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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 19, 1966 The third statutory meeting of the Federal Advisory Council for 1966 was convened in the Board Room of The Madison, Washington, D.C., on September 19, 1966, 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 John Simmen William H. Moore William L. Day L. A. Stoner John F. Watlington, Jr. Sam M. Fleming Henry T. Bodman A. M. Brinkley, Jr. John A. Moorhead Roger D. Knight, Jr. Robert H. Stewart, III Ransom M. Cook Herbert V. Prochnow William J. Korsvik On motion duly made and seconded, the mimeographed notes of the meeting held on June 20-21, 1966, 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 C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f Governors f rom t he F e d e r a l A d v i s o r y C o u n c i l , which follows on pages 22, 23, 24 and 25. The meeting adjourned at 12:45 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 20. MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 19, 1966 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building. Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, and Ransom M. Cook. The members of the Board’s staff, Division of Research and Statistics and Division of International Finance, including Messrs. J. Charles Partee, Tynan Smith and John E. Reynolds, participated in an audio-visual presentation on recent domestic and interna tional developments. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary At 5:30 P.M., the Federal Advisory Council reconvened in the Board Room of The Madison, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. 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 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 22, 23, 24 and 25, listing the Agenda items with the conclusions reached by the Council. The M e m o r a n d u m was delivered to the Federal Reserve Building at 7:45 P.M., on September 19, 1966. The meeting adjourned at 6:50 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 21. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 20, 1966 1. Economic conditions and prospects. A. How does the Council appraise prospects for business costs and prices during the remainder of 1966? The Council anticipates that upward pressures on business costs and prices will intensify during the remainder of 1966. This will reflect a continuation of expanding demands as well as an exceedingly tight labor situation and the probability of increasing wage costs. B. Have Council members observed any significant recent changes in business expenditures or ex penditure plans in response to tighter conditions in markets for labor, materials, and credit? Have there been any significant changes in inventory policies? The members of the Council have not observed any significant recent changes in either business expenditures or plans. However, tighter conditions in the markets for labor, materials and credit, together with the proposed suspension of (1) the 7 per cent in vestment tax credit, and (2) the liberalized depreciation allowances, may result in some moderation in business investment plans and outlays in the months ahead. The members of the Council are not aware of any significant change in inven tory policies. While there have been substantial additions to inventories, the inventorysales ratio has not changed appreciably. 2. Banking Developments. A. By how much, if at all, does the Council expect the fall demand for business loans to exceed nor mal seasonal projections? Do the members ex pect banks to have difficulty in raising funds to meet such demands? If so. to what extent are banks resorting to refusals or discouragement of business loan requests? A number of members of the Council report that in addition to loan requests from regular borrowers they are receiving loan applications from customers with excel lent credit standings who have maintained good balances for years but have never prev iously borrowed, and who feel they are entitled to credit. The Council expects the fall demand for business loans to exceed normal seasonal expectations. 22. I Bankers expect to have considerable difficulty in raising funds to meet the credit demands of the economy. Some bankers are not at all certain that they will be able to meet adequately the seasonal requirements of their customers or commitments already existing. As a consequence, there is a wide expectation that banks will continue to be obliged to refuse or discourage a growing volume of business loan requests. B. How have recent developments affected the abil ity and w illingness of banks to attract funds through issuance of large-denomination negotiable C D 's? Through issuance of small-denomination consumer-type C D ’s? What is the prospect for renewed emphasis on sales of consumer-type CD's? The rise in interest rates in recent weeks which has lifted yields on prime short-term investments above the Regulation Q ceiling has limited the ability of banks in the money centers to maintain their volume of large-denomination negotiable CD’ s. Al though there is no evidence of unw illingness of the money center banks to continue to bid for these funds, the ceiling has substantially curtailed their competitive ability. The pre sent tendency to shorter maturities for C D ’ s further aggravates the practice of borrowing short and lending long. Banks generally continue to find the small-denomination consumer-type CD a helpful instrument in competing for individual savings. However, some banks are experi encing a net decline in consumer-type savings despite the use of CD’s. The persistence of a strong demand for credit and the present high interest rate structure suggest the con tinued reliance on consumer-type C D ’ s to help retain deposits. The ability to do so will depend to a great extent on any regulations which may be issued under the new legislation. C. How does the Council appraise the current and prospective state of the market for municipal se curities and for Federal agency issues? The Council is not certain that the recent modest improvement in the market for municipal securities and for Federal agency issues w ill persist. The present yields on these investments have made them attractive to certain institutional and private in vestors. However, the possibility of further sales by banks as they seek additional funds to meet seasonal loan requirements poses a threat that overhangs the market. D. How does the Council appraise the prospect of continued intensive competition for savings among banks, savings and loan associations, mutual savings banks, and market borrowers? The Council anticipates continued intensive competition for savings among tanks, savings and loan associations, mutual savings banks, and market borrowers. The ability to compete also depends on any regulations which may be issued under the new legislation. 3. Balance of Payments. A. Are outstanding U. S. bank loans to foreigners likely to decline substantially further during the next six months? The Council does not anticipate that outstanding U. S. bank loans to foreign ers will decline substantially further during the next six months. However, the continued tightness of credit suggests that there w ill be no important increase in foreign lending by U. S. banks in the months immediately ahead. B. Would the Council expect any sig n ific a n t easing of domestic credit conditions during the course of 1967 to be followed fairly promptly by renew ed expansion of U- S. bank loans to foreigners? Although it is difficult at present to see any sig n ificant easing of domestic credit conditions during the course of 1967, such a development is possible if restrictive fiscal policies are employed. In these circum stances, U. S. bank loans to foreigners might expand, although there is no assurance that this would take place. With domestic credit demands tending to lim it U. S. bank loans to foreigners, it might be appropriate now to consider the repeal of the present voluntary foreign credit restraint program. C. Have Council members observed any s ig n ifican t recent changes in U. S. business plans to ex pand their operations abroad through foreign branches and subsidiaries? The Council members have not observed any sig n ific a n t recent changes in U.S. business plans to expand their operations abroad through f o r e i g n b r a n c h e s a n d subsidiaries. Presumably some plans may have been delayed or postponed because of the strengthof the domestic demands and also the difficu lty of obtaining funds both here and abroad. D. To what extent would the C ouncil judge that U.S. merchandise exports are being hampered by sup ply bottlenecks and delivery delays or by lim ited availability of export financing? The Council is not aware that U.S. merchandise exports are being materially hampered by supply bottlenecks, delivery delays, or by lim ited av ailab ility of export fi nancing. This is not to say, however, that exports could not be larger i f domestic dt mand were less strong. E. How does the Council appraise the effects on the balance of payments of U.S. bank borrow ing from the Euro-dollar market? 24. It is difficult to appraise the effects on the balance of payments of U.S. bank borrowing from the Euro-dollar market without determining the use to which the funds are put. For example, if the funds are used to finance domestic transactions, the effect on our balance of payments may be different than if the funds are used to pay for imports. On the other hand, to the extent that U.S. bank borrowing in the Euro-dollar market reduces the supply of funds available to finance foreign buying of U.S. goods, our exports and the balance of payments may presumably be adversely affected. 4. What are the Council’s views on monetary and credit policy under current circumstances? In general, the Council approves the continuation of a policy of monetary re straint in the critical period ahead. This policy implies (1) sufficient flexibility to meet seasonal demands and an orderly growth in the economy, and (2) time to make adjustments that may prove necessary in the banks' assets and liabilities. The members of the Council are apprehensive about the impact on the credit and financial markets and the resulting distortions in the economy if monetary policy alone is to continue to be relied on to restrain demand. As a consequence, the members of the Council and bankers generally approve the recently expressed intent of the Administration to use fiscal policy and are greatly hopeful that fiscal policy will be employed to an in creasing degree to restrain the economy. Such a program would include a reduction in Federal expenditures and, if necessary, an increase in taxes. 25. MINUTES OF JOINT CONFERENCE OF THE F E D ER A L ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FED ERA L RESERVE SYSTEM September 20, 1966 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 J. L. Robertson; Governors Chas. N. Shepardson, George W. Mitchell, J. Dewey Daane, Sherman J. Maisel and Andrew F. Brimmer; 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. John Simmen, William H. Moore, William L. Day, L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, 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 22, 23, 24 and 25 of these minutes. A brief discussion followed. President Moorhead then read the second item and the C ouncil’s conclusions. In an effort to appraise the intensity of the strong loan demand described by the members of the Council, Governor Maisel inquired about the extent of anticipatory borrowing. Several members of the Council said they had knowledge of companies who were trying to firm up credit arrangements and were w illing to pay commitment fees to be sure that the money would be available when needed. In the discussion about the September 1 letter that had been sent to member banks. Governor Mitchell emphasized that there was no disposition to try to curb all further ex pansion. It was recognized, he added, that allowance should be made for seasonal re quirements. The President of the Council read the third item on the Agenda and the Council's response. 26. Governor Robertson stated that he thought it would be unwise to terminate the voluntary foreign credit restraint program at this time not so much because it was needed for the banking system, but because it was needed in other areas. The fourth item on the Agenda and the Council’s reply were then read by President Moorhead. There followed a long discussion on current monetary and credit developments, including the administration of the discount window in the light of the recent directive to member banks. The meeting adjourned at 12:40 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 27. NOTE: T h i s t r a n s c r i p t of the S e c r e t a r y ’s n o t e s is n o t to b e r e g a r d e d as c o m p l e t e or n e c e s s a r i l y e n t i r e l y accurate* T h e t r a n s c r i p t is f o r the s o l e u s e of the m e m b e r s of t h e F e d e r a l A d v i s o r y C o u n c i l * The concise o f f i c i a l m i n u t e s f o r t h e e n t i r e y e a r are p r i n t e d and distributed later. H.V.P. W.J.K. T h e S e c r e t a r y Ts n o t e s of t h e m e e t i n g of the F e d e r a l A d v i s o r y C o u n c i l o n S e p t e m b e r 19, 1 9 6 6 at 9 : 3 0 A . M . in the B o a r d R o o m of T h e M a d i s o n , W a s h 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 C o u n c i l w e r e p r e s e n t . T he 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 Ts n o t e s f o r the m e e t i n g of June 2 0 - 2 1 , 1 9 6 6 . ITEM I A AND B ECONOMIC CONDITIONS AND PROSPECTS. A. H O W D O E S T H E C O U N C I L APPRAISE. P R O S P E C T S F O R B U S I N E S S COSTS AND PRICES D U R I N G T H E R E M A I N D E R OF 1966? B. H A V E C O U N C I L M E M B E R S O B S E R V E D A N Y S I G N I F I C A N T RECENT CHANGES IN B U S I N E S S E X P E N D I T U R E S OR E X P E N D I T U R E P L A N S I N R E S P O N S E TO TIGHTER C O N D I T I O N S I N MARKETS FOR LABOR, MATERIALS, AND CREDIT? H A V E T H E R E B E E N A N Y S I G N I F I C A N T C H A N G E S IN I N V E N T O R Y _____ P O L I C I E S?_____________________________________________________________________ President M o o r h e a d r e a d I t e m I A and B and invited comment from r.enbers of t h e C o u n c i l . The d i s c u s s i o n dis c l o s e d that they were unanimous in t h e i r o p i n i o n t h a t u p w a r d p r e s s u r e s on b u s i n e s s costs and pri c e s w i l l i n t e n s i f y d u r i n g the r e m a i n d e r of 1 9 6 6 . This will reflect a c o n t i n u a t i o n of e x p a n d i n g d e m a n d s as w e l l as the e x c e e d i n g ly tight s i t u a t i o n t h a t c h a r a c t e r i z e s the l a b o r m a r k e t in p r a c t i c a l l y every d i s t r i c t . As a r e s u l t , i n c r e a s i n g w a g e co s t s are w i d e l y a n t i cipated. A l t h o u g h t h e m e m b e r s of t h e C o u n c i l h a v e not o b s e r v e d a n y s i g nificant r e c e n t c h a n g e s in e i t h e r b u s i n e s s e x p e n d i t u r e s or plans, sioat of t h e m e x p e c t t h a t t i g h t e r c o n d i t i o n s in the m a r k e t s for labor, m a t e r i a l s a n d c r e d i t , t o g e t h e r w i t h the p r o p o s e d s u s p e n s i o n of the 7 p e r c e n t i n v e s t m e n t t a x c r e d i t a n d the l i b e r a l i z e d d e p r e cation a l l o w a n c e m a y r e s u l t in s o m e m o d e r a t i o n in b u s i n e s s i n v e s t or,4; plans a n d o u t l a y s in the m o n t h s a h e a d . I n v e n t o r y p o l i c i e s , a c c o r d i n g to t he m e m b e r s of the Coun c i l , apparently h a v e n o t c h a n g e d s i g n i f i c a n t l y * Several members ^o^nowledged t h a t d e s p i t e the a d d i t i o n s to s t o c k s on h a n d , the in7entory~ sa l e s r a t i o h a s n o t c h a n g e d a p p r e c i a b l y . ITEM II A BANKING D E V E L OPMENTS. A. B Y H O W MUCH, IP AT ALL, DOES THE COUNCIL EXPECT T H E PALL DEMAND FOR B U S I N E S S LOANS TO EXCEED N ORMAL SEASONAL PRO JECTIONS? D O T H E M E M B E R S E X P E C T B A N K S TO H A V E D I F F I C U L T Y IN R A I S I N G F U N D S T O M E E T S U C H D E M A N D S ? I P SO, TO W H A T E X T E N T A R E B A N K S R E S O R T I N G T O R E F U S A L S OR D I S C O U R A G E M E N T OP B U S I N E S S L O A N R E Q U E S T 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, An extended discussion followed w i t h s e v e r a l m e m b e r s r e p o r t i n g l o a n a p p l i c a t i o n s f r o m customers w i t h e x c e l l e n t c r e d i t s t a n d i n g s w h o h a v e m a i n t a i n e d g o o d balances f o r y e a r s b u t w h o h a v e n e v e r p r e v i o u s l y b o r r o w e d a n d w h o feel t h e y a r e e n t i t l e d to c r e d i t . This, t ogether w i t h loan requests from r e g u l a r b o r r o w e r s , i n d i c a t e s the f a l l d e m a n d f o r b u s i n e s s l o a n s will e x c e e d n o r m a l s e a s o n a l e x p e c t a t i o n s . As a c o n s e q u e n c e , m o s t bankers e x p e c t to h a v e c o n s i d e r a b l e d i f f i c u l t y in r a i s i n g f u n d s to meet c r e d i t d e m a n d s . S e v e r a l m e m b e r s r e p o r t e d t h a t some b a n k e r s are not c e r t a i n t h a t t h e y w i l l b e a b l e to m e e t a d e q u a t e l y the s e a s o n a l re q u i rements of t h e i r c u s t o m e r s or c o m m i t m e n t s a l r e a d y e x i s t i n g . Accordingly, t h e r e is w i d e e x p e c t a t i o n t h a t b a n k s w i l l be o b l i g e d to c o n tinue to r e f u s e or d i s c o u r a g e a g r o w i n g v o l u m e of b u s i n e s s loan r e q u e s t s . I T E M II B B. 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 THE A B I L I T Y AND W I L L I N G N E S S OF B A N K S TO A T T R A C T FUNDS THROUGH ISSUANCE OF L A R G E - D E N O M I N A T I O N N E G O T I A B L E C / D ' S ? THROUGH I S S U A N C E O P S M A L L - D E N O M I N A T I O N C O N S U M E R - T Y P E C / D TS? W H A T IS T H E P R O S P E C T F O R R E N E W E D E M P H A S I S ON S A L E S OF C O N S U M E R - T Y P E C / D t 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 B. A brief discussion -ollowed. T h e C o u n c i l r e a d i l y a g r e e d t hat the r i s e in i n t e r e s t rate3 in r e c e n t w e e k s , w h i c h h a s l i f t e d the y i e l d s on s h o r t - t e r m investments a b o v e t h e R e g u l a t i o n Q, c e i l i n g , h a s l i m i t e d t he a b i l i t y banks in the m o n e y c e n t e r s to m a i n t a i n t h e i r v o l u m e of l a r g e ienomination n e g o t i a b l e C / P Ts. In v i e w of the t i g h t n e s s of m o n e y , ^'"ere obviously is n o e v i d e n c e of u n w i l l i n g n e s s on the p a r t of the V°ney center b a n k s to c o n t i n u e to b i d f o r t h e s e fu n d s . T h e c eilh owever, h a s s u b s t a n t i a l l y c u r t a i l e d t h e i r c o m p e t i t i v e a bility, ^veral m e m b e r s o b s e r v e d t h a t t he r e c e n t t e n d e n c y to s h o r t e r I " P u r i t i e s f o r C / D ’s a g g r a v a t e s the p r a c t i c e of b o r r o w i n g s h o r t and | e n d i n g long. It was r e p o r t e d t h a t b a n k s g e n e r a l l y c o n t i n u e to f i n d the s m a l l-denomination c o n s u m e r - t y p e C / D a h e l p f u l i n s t r u m e n t f o r c om^ - i n g for i n d i v i d u a l s a v i n g s . D e s p i t e t h e i r u se, h o w e v e r , some ^Aks are e x p e r i e n c i n g a n e t d e c l i n e in c o n s u m e r s a v i n g s . The 3. p r e s e n t t i g h t n e s s of m o n e y s u g g e s t s t h a t b a n k s w i l l c o n t i n u e to e m p l o y a c o n s u m e r - t y p e c / D in an e f f o r t to o b t a i n f u n d s . Concern was e x p r e s s e d o v e r t h e p o s s i b i l i t y of r e g u l a t i o n s w h i c h m a y b e i s s u e d u n d e r the n e w l e g i s l a t i o n w h i c h c o u l d l i m i t the a b i l i t y of banks to e f f e c t i v e l y c o m p e t e f o r thi s t y p e of s a v i n g s . I T E M II C C. H O W DOES T H E COUNCIL APPRAISE THE CURRENT AND PROSPECTIVE STATE OF T HE M A R K E T FOR MUNICIPAL SECURITIES AND FOR FEDERAL AGENCY ISSUES? __________ 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 C* The ensuing discussion dis ci oseT^tTTaT- the”C c u n c T T w a s n o t c e r t a i n t h a t the r e c e n t m o d e s t i m p r o v e m e n t In the m a r k e t f o r m u n i c i p a l s e c u r i t i e s a n d f o r f e d e r a l agency i s s u e s w i l l p e r s i s t . The s t rong and growing demand for co m m u n i t y f a c i l i t i e s a n d s e r v i c e s s u g g e s t s the f l o t a t i o n of n e w issues. M o r e o v e r , t h e p o s s i b i l i t y of f u r t h e r sa l e s b y b a n k s f r o m their p o r t f o l i o s as t h e y s e e k a d d i t i o n a l f u n d s to m e e t s e a s o n a l loan r e q u i r e m e n t s p o s e s a t h r e a t that o v e r h a n g s the m a r k e t . I T E M II D D. 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 PROSPECT/ OF C O N T I N U E D I NTENSIVE C O M P E T I T I O N FOR SAVINGS AMONG BANKS, SAVINGS AND L O A N A S S O C I A T I O N S , M U T U A L SAVINGS BANK?, AND MARKET BORROWERS? __________________________________________ _ The P r e s i d e n t of t h e C o u n c i l t h e n r e a d I t e m II D. Depending somewhat on a n y r e g u l a t i o n s w h i c h m a y b e i s s u e d u n d e r the n e w l e g i s lation, t h e C o u n c i l a n t i c i p a t e s c o n t i n u e d i n t e n s i v e c o m p e t i t i o n for s avings a m o n g b a n k s , s a v i n g s a n d l o a n a s s o c i a t i o n s , m u t u a l savings b a n k s a n d m a r k e t b o r r o w e r s . I T E M I I I A, B A N D C BALANCE OF P A Y M E N T S . A. A R E O U T S T A N D I N G U . S . B A N K L O A N S TO F O R E I G N E R S L I K E L Y TO D E C L I N E S U B S T A N T I A L L Y F U RTHER DU RI NG THE NEXT SIX MONTHS? E. W O U L D T H E C O U N C I L E X P E C T A N Y S I G N I F I C A N T E A S I N G OF D O M E S T I C CREDIT C O N D I T I O N S D U R I N G T H E C O U R S E OF 1967 TO B E FOLLOWED F A I R L Y P R O M P T L Y B Y R E N E W E D E X P A N S I O N O F U . S . B A N K L O A N S TO FOREIGNERS? % HAV E C O U N C I L M E M B E R S O B S E R V E D A N Y S I G N I F I C A N T RE C E N T CHANGES IN U . S . B U S I N E S S P L A N S T O E X P A N D T H E I R O P E R A T I O N S A B R O A D T H R O U G H F O R E I G N B R A N C H E S A N D S U B S I D I A R I 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 III A, B a n d C. The C o u n c i l ° ° es not a n t i c i p a t e t h a t o u t s t a n d i n g U . S . b a n k l o a n s to f o r e i g n e r s will d e c l i n e s u b s t a n t i a l l y f u r t h e r d u r i n g the nex t six months. More over, b e c a u s e of t h e t i g h t n e s s of c r e d i t , n o i m p o r t a n t i n c r e a s e is anticipated. T h e m e m b e r s o f the C o u n c i l f i n d it d i f f i c u l t to see any s i g n i f i c a n t e a s i n g of d o m e s t i c c r e d i t c o n d i t i o n s d u r i n g the course of 1 9 6 7 . If this s h o u l d develop, however, several members c a u t i o n e d t h a t t h e r e is n o a s s u r a n c e t h a t U.S.. b a n k l o a n s to f o r e igners w o u l d e x p a n d . It w a s s u g g e s t e d t hat I n a s m u c h as d o m e s t i c credit d e m a n d s a r e t e n d i n g to l i m i t U.S . b a n k l o a n s to f o r e i g n e r s , it m i g h t b e a p p r o p r i a t e n o w to c o n s i d e r the r e p e a l of t h e p r e s e n t voluntary foreign restraint program. The C o u n c i l m e m b e r s a r e n o t a w a r e of a n y s i g n i f i c a n t r e c e n t c hanges in U . S . b u s i n e s s p l a n s to e x p a n d t h e i r o p e r a t i o n s a b r o a d . H o w e v e r , s e v e r a l t h o u g h t t h a t s o m e p l a n s m a y h a v e b e e n d e l a y e d or p o s t p o n e d b e c a u s e o f t h e s t r e n g t h of d o m e s t i c d e m a n d s a n d a l s o b e c a u s e of t h e d i f f i c u l t y of o b t a i n i n g f u n d s b o t h h e r e a n d a b r o a d * I T E M III D D. T O W H A T E X T E N T W O U L D T H E C O U N C I L JUDGE. T H A T U . S . M E R C H A N D I S E EXPORTS A R E BEING HAMPERED B Y SUPPLY BOTTLENECKS AND D E L I V E R Y D E L A Y S OR B Y LIMITED. A V A I L A B I L I T Y O P E X P O R T FINANCING? The C o u n c i l is n o t a w a r e t h a t U . S . m e r c h a n d i s e e x p o r t s are bei n g m a t e r i a l l y h a m p e r e d b y s u p p l y b o t t l e n e c k s , d e l i v e r y d e l a y s or b y the l i m i t e d a v a i l a b i l i t y of e x p o r t f i n a n c i n g . There was some f e e l i n g t h a t e x p o r t s m i g h t b e l a r g e r if d o m e s t i c d e m a n d s w e r e less s t r o n g . I T E M III E E. 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 E F F E C T S O N T H E B A L A N C E OF PAYMENTS OF U.S. B A N K BORROWINGS F R O M THE EURO-DOLLAR M A R K E T ? ___________________________________________________________________ A f t e r a b r i e f d i s c u s s i o n on U . S . b a n k b o r r o w i n g f r o m t h e E u r o dollar m a r k e t , it w a s c o n c l u d e d t h a t it is d i f f i c u l t to a p p r a i s e "he e f f e c t s on the b a l a n c e of p a y m e n t s w i t h o u t d e t e r m i n i n g the u s e to w h i c h the f u n d s a r e p u t , ITEM IV W H AT A R E T H E C O U N C I L TS 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 U N D E R C U R R E N T 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 r e a d I t e m IV. A long discussion followed in w h i c h r e f e r e n c e w a s m a d e to t h e S e p t e m b e r 1 l e t t e r to m e m b e r banks a n d the d i f f e r i n g i n t e r p r e t a t i o n s g i v e n to t h i s p o l i c y d irective b y t h e d i s c o u n t o f f i c e r s at the v a r i o u s l o c a l F e d e r a l eserve b a n k s . I t w a s c o n c l u d e d t h a t the C o u n c i l a p p r o v e s a c o n tinuation of a p o l i c y of m o n e t a r y r e s t r a i n t in the criti c a l p e r i o d ahead. S u c h a p o l i c y i m p l i e s (l) suffi c i e n t f l e x i b i l i t y to meet seasonal de m a n d s a n d an o r d e r l y g r o w t h in the economy, and (2) time to m a k e a d j u s t m e n t s that m a y p r o v e n e c e s s a r y in the b a n k s 1 assets and l i a b i l i t i e s . C o n s i d e r a b l e a p p r e h e n s i o n was e x p r e s s e d b y the members about the impact on the c r e d i t and f i n a n c i a l m a r k e t s and the resulting distortions in the e c o n o m y if m o n e t a r y p o l i c y alone is to continue to be r e l i e d on to r e s t r a i n d e m a n d * The m e m b e r s of the Council are gr e a t l y h o p e f u l t h a t f i s c a l p o l i c y w i l l be e m p l o y e d to an in creasing d e g r e e in an e f f o r t to r e s t r a i n the economy. The Council has been e n c o u r a g e d b y r e c e n t s t a t e m e n t s to this e f f e c t b y the Administration, The m e e t i n g a d j o u r n e d at 12:I|_5 P,M, T H E C O U N C I L C O N V E N E D I N T H E B O A R D R O O M OF T H E F E D E R A L R E S E R V E B U I L D I N G , W A S H I N G T O N , D . C , A T 2:3 0 P . M . , ON S E P T E M B E R 19, 1 9 6 6 * 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* T h e m e m b e r s of t h e B o a r d ' s s t a f f , D i v i s i o n of R e s e a r c h a n d S t a t i s t i c s , D i v i s i o n of I n t e r n a t i o n a l F i n a n c e , i n c l u d i n g Messrs. J. C h a r l e s P a r t e e , T y n a n S m i t h a n d J o h n E. R e y n o l d s , p a r t i c i p a t e d in an a u d i o - v i s u a l p r e s e n t a t i o n on r e c e n t d o m e s t i c and i n t e r n a t i o n a l d e v e l o p m e n t s . T H E C O U N C I L R E C O N V E N E D A T 5 : 3 0 P « M . , ON S E P T E M B E R 19, 1 9 66, I N T H E B O A R D R O O M O F T H E M A D I S O N . ALL MEMBERS OF T H E C O U N C I L W E R E PRESENT. T he 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 C o n f i d e n t i a l M e m o r a n d u m to b e s e n t to t h e B o a r d of G o v e r n o r s r e l a t i v e to the A genda f o r t h e j o i n t m e e t i n g of t h e C o u n c i l a n d the B o a r d on Se p t e mber 20, 1 9 6 6 . T h e M e m o r a n d u m w a s d e l i v e r e d to the F e d e r a l Reserve B u i l d i n g at P*M. The m e e tin g a d jo u r n e d a t 6 :^ 0 P.M* C O N F I D E N T IAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 20, 1966 1. Economic conditions and prospects. A. How does the Council appraise prospects for business costs and prices during the remainder of 1966? The Council anticipates that upward pressures on business costs and prices will intensify during the remainder of 1966. This will reflect a continuation of expanding demands as well as an exceedingly tight labor situation and the probability of increasing wage costs. B. Have Council members observed any significant recent changes in business expenditures or expenditure plans in response to tighter condi tions in markets for labor, materials, and credit? Have there been any significant changes in inventory policies? The members of the Council have not observed any significant recent changes in either business expenditures or plans. However, tighter conditions in the markets for labor, materials and credit, together with the proposed suspension of (1) the 7 per cent investment tax credit, and (2) the liberalized depreciation allowances, may result in some moderation in business investment plans and outlays in the months ahead. The members of the Council are not aware of any significant change in inventory policies. While there have been substantial additions to inventories, the inventory-sales ratio has not changed appreciably. 2. Banking Developments. A. By how much, if at all, does the Council expect the fall demand for business loans to exceed normal seasonal projections? Do the members expect banks to have difficulty in raising funds to meet such demands? If so, to what extent are banks resorting to refusals or discouragement of business loan requests? -2- A number of members of the Council report that in addition to loan requests from regular borrowers they are receiving loan applications from customers with excellent credit standings who have maintained good balances for years but have never previously borrowed, and who feel they are entitled to credit. The Council expects the fall demand for business loans to exceed normal seasonal expectations. Bankers expect to have considerable difficulty in raising funds to meet the credit demands of the economy. Some bankers are not at all certain that they will be able to meet adequately the seasonal requirements of their customers or commitments already existing. As a consequence, there is wide expectation that banks will continue to be obliged to refuse or discourage a growing volume of business loan requests. B. How have recent developments affected the ability and willingness of banks to attract funds through issuance of large-denomination negotiable CD's? Through issuance of small-denomination consumertype CD's? What is the prospect for renewed emphasis on sales of consumer-type CD's? The rise in interest rates in recent weeks which has lifted yields on prime short-term investments above the Regulation Q ceiling has limited the ability of banks in the money centers to maintain their volume of large-denomination negotiable CD's. Although there is no evidence of unwillingness of the money center banks to continue to bid for these funds, the ceiling has substantially curtailed their competitive ability. The present tendency to shorter maturities for CD’ s further aggravates the practice of borrowing short and lending long. Banks generally continue to find the small denomination consumer-type CD a helpful instrument in competing for individual savings. However, some banks are experiencing a net decline in consumer-type savings despite the use of CD's. The persistence of a strong demand for credit and the present high interest rate struc ture suggest the continued reliance on consumer-type CD's to help retain deposits. The ability to do so will depend to a great extent on any regulations which may be issued under the new legislation. C. How does the Council appraise the current and prospective state of the market for municipal securities and for Federal agency issues? The Council is not certain that the recent modest improvement in the market for municipal securities and for Federal agency issues -3- will persist. The present yields on these investments have made them attractive to certain institutional and private investors. However, the possibility of further sales by banks as they seek additional funds to meet seasonal loan requirements poses a threat that overhangs the market. D. How does the Council appraise the prospect of continued intensive competition for savings among banks, savings and loan associations, mutual savings banks, and market borrowers? The Council anticipates continued intensive competition for savings among banks, savings and loan associations, mutual savings banks, and market borrowers. The ability to compete also depends on any regulations which may be issued under the new legislation. 3. Balance of Payments. A. Are outstanding U.S. bank loans to foreigners likely to decline substantially further during the next six months? The Council does not anticipate that outstanding U.S. bank loans to foreigners will decline substantially further during the next six months. However, the continued tightness of credit suggests that there will be no important increase in foreign lending by U.S. banks in the months immediately ahead. B. Would the Council expect any significant easing of domestic credit conditions during the course of 1967 to be followed fairly promptly by renewed expansion of U.S. bank loans to foreigners? Although it is difficult at present to see any significant easing of domestic credit conditions during the course of 1967, such a development is possible if restrictive fiscal policies are employed. In these circumstances, U.S. bank loans to foreigners might expand, although there is no assurance that this would take place. With domestic credit demands tending to limit U.S. bank loans to foreigners, it might be appropriate now to consider the repeal of the present voluntary foreign credit restraint program. -4- C. Have Council members observed any significant recent changes in U.S. business plans to expand their operations abroad through foreign branches and subsidiaries? The Council members have not observed any significant recent changes in U.S. business plans to expand their operations abroad through foreign branches and subsidiaries. Presumably some plans may have been delayed or postponed because of the strength of the domestic demands and also the difficulty of obtaining funds both here and abroad. D. To what extent would the Council judge that U.S. merchandise exports are being hampered by supply bottlenecks and delivery delays or by limited availability of export financing? The Council is not aware that U.S. merchandise exports are being materially hampered by supply bottlenecks, delivery delays, or by limited availability of export financing. This is not to say, however, that exports could not be larger if domestic demand were less strong. E. How does the Council appraise the effects on the balance of payments of U.S. bank borrowing from the Euro-dollar market? It is difficult to appraise the effects on the balance of payments of U.S. bank borrowing from the Euro-dollar market without determining the use to which the funds are put. For example, if the funds are used to finance domestic transactions, the effect on our balance of payments may be different than if the funds are used to pay for imports. On the other hand, to the extent that U.S. bank borrowing in the Euro-dollar market reduces the supply of funds available to finance foreign buying of U.S. goods, our exports and the balance of payments may presumably be adversely affected. 4. What are the Council's views on monetary and credit policy under current circumstances? In general, the Council approves the continuation of a policy of monetary restraint in the critical period ahead. This policy implies (1) sufficient flexibility to meet seasonal demands and an orderly growth in the economy, and (2) time to make adjustments that may prove necessary in the banks' assets and liabilities. -5- The members of the Council are apprehensive about the impact on the credit and financial markets and the resulting distortions in the economy if monetary policy alone is to continue to be relied on to restrain demand. As a consequence, the members of the Council and bankers generally approve the recently expressed intent of the Administration to use fiscal policy and are greatly hopeful that fiscal policy will be employed to an increasing degree to restrain the economy. Such a program would include a reduction in Federal expenditures and, if necessary, an increase in taxes. ON S E P T E M B E R 20, 1 9 6 6 , A T 1 0 : 3 0 A . M . , T H E F E D E R A L A D V I S O R Y C O U N C I L H E L D A J O I N T M E E T I N G W I T H T H E B O A R D OF G O V E R N O R S OF T H E F E D E R A L R E S E R V E S Y S T E M I N T H E F E D E R A L R E S E R V E B U I L D ING, 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. T H E F O L L O W I N G M E M B E R S O F T H E B O A R D OF G O V E R N O R S W E R E PRESENT: C H A I R M A N MARTIN, V I C E CHAIRMAN ROBERTSON, GOVERNORS SHEPARDSON, MITCHELL, DAANE, MAISEL AND BRIMMER. M R . S H E R M A N , S E C R E T A R Y , A N D MR. K E N Y O N , A S S I S T A N T S E C R E T A R Y , O F T H E BOARD. OF G O V E R N O R S , A L S O WERE PRESENT. T h e m i n u t e s o f t h e j o i n t m e e t i n g a r e b e i n g p r e p a r e d in the office of t h e S e c r e t a r y of t h e B o a r d of G o v e r n o r s of the F e d e r a l Reserve S y s t e m . T h e i r c o n t e n t w i l l b e c o m p a r e d w i t h the n o t e s of the S e c r e t a r y o f t h e C o u n c i l . A s s u m i n g t h e y are in s u b s t a n t i a l agreement, t h e y w i l l b e r e p r o d u c e d a n d d i s t r i b u t e d to the m e m b e r s of the C o u n c i l . The m e e t i n g a d j o u r n e d a t 12:1_|_0 P . M . The n e x t m e e tin g o f th e C o u n c il w i l l be h e ld on November ll^_-l5, 1966*
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