966? 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 I I 0 In the d i s cussion w h i c h followed, t h e r e w a s g e n e r a l a g r e e m e n t that the foreign demand for U. S. b a n k f u n d s is s t r o n g a n d e x c e e d s the ava i l a b l e supply. Several members sa i d t h e y e x p e c t e d the d e m a n d to b e c o m e more intense as the voluntary r e s t r a i n t p r o g r a m c o n t i n u e s in force. The members also believe that t h e r e h a s b e e n n o l e s s e n i n g on the effectiveness of the program in r e c e n t m o n t h s * It w a s a g r e e d to suggest that if the p r o gram m u s t be c o n t i n u e d in 1 9 66, t h a t the b a s e or the allowable p e r centage be r a i s e d in the l o n g - t e r m i n t e r e s t of the economy. I T E M IV WHAT 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 CREDIT POLICY UNDER _______ _ _ CURRENT C I R C U M S T A N C E S ? The P r e s i d e n t t h e n r e a d I t e m IV and an e x t e n d e d discussion followed. T h e r e w a s g e n e r a l a g r e e m e n t that the produ c t i v e resources the n a t i o n are a p p r o a c h i n g m a x i m u m u t i l i z a t i o n . In these circum stances, it see m s p r u d e n t to s l o w the ra t e of b a n k credit expansion* Failure to do so p r o b a b l y w i l l r e s u l t in i n c r e a s e d upwa r d pressure on prices. The C o u n c i l a c c o r d i n g l y c o n c l u d e d that it w o u l d reaffirm the f o l l o w i n g s t a t e m e n t w h i c h it m a d e in r esponse to a similar item the S e p t e m b e r m e e t i n g : uT h e C o u n c i l is c o n c e r n e d w i t h the increasing evidence of the d e v e l o p m e n t of i n f l a t i o n a r y pressures, the continued strong d e m a n d for b a n k loa ns w i t h the reliance on c/D*s to meet this demand, and the u n d e r l y i n g difficulties w i t h the b a l a n c e of p a y m e n t s . C o n s e q uently, we b e l ieve the Board should be p r e p a r e d to m o v e in the d i r e c t i o n of further r e s t raint i n c l u d i n g a t i g h t e n i n g of r eserves and an increase in the d i s c o u n t r a t e . " The m e e t i n g a d j o u r n e d at 1 2 : 3 0 P.M* T H E C O U N C I L C O N V E N E D IN THE B O A R D R O O M OP THE FEDERAL 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 Q , AT 2:30 P.M., ON N O V E M B E R 15, 196 5 * A LL M E M B E R S OF THE COUNCIL WERE P R E S E N T E X C E P T MR, F L E M I N G W H O HAD TO LE A V E IN ORDER TO A T T E N D A S P E C I A L S E A R S R O E B U C K B O A R D OF DIRECTORS M E E T I N G IN A T L A N T A . ^ e m b e r s of the B o a r d 1s staff p a r t i c i p a t e d in an audio-visual pres e n t a t i o n on d o m e s t i c a n d i n t e r n a t i o n a l busi n e s s c o n d i t i o n s „ An outline of the 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 by the staff for di s t r ibution to the m e m b e r s of the Council. T H E C O U N C I L R E C O N V E N E D AT 8:10 P.M. ON N O V E M B E R 15, 1965, IN T H E B O A R D R O O M OF T H E MADI S O N . A L L MEMBERS 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. FLEMING. 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 Me m o r a n d u m to b e se n t to the B o a r d of G o v ernors relative to the Agenda for the joint m e e t i n g of the Co u n c i l and the B oard on November 16, 1965» The M e m o r a n d u m was d e l i v e r e d to the Federal Reserve B u i l d i n g at 1 0 : 1 5 P*M. on N o v e m b e r 15, 1965* The m e e t i n g a d j o u r n e d at 9 : 0 5 P#M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 16, 1965 1. Economic conditions and prospects: A. How does the Council appraise prospects for the U.S. economy during the remainder of this year and the first part of 1966? The Council anticipates that the U.S. economy during the remainder of this year and the first part of 1966 will continue favorable. Businessmen, investors and consumers appear to be generally optimistic. Employment, incomes, production, sales and profits are at high levels. With the exception of steel, plant capacity in most major industries is at, or is approaching, optimum utilization levels. There is also increasing evidence of labor shortages, especially of skilled workers. B. What are the Council's expectations with re spect to business fixed capital outlays in 1966? Is it anticipated that over-capacity will re sult in any important industries? The members of the Council expect that business fixed capital outlays in 1966 will be higher than they were this year, although the percentage increase may be less in 1966 than in 1965. The Council sees no evidence at present that capital outlays in 1966 will result in over-capacity in any important industries. C. Does the Council anticipate that price in creases will continue to be selective in character or become more general? The Council believes that price increases will continue to be selective in character, although such increases are likely to become more widespread and include a greater number of products and services. D. How are business expectations being reflected in inventory policies? Despite the rather optimistic expectations that prevail in the business community, additions to inventories do not appear excessive in relation to sales. However, the present high inventory totals assume a continuation of current sales trends. -2- E. What are the prospects for business profits in 1966? If changes from thib year's exper ience are foreseen, are they likely to be significant from the standpoint of need for outside capital and credit and from the standpoint of their effect on the course of business investment? The Council anticipates that the increase in business profits in 1966 will be less than in 1965. This change, together with the decline in corporate liquidity, indicates an increased need for outside capital and credit to finance the anticipated investment spending. It is doubtful that the expected change in profits will have any marked impact on the course of business investment. 2. Banking developments. A. What does the Council anticipate as to year-end business demands for bank credit in relation to usual seasonal needs? Most members of the Council expect that year-end business demands for bank credit will be somewhat above the usual seasonal pattern. B. To what extent have selected increases occurred in rates charged to various classes of business loan customers5 and have there been other significant changes in loan terms? How have customers reacted to such increases; for example, have plans to finance in the longer-term capital markets been accelerated? The Council believes that the increases in the interest rate on business loans to various borrowers have been highly selective and practically negligible in their effect. Although other changes in loan terms have not been significant, there is some limited indica tion of an increased tendency to finance in the longer-term capital markets. C. How have recent developments affected the ability of banks to attract funds in the CD market or through the issuance of short term promissory notes? As a result of recent developments, banks have been obliged to pay higher rates and generally to shorten maturities on CDs and short-term promissory notes in an attempt to attract the funds necessary to meet their borrowing customers' requirements. Banks are now finding it difficult to replace maturing CDs or to attract new funds at ceiling rates established by Regulation Q. -3- D. How does the Council evaluate the recent slow down in bank acquisition of municipals? The demand for funds by business borrowers has been so strong that banks have been obliged to reduce their acquisition of municipal obligations. 3. Balance of payments. A. How does the Council appraise the strength of foreign demand for U.S. bank funds? In the Council's judgment, foreign demand for U.S. bank funds is strong and exceeds the available supply,, As the voluntary restraint program continues, the pent-up demand probably will increase. B. Have the Council's views on the effectiveness of the voluntary foreign credit restraint program changed materially since the Council met with the Board in September? The Council believes that the voluntary foreign credit restraint program continues to be a helpful temporary measure and that there has been no lessening in its effectiveness since the Council met with the Eoard in September. C. Are there any changes that the Council would recommend in the details of the voluntary restraint program for banks in 1966? If it becomes imperative that the voluntary restraint program for banks banks must be continued in 1966, the Council would urge that the base, or the allowable percentage, or both, be raised in the long term interests of the economy. 4. What are the Council's views on monetary and credit policy under current circumstances? The productive resources of the nation--plant, equipment, labor force, and capital--are approaching maximum utilization. In these circumstances, an expansion of bank credit at the rate that has prevailed in the recent past will tend to bring about increasingly upward pressure on prices without a commensurate increase in production. The Council therefore wishes to reaffirm the following statement from its September Memorandum: -4- "The Council is concerned with the increasing evidence of the development of inflationary pressures, the continued strong demand for bank loans with the reliance on C.D.'s to meet this demand, and the underlying difficulties with the balance of payments. Consequently, we believe the Board should be prepared to move in the direction of further restraint including a tightening of reserves and an increase in the discount rate." 60 ON N O V E M B E R 16, 1965, AT 1 0:30 A . M o , THE 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 JOI N T M E E T I N G W I T H T H E BOARD OF GOVERNORS 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 RESERVE 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 COUNCIL WERE PRESENT. T H E F O L L O W I N G M E M B E R S OF THE B O A R D OF G O V ERNORS W E R E PRE S E N T : C H A I R M A N M A R T I N , V I C E C H A I R M A N BALDERSTON, G O V E R N O R S M I T C H E L L , D A A N E A N D MAISEL. M R ? SHERMAN, 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 SECRETARY, OF THE B O A R D OF G O V E R N O R S A L S O W E R E P R E S E N T ? The m i n u t e s of the joint 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 the B o a r d of Governors of the Federal Reserve S y s t e m , 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 t a r y of the C o u n c i l * A s s u m i n g they are in substantial agreement, t h e y w i l l be r e p r o d u c e d and d i s t r i b u t e d to the members 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 5 P VM* 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 February II4.-I5 * 1966. It also w a s a g r e e d t h a t the f o l l o w i n g m e e t i n g wil l be held on June 20-21, 1 9 6 6 ,
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