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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 17, 1962 The third statutory meeting of the Federal Advisory Council for 1962 was convened in Room 928 of the Mayflower Hotel, Washington, D. C. on September 17, 1962, 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 Ostrom Enders George A. Murphy Howard C. Petersen Reuben B. Hays Robert B. Hobbs J. Finley McRae Kenneth V. Zwiener Sidney Maestre John A. Moorhead Maurice L. Breidenthal I. F. Betts Charles de Bretteville, Alternate Herbert V. Prochnow William J. Korsvik Absent: Elliott McAllister District No. 12 On motion duly made, and seconded, the mimeographed notes of the Council held on April 30-May 1, 1962, copies of which had been sent previously to the members of the Council, 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 Confidential Memorandum to the Board of Governors from (he Federal Advisory Council, which follows on pages 35, 36, and 37 of these minutes. The meeting adjourned at 12:30 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 32 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 17, 1962 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Mr. George A. Murphy, President; Messrs. Ostrom Enders, Reuben B. Hays, Robert B. Hobbs, J. Finley McRae, Kenneth V. Zwiener, Sidney Maestre, John A. Moorhead, Maurice L. Breidenthal, I. F. Betts, and Charles de Bretteville, Alternate for Mr. Elliott McAllister. Absent: Messrs. Howard C. Petersen and Elliott McAllister. Mr. Guy E. Noyes, Director, Division of Research and Statistics, assisted by mem bers of the Board’s staff, participated in an audio-visual presentation on the current economic situation. Copies of the statement together with reproductions of the charts were sent to members of the Council. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 33 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 17, 1962 At 8:00 P.M., the Federal Advisory Council reconvened in Room 928 of the May flower Hotel, Washington, D. C. Present: Mr. George A. Murphy, President; Messrs. Ostrom Enders, Reuben B. Hays, Robert B. Hobbs, J. Finley McRae, Kenneth V. Zwiener, Sidney Maestre, John A. Moorhead, Maurice L. Breidenthal, I. F. Betts, Charles de Bretteville. Alternate for Mr. Elliott McAllister; Messrs. Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Messrs. Howard C. Petersen and Elliott McAllister. 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 Confidential Memorandum to the Board of Governors from the Federal Advisory Council, which follows on pages 35, 36, and 37, listing the agenda items with the conclusions reached by the Council. The Memorandum was delivered to the Federal Reserve Building at 10:30 P.M. on September 17, 1962. The meeting adjourned at 9:15 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 34 CO NFIDENTIAL M EM ORAN DU M TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 18, 1962 1. What are the observations of the Council regarding (a) the performance of the economy thus far this year, and (b) the business outlook for the remainder of this year and early 1963? In reviewing recent developments, what factors are considered of most significance by the members of the Council? The performance of the economy this year has been somewhat below expectations. Despite this development, and the fact that our labor force and productive facilities have not been fully utilized, the members of the Council believe that the year as a whole as measured by most of the indicators of aggregate economic activity, including income, employment, and production will prove to be good. They expect that business for the remainder of this year and early 1963 will continue to follow an irregular though slightly rising trend. Among significant recent developments, the members of the Council have been particularly impressed by the demonstrated resiliency of the economy following the sharp decline in stock prices around mid-year. This resiliency has been most evident in the persistence of consumer buying, the high volume of construction activity, and the surveys of businessmen and consumers which give no indication of a cutback in buying or invest ment plans. 2. How does the Council appraise the current and prospective strength of the automobile and housing markets? Does the high proportion of multi-family housing starts appear to be solidly based or mainly speculative? Although automobile sales in the next year may not equal the volume of 1962, the members of the Council expect that the demand will continue relatively good with firm used car prices, one of the essentials of a strong new car market. The large replacement market is also one of the underlying factors of strength supporting automobile sales. The extent to which multi-family housing starts appear to be solidly based or mainly speculative varies not only from district to district but also within districts. Several members reported overbuilding, but the types of construction in which there was over building varied. Furthermore, sales of older houses and rentals of older apartments are slow in some areas. The high proportion of multi-family housing starts appears to be strongly influenced by the ready availability of funds for the full financing of such projects. In some instances, the absence of the need for equity financing is encouraging speculative construction. 35 3. What is the Council’s judgment regarding the probable effect on business capital decisions of the recent Bulletin F changes? What effects woiikl be envisaged from enactment of the proposed investment tax credit provision? The Council is doubtful that the over-all volume of business investment will In significantly increased as the result of the recent changes in Bulletin !• or by the enact ment of the proposed investment tax credit. Insofar as the changes in Bulletin 1* prove \ <> be beneficial, they are likely to be more helpful to small business concerns than to lar^e enterprises. The possibility of earning an adequate profit is the motivating and determining factor in reaching investment decisions. 4. What are the prospects for loan demand at banks during the next several months, including the demand for real estate and consumer loans? Most members of the Council believe that loan demand at banks during the next several months will rise seasonally, while some expect the expansion will be slightly stronger. Modest increases in consumer and real estate loans are anticipated. 5. What are the Council’s views regarding the degree of liquidity of the banking system? The members of the Council are in general agreement that the liquidity of the banking system has declined this year. Although the loan deposit ratio is below recent high levels, there has been a significant increase in the holdings of municipal securities and mortgages. Moreover, lengthening of maturities has been another factor lessening liquidity of the banking system. 6. What are the Council’s observations concerning the recent and prospective trend of savings and other time deposits, and the effects from the standpoint of bank portfolio management? Members of the Council report that the volume of savings and other time deposits continues to increase. The rate of growth, however, while more rapid than last year, is less than it was in the early months of 1962. The Council believes that the volume of savings and other time deposits will grow but at a decreasing rate. The squeeze on bank profit margins has resulted in an increase in the holdings of municipal securities and in the expansion of real estate and consumer loans. It also has resulted in a more critical analysis of operations and costs, including interest expense. 36 7. What are the views of the Council with respect to the impact of current monetary and credit policy? Would the Council be inclined to place relatively more weight on domestic considerations or on international considerations? Current monetary and credit policy has had a generally favorable impact on the economy. Despite the progress that has been made in our international payments position, the improvement has not been sufficient in the opinion of the Council to warrant placing more weight on domestic considerations in the determination of monetary policy. 37 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM September 18, 1962 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 A. L. Mills, Jr., Chas. N. Shepardson, G. H. King, Jr., and George W. Mitchell; 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. George A. Murphy, President; Messrs. Ostrom Enders, Howard C. Petersen, Reuben B. Hays, Robert B. Hobbs, J. Finley McRae, Kenneth V. Zwiener, Sidney Maestre, John A. Moorhead, Maurice L. Breidenthal, I. F. Betts, Charles de Bretteville, Alternate for Mr. Elliott McAllister; and Messrs. Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. Elliott McAllister. President Murphy read the first item on the Agenda, and the conclusions of the Council as given in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council as printed on pages 35, 36, and 37 of these minutes. He added that a spirit of optimism prevailed among the members of the Council as they were impressed by the fact that the economy had weathered a number of rough spots within the past few months. The members of the Council then commented on the business situation and outlook in their respective districts. The President read the second item, and the conclusions of the Council. In response to a question from Chairman Martin, the members of the Council stated that an ample supply of mortgage money was readily available. President Murphy read the third item and the conclusions of the Council. A brief discussion followed. 38 7. What are the views of the Council with respect to the impact of current monetary and credit policy? Would the Council be inclined to place relatively more weight on domestic considerations or on international considerations? Current monetary and credit policy has had a generally favorable impact on the economy. Despite the progress that has been made in our international payments position, the improvement has not been sufficient in the opinion of the Council to warrant placing more weight on domestic considerations in the determination of monetary policy. 37 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM September 18, 1962 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 A. L. Mills, Jr., Chas. N. Shepardson, G. H. King, Jr., and George W. Mitchell; 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. George A. Murphy, President; Messrs. Ostrom Enders, Howard C. Petersen, Reuben B. Hays, Robert B. Hobbs, J. Finley McRae, Kenneth V. Zwiener, Sidney Maestre, John A. Moorhead, Maurice L. Breidenthal, I. F. Betts, Charles de Bretteville, Alternate for Mr. Elliott McAllister; and Messrs. Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. Elliott McAllister. President Murphy read the first item on the Agenda, and the conclusions of the Council as given in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council as printed on pages 35, 36, and 37 of these minutes. He added that a spirit of optimism prevailed among the members of the Council as they were impressed by the fact that the economy had weathered a number of rough spots within the past few months. The members of the Council then commented on the business situation and outlook in their respective districts. The President read the second item, and the conclusions of the Council. In response to a question from Chairman Martin, the members of the Council stated that an ample supply of mortgage money was readily available. President Murphy read the third item and the conclusions of the Council. A brief discussion followed. 38 The fourth item on the Agenda and the conclusions of the Council were then read by the President of the Council. President Murphy then read the fifth item on the Agenda and the conclusions of the Council. He added that although the statistics suggested that the banking system was quite liquid, this could fade away rather quickly. Governor Balderston referred to the large number of securities issued by smaller political units and raised the question of their marketability in times of crisis. The mem bers of the Council agreed that banks must use discretion in acquiring issues of smaller communities and political subdivisions. The sixth item and the Council’s conclusions were then read by President Murphy. The seventh item was then read by President Murphy together with the conclusions of the Council. Chairman Martin, referring to the lack of expansion of the money supply in recent months, stated that this led to questions concerning the liquidity of the economy and the impact on business conditions. Some persons, the Chairman suggested, advocated a substantially easier monetary policy. Over the years, the Chairman continued, he had maintained there is a certain point beyond which easier money tends to hurt rather than help. The difficulty, however, was in noting when that point had been reached. In the comments which followed, the members of the Council indicated their belief that there was an ample supply of funds available and that the existing rate structure was not an impediment to business expansion. As an additional item, Chairman Martin noted that the Board was in receipt of a request from a Committee of the Congress for its views on proposed legislation that would permit commercial banks to underwrite and deal in revenue bonds. The members of the Council indicated that they would favor the enactment of such legislation. The meeting adjourned at 12:50 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 39 NOTE: This 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 entirely accur a t e . The t r a n s c r i p t is for the sole use 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 Council, The concise off i c i a l m i n u t e s f o r the entire year are pr 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 not 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 S e p t e m b e r 17, 1962, at 9:30 A.M., in R o o m 928 of the M a y f l o w e r Hotel, Washington, D. C. A l l m e m b e r s of the C o u n c i l were p r e s e n t except Mr, M c A l l i s t e r . Mr* C h a r l e s de B r e t t e v i l l e attended as an A l t e r n a t e f o r Mr. M c A l l i s t e r . 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 meeting of A p r i l 3 0 - M a y 1, 1962. P r e s i d e n t M u r p h y d i s t r i b u t e d to e a c h m e m b e r of the Council a number of c h a r t s of v a r i o u s e c o n o m i c series r e l a t i n g to the items on the A g e n d a . ITEM I WHAT ARE. THE- O B S E R V A T I O N S OF. THE. C O U N C I L R E G A R D I N G (a) T H E P E R F O R M A N C E OF T H E E C O N O M Y THUS FAR THIS YEAR, A N D (b) T H E B U S I N E S S O U T L O O K F O R THE. R E M A I N D E R OF THIS YEAR AND E A R L Y 1 9 6 3 ? I N REVIEWING.. R E C E N T D E V E L O P M E N T S , WHA T F A CTORS A R E CONSIDERED. O F M O S T S I G N I F I C A N C E B Y T H E M E M BERS OF T H E COUNCIL.? M u r p h y r e a d I t e m I a n d a s k e d m e m b e r s of the Council to comment 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 in w h i c h all p a r t i c i p a t e d . There was f a i r l y g e n e r a l a g r e e m e n t t h a t the p e r f o r m a n c e of the economy this year, t h o u g h s o m e w h a t b e l o w e a r l i e r p r o j e c t i o n s , h a d been good. The e x p e c t a t i o n w a s that b u s i n e s s w i l l c ontinue to follow an ir r e g u l a r t h o u g h s l i g h t l y r i s i n g t rend for the r e m a i n d e r of this y e a r a n d e a r l y 1 9 63. A m o n g s i g n i f i c a n t r e c e n t d e v e l o p m e n t s , a n u m b e r of members were i m p r e s s e d b y t h e d e m o n s t r a t e d r e s i l i e n c y of the ec o n o m y follow ing the v a r i o u s s h o c k s th a t the b u s i n e s s c o m m u n i t y h a d e n c o u n t e r e d earlier in the y e a r . F r e q u e n t l y m e n t i o n e d was the sharp decline in stock p r i c e s a r o u n d m i d y e a r * This r e s i l i e n c y was m o s t evident in the p e r s i s t e n c e of c o n s u m e r b u y i n g , the h i g h v o l u m e of const r u c t i o n activity, a n d the s u r v e y s of b u s i n e s s m e n and consumers w h i c h gave no i n d i c a t i o n of a c u t b a c k in b u y i n g or i n v e s t m e n t plans. 2. I T E M II 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 THE. C U R R E N T A N D P R O S P E C T I V E S T R E N G T H OF T H E A U T O M O B I L E A N D H O U S I N G M A R K E T S ? DOES THE HIGH P R O P O R T I O N O F M U L T I - F A M I L Y H O U S I N G S T A R T S A P P E A R TO B E S O L I D L Y B A S E D 0R M A I N L Y S P E C U L A T I V E ? M u r p h y r e a d I t e m I I a n d i n v i t e d c o m m e n t f r o m the C o u n c i l . The members i n d i c a t e d t h a t t h e h i g h l e v e l of a u t o m o b i l e s a l e s is b e i n g maintained. F u r t h e r m o r e , t h e y r e p o r t e d t h a t the i n v e n t o r i e s of u s e d cars w e r e m o d e s t a n d t h a t p r i c e s w e r e f i r m . T h i s is e s s e n t i a l to a strong n e w c a r m a r k e t s It w a s c o n c l u d e d t h a t w h i l e a u t o m o b i l e sales next y e a r m a y n o t e q u a l t h e v o l u m e o f 1 9 6 2 , d e m a n d w i l l c o n t i n u e relatively g o o d . T h e r e p l a c e m e n t m a r k e t , of just u n d e r five m i l l i o n units, was c i t e d as a n o t h e r u n d e r l y i n g f a c t o r of s t r e n g t h s u p p o r t i n g automobile s a l e s . In the d i s c u s s i o n o f t h e h o u s i n g m a r k e t , it b e c a m e a p p a r e n t that the e x t e n t to w h i e h m u l t i - f a m i l y h o u s i n g s t a r t s appe a r to be solidly b a s e d or m a i n l y s p e c u l a t i v e v a r i e d n o t o n l y f r o m d i s t r i c t to district b u t a l s o w i t h i n d i s t r i c t s . Similarly, while several members r e p o r t e d o v e r b u i l d i n g iA-, t h e i r d i s t r i c t s , t h e types of construction in w h i c h t h e r e w a s ' o v e r b u i l d i n g v a r i e d . One of the consequences of t h e h i g h v o l u m e o f c o n s t r u c t i o n is tha t s a les of older h o u s e s a n d r e n t a l s o f o l d e r a p a r t m e n t s a r e s l o w i n some areas. The r e a d y a v a i l a b i l i t y o f f u n d s f o r the f u l l f i n a n c i n g of multi-family h o u s i n g p r o j e c t s a p p e a r s to be o n e of the f a c t o r s in their r e c e n t g r o w t h . A f e w m e m b e r s s u g g e s t e d t h a t the ab s e n c e of the n e e d f o r e q u i t y f i n a n c i n g e n c o u r a g e d s p e c u l a t i v e c o n s t r u c tion in some i n s t a n c e s * ITE M III WHAT IS T H K C O U N C I L VS J U D G M E N T R E G A R D I N G T H E P R O B A B L E E F F E C T ON B U S I N E S S C A P I T A L D E C I S I O N S O F T H E R E C E N T B U L L E T I N F CHANGES? WHAT E F F E C T S WOULD, BE, ENVISAGED, F R O M E N A C T M E N T OF T H E P R O P O S E D INVESTMENT TAX. C R E D I T P R O V I S I O N ? M u r p h y r e a d I t e m I I I a n d a b r i e f d i s c u s s i o n f o l l o w e d in w h i c h the Council e x p r e s s e d its d o u b t s t h a t t h e o v e r - a l l v o l u m e of business i n v e s t m e n t w i l l b e s i g n i f i c a n t l y i n c r e a s e d as a r e s u l t of the recent c h a n g e s i n B u l l e t i n F or b y t h e e n a c t m e n t of the p r o p o s e d investment tax c r e d i t * T h e d i s c u s s i o n a l s o d i s c l o s e d that i n s o f a r as the changes in B u l l e t i n F p r o v e d to b e b e n e f i c i a l , they w e r e likely to b e m o r e h e l p f u l to s m a l l b u s i n e s s c o n c e r n s t h a n to large enterprises. T h e r e w e r e r e p e a t e d r e f e r e n c e s to t h e p r o f i t sq u e e z e and the n e e d f o r a n i m p r o v e m e n t in p r o f i t e x p e c t a t i o n s if b u s i n e s s investment is to e x p a n d * I T E M IV M A T ARE. T H E P R O S P E C T S F O R L O A N D E M A N D A T B A N K S D U R I N G THE NEXT SEVERAL M O N T H S , I N C L U D I N G T H E D E M A N D F O R R E A L E S T A T E A N D C O N SUMER L O A N S ? ___________________ Murphy read I t e m I V a n d i n v i t e d c o m m e n t f r o m the m e m b e r s * The discussion d i s c l o s e d that most m e m b e r s of the Council expect loan demand at b a n k s d u r i n g the next several mon t h s to rise seasonally, while four of t h o s e p r e s e n t e x p e c t the ex p a n s i o n to be slightly stronger. M o d e s t i n c r e a s e s in c o n s u m e r and real estate loans are also anticipated* ITEM V WHAT A R E T H E C O U N C I L » S V I E W S R E G A R D I N G T H E D E G R E E OF LIQ U I D I T Y OF T H E B A N K I N G S Y S T E M ? M u r p h y r e a d I t e m V. The e n s u i n g di s c u s s i o n found the members of the Co u n c i l i n g e n e r a l a g r e e m e n t that the l i q u i d i t y of the banking s y s t e m h a d d e c l i n e d . E x c e p t i o n s to this g e n e r a l i z a t i o n were the f i r s t a n d f i f t h d i s t r i c t s w h e r e m o s t of the b a n k s are not paying m a x i m u m r a t e s , ' a s p e r m i t t e d u n d e r R e g u l a t i o n Q, on time and sav ings’b a l a n c e s . A l t h o u g h the l o a n d e p o s i t r a t i o for the b a nking system is s o m e w h a t b e l o w r e c e n t h i g h levels, there has b e e n a sig nificant i n c r e a s e in the h o l d i n g s of m u n i c i p a l securities and mortgages* A n u m b e r of m e m b e r s also r e p o r t e d some lengthening of maturities w h i c h has b e e n a n o t h e r f a c t o r l e s s e n i n g the l i q m d i t y of the b a n k i n g s y s t e m * I T E M VI WHAT A R E T H E C O U N C I L ’S O B S E R V A T I O N S C O N C E R N I N G T H E RECENT AND PROSPECTIVE. T R E N D O F S A V I N G S AND. O T H E R T I M E .DEPOSITS, A N D THE E F F E C T S FROM. T H E .STANDPOINT. OF1 B A N K P O R T F O L I O MANAGEMENT? M u r p h y r e a d I t e m VI* The m e m b e r s of the Council r e p o r t e d in creases in the v o l u m e of s a v i n g s .and ot h e r time deposits* The rate of growth, h o w e v e r , w h i l e m o r e r a p i d t h a n last year, is less than it was in the e a r l y m o n t h s of 1 9 62* The Council believes that this r i s i n g t r e n d w i l l c o n t i n u e b u t at a d e c r e a s i n g rate* The squeeze on b a n k p r o f i t m a r g i n s has r e s u l t e d in an increase in the holdings of m u n i c i p a l s e c u r i t i e s a n d in the e x p a n s i o n of real estate a n d c o n s u m e r l o a n s . A n u m b e r of m e m b e r s r e p o r t e d that banks in their areas w e r e c r i t i c a l l y e x a m i n i n g t h eir operations and costs giving p a r t i c u l a r a t t e n t i o n to i n t e r e s t expense. ITEM VII W H A T A R E T H E V I E W S OF T H E C O U N C I L W I T H R E S P E C T TO THE IMPACT OF CURRENT M O N E T A R Y A N D C R E D I T P O L I C Y ? W O U L D T H E COUNCIL BE IN CLINED TO P L A C E R E L A T I V E L Y M O R E W E I G H T ON D O M E S T I C C O N S I D E R A TIONS OR ON I N T E R N A T I O N A L C O N S I D E R A T I O N S ? M u r p h y r e a d I t e m VT I * A b r i e f d i s c u s s i o n followed. In general, the C o u n c i l f e l t t h a t c u r r e n t m o n e t a r y a n d credit policy had h a d a f a v o r a b l e i m p a c t on the e conomy. W h i l e the members were pleased w i t h the p r o g r e s s that h a d b e e n m a d e in our international Payments position, t h e y d i d n o t b e l i e v e that the improvement had been s u f f i c i e n t to w a r r a n t p l a c i n g m o r e w e i g h t on domestic considera tions in the d e t e r m i n a t i o n of m o n e t a r y p o l i c y * 1+. t& x ment T he re t as . tn a u f o llo w e d a b r i e f d is c u s s io n on th e p o s s i b i l i t y o f a p ro p o s e d b y th e A d m in is t r a t io n . T h e r e w a s w id e a g r e e F e d e r a l t a x r e f o r m w as l o n g o v e r d u e * T he m e e t i n g a d jo u r n e d at 1 2 : 3 0 P.M* 5* 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 ROO M OF THE FE 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., AT 2:30 P.M., ON S E P T E M B E R 17, 1962* A L L M E M B E R S OF T H E COUNCIL W E R E P R E S E N T E X C E P T M E S S R S * P E T E R S E N A N D MC ALLISTER. MR. C H A R L E S de B R E T T E V I L L E A T T E N D E D AS AN AL T E R N A T E FOR MR. MC A L L I S T E R . Mr. G u y E* N o yes, D i r e c t o r , tics, a s s i s t e d b y m e m b e r s of the audio-visual p r e s e n t a t i o n on the Copies of the s t a t e m e n t t o g e t h e r will be m a i l e d to the m e m b e r s of from the B o a r d ’s staff* D i v i s i o n of R e s e a r c h and Stat i s B o a r d ’s staff, par t i c i p a t e d in an current economic situation. w i t h r e p r o d uctions of the charts the Council u p o n their receipt THE. C O U N C I L C O N V E N E D A T 8:00 P*M * ON S E P T E M B E R 17, 1962, IN R O O M 928 OF T H E M A Y F L O W E R H OTEL. A L L MEMBERS OF THE C O U N C I L W E R E PRESENT. E X C E P T M E S SRS. P E T E R S E N AND MC ALLISTER* MR*. C H A R L E S de B R E T T E V I L L E A T T E N D E D AS AN A L T E R N A T E F O R MR. M C A L L I S T E R * 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 M e m o r a n d u m to b e sent to t h e B o a r d of G o v e r n o r s r elative to the Ag e n d a for the joint m e e t i n g of the Co u n c i l and the B o a r d on September l8, 1962* T h e M e m o r a n d u m was d e l i v e r e d to the Federal Reserve B u i l d i n g at 1 0 : 3 0 P*M* on S e p t e m b e r 17* The m e e t i n g a d j o u r n e d at 9: 1 5 P*M* CONFIDENTIAL MEMORANDUM TO THE EOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING CN SEPTEMBER 18, 1?62 1, W hat a r e t lie o b s e r v a t io n s o f t h e C o u n c il r e g a r d in g ( a ) t h e p e r fo rm a n c e o f t h e economy t h u s f a r t h i s y e a r , and ( b ) t h e b u s in e s s o u t lo o k u'or t h e re m a in d e r o f t h i s y e a r and e a r l y 1963? ^ I n r e v ie w in g r e c e n t d e v e lo p m e n ts , w hat f a c t o r s a r e c o n s id e r e d o f m o s t s i g n i f i c a n c e by th e mem b e r s o f t h e C o u n c il? The p e r fo r m a n c e o f th e economy t h i s y e a r has been somewhat below e x p e c ta tio n s . D e s p it e t h i s d e v e lo p m e n t, and th e f a c t t h a t o ur l a b o r fo r c e and p r o d u c tiv e f a c i l i t i e s h a v e n o t b een f u l l y u t i l i z e d , th e members o f the C o u n c il b e l i e v e t h a t t h e y e a r as a w hole as m easured b y m ost o f th e in d ic a t o r s o f a g g r e g a te e co n o m ic a c t i v i t y , i n c l u d i n g incom e, employment and p r o d u c tio n w i l l p r o v e t o b e g o o d . They e x p e c t t h a t b u s in e s s f o r th e rem ainder o f t h i s y e a r and e a r l y 1963 w i l l c o n t in u e t o f o l l o w an i r r e g u la r th o u g h s l i g h t l y r i s i n g t r e n d . Among s i g n i f i c a n t r e c e n t d e v e lo p m e n ts , th e members o f th e C o un cil have b e e n p a r t i c u l a r l y im p re s s e d b y th e d e m o n s tra te d r e s i l i e n c y o f the economy f o l l o w i n g th e s h a r p d e c l i n e i n s to c k p r ic e s aro und m id y e ar. T his r e s i l i e n c y h a s b e e n m o s t e v id e n t i n t h e p e r s is t e n c e o f consumer b u y in g , t h e h i g h v o lu m e o f c o n s t r u c t io n a c t i v i t y , and th e surveys o f businessm en and c o nsu m e rs w h ic h g iv e no i n d i c a t i o n o f a c u tb a c k i n buy in g or in v e s tm e n t p l a n s , 2# How does t h e C o u n c il a p p r a is e th e c u r r e n t and p r o s p e c tiv e s t r e n g t h o f t h e a u t o m o b ile and h o u s in g m a rk e ts ? Does th e h ig h p r o p o r t i o n o f m u l t i - f a m i l y h o u s in g s t a r t s a p p e a r to be s o l i d l y b a s e d o r m a i n l y s p e c u l a t iv e ? A lth o u g h a u t o m o b ile s a l e s i n th e n e x t y e a r may n o t e q u a l th e volume o f 1962, t h e members o f t h e C o u n c il e x p e c t t h a t th e demand w i l l c o n tin u e r e l a t i v e l y good w i t h f i r m u se d c a r p r i c e s , one o f th e e s s e n t ia ls of a s tr o n g new c a r m a r k e t . The l a r g e r e p la c e m e n t m a rk e t i s a ls o one o the u n d e r ly in g f a c t o r s o f s t r e n g t h s u p p o r t in g a u to m o b ile s a l e s . The e x t e n t t o w h ic h m u l t i - f a m i l y h o u s in g s t a r t s appear t o be s o l i d l y b ased o r m a in l y s p e c u l a t i v e v a r i e s n o t o n ly fro m d i s r i c 0 d i s t r i c t b u t a ls o w it h in d i s t r i c t s . S e v e r a l members r e p o r te d in g , b u t th e ty p e s o f c o n s t r u c t i o n i n w h ic h t h e r e was o v e r b u ij.d i g F u rthe rm o re , s a le s o f o l d e r h o u s e s and r e n t a l s o f o l d e r apartm en slow i n some a r e a s . The h i g h p r o p o r t i o n o f f or appears t o be s t r o n g l y i n f l u e n c e d b y th e ready^ a v a i l a b i l i t y of the f u l l f i n a n c i n g o f s u c h p r o j e c t s . I n some in s t a n c e s , m o tio n the need f o r e q u it y f i n a n c i n g i s e n c o u r a g in g s p e c u l a t iv e cons 3, VJhat is the Council’ s judgment regarding the probable effect on business capital decisions of the recent Bulletin F changes? What effects would be envisaged frcm enactment of the proposed investment tax credit provision? The Council is doubtful that the over-all volume of business investment will be significantly increased as the result of the recent changes in Bulletin F or by the enactment of the proposed investment tax c r e d it . Insofar as the changes in Bulletin F prove to be beneficial, they are likely to be more helpful to small business concerns than to large enterprises. The possibility of earning an adequate profit is the motivat ing and determining factor in reaching investment decisions, h. What are the prospects for loan demand at banks during the next several months, including the demand for real estate and consumer loans? Most members of the Council believe that loan demand at banks during the next several months will rise seasonally, while seme expect the expansion will be slightly stronger. Modest increases in consumer and real estate loans are anticipated# 5>. VJhat are the Councilfs views regarding the degree of liquidity of the banking system? The members of the Council are in general agreement that the liquidity of the banking system has declined this year. Although the loan deposit ratio is below recent high levels, there has been a significant increase in the holdings of municipal securities and mortgages, Moreover, lengthening of maturities has been another factor lessening liquidity of the banking system. 6. VJhat are the Council1s observations concerning the recent and prospective trend of savings and other time deposits, and the effects from the standpoint of bank portfolio management? Members of the Council report that the volume of savings and other time deposits continues to increase. The rate of growth, hoxtfever, while more rapid than last year, is less than it was in the early months of 1962, The Council believes that the volume of savings and other time deposits will grow but at a decreasing rate. The squeeze on bank profit margins has resulted in an increase in the holdings of municipal securities and in the expansion of real estate and. consumer loans. It also has resulted in a more critical analysis of operations and costs, including interest expense. 7. What are the views o f the C ouncil w ith respect to the im pact o f c u rre n t monetary and c r e d it p o lic y ? Would the C ouncil be in c lin e d to p la c e r e la t iv e ly more weight on dom estic c o n sid e ra tio n s or on in te r n a tio n a l considera tio n s ? Current monetary and c r e d it p o lic y has had a generally favorable impact on the economy. D espite the progress th a t has been made in our in te r n a tio n a l payments p o s it io n , the improvement has not been s u f f ic ie n t in the o p in io n o f the C ou n cil to w arrant p la c in g more w eight on domestic considerations i n the d e te rm in a tio n of monetary p o lic y . ON S E P T E M B E R 18, 1 9 6 2 , 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 I N 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., W I T H T H E E X C E P T I O N OF MR. E L L I O T T M C A L L I S T E R , 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. M R . C H A R L E S de B R E T T E V I L L E A T T E N D E D AS A N A L T E R N A T E F O R MR. M C A L L I S T E R . T H E 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 G O V E R N O R S W E R E PRESENT: CHAIRMAN MARTIN, V I C E CHAIRMAN BALDERSTON, GOVERNORS MILLS, SHEPARDSON, KING AND MITCHELL. MR. S H E R M A N , S E C R E T A R Y , AND. M R . K E N Y O N , A S S I S T A N T S E C R E TARY, OF T H E B O A R D O F 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 j o i n t m e e t i n g are b e i n g p r e p a r e d i n the office of the S e c r e t a r y of t h e B o a r d of G o v e r n o r s of t h e F e d e r a l 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 t h e C o u n c i l * A s s u m i n g t h e y are in s u b s t a n tial a g r e e m e n t , t h e y w i l l b e d i s t r i b u t e d to the m e m b e r s of the Council. E a c h m e m b e r of t h e C o u n c i l w a s h a n d e d a n a d v a n c e p r i n t of a r e p o r t e n t i t l e d " T r e a s u r y a n d F e d e r a l R e s e r v e F o r e i g n E x change O p e r a t i o n s . TT T h e r e p o r t is to a p p e a r i n the S e p t e m b e r , 1962 issue of t h e F e d e r a l R e s e r v e B u l l e t i n * The m e e t i n g a d j o u r n e d at 1 2 : 5 0 P . M . 1962 .The n e x t m e e t i n g of t h e C o u n c i l w i l l b e h e l d N o v e m b e r 19-20, F o l l o w i n g t h e m e e t i n g , the m e m b e r s of the C o u n c i l h a d lunche o n w i t h the B o a r d o f G o v e r n o r s a n d c e r t a i n m e m b e r s of the B o a r d 1s staff, t o g e t h e r w i t h a g r o u p of c e n t r a l b a n k e r s f r o m abroad w h o are i n W a s h i n g t o n as d e l e g a t e s to t h e A n n u a l M e e t i n g s of the I n t e r n a t i o n a l M o n e t a r y F u n d a n d W o r l d B a n k .
@FedFRASER