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For release at 7: p.m., EDT
Sunday, September 11, 1966




Monetary Policy and the Allocation
©f Commercial Bank Credit
Remarks by
Andrew F . Brimmer
Member,
Board of Governors of the
Federal Reserve System
Before the
Vermont-New Hampshire
School of Banking
Amos Tuck School
O£
Business Administration
f

Dartmouth College
Hanover, New Hampshire
Sunday, September 11, 1966

Monetary Policy and the Allocation
of Commercial Bank Credit

Commercial banks are front-line troops in the current campaign
to moderate inflationary pressures and to enhance the over-all health
f

and stability of the Nation s economy. In general, as we x/ould expect,
they have acted conscientiously to restrain the extension of credit
and thus further the objectives of monetary policy.

All of us applaud

their efforts.
At the same time, however, many of our banks -- especially the
largest ones catering to the financial needs of leading national and
international corporations -- have found themselves in an extremely
difficult position:

as the availability of loanable funds has groxm

more slowly in the fact of a rapidly expanding demand for credit, these
banks have been pressed to increase their business loans at a rate
roughly equal to that registered a year ago.




To do this, they have embarked on a virtual scramble for funds:
They have competed vigorously for time deposits, although
they have become less-and-less successful in their efforts
to attract large denominated negotiable CD's.
They have liquidated marketable securities, frequently
at sizable capital losses.
They have borrowed from the Federal Reserve Banks,
although the principal reliance has been on the federal
funds market for short-term accommodation.
Over the summer, they have greatly increased their
borrowings from their Foreign branches, who have in turn
actively sought Euro-dollars.

-2And perhaps of special importance, the banks have changed
significantly the allocation of credit among different types of users.
For example, for far this year, they.have:
Reduced their purchases, and most recently have been
liquidating their holdings of — municipal securities
after having been a major supplier of funds to local
f
governments in the 1960 s,

—

Induced finance companies and securities underwriters
and dealers to seek other sources of funds -- particularly
in the capital market.
Been less-and-less billing to finance consumer purchases
of durable goods.
Been less-and-less billing to provide real estate loans
to potential home-buyers.
Virtually ceased their short-term financing of building
projects.
If asked, every bank undoubtedly would conclude that its pattern
of credit extension and types of portfolio adjustments undertaken so
far this year are appropriate -- given its individual circumstances. Yet,
I believe we should also ask whether, from the point of view of both
the national interest and of our financial system as a whole, the noticeable shift in favor of business loans should continue unabated. In my
personal opinion, the orderly and efficient functioning of our money and
credit markets —

as critical links in the total economy — would be

enhanced by a less skewed allocation of loanable funds at commercial banks.
To a considerable extent, many of the recent policy actions taken
by the Federal Reserve System -- especially the revision of discount
administration -- have been aimed at moderating the allocation of funds




and other inarleet adjustments during the present period of monetary
restraint.

These measures (which also included changes in reserve

requirements and other modifications applicable to certain types
of member banks

1

time deposits) have unquestionably been helpful.

But the current against which we have had to swim is particularly
strong. The pressure on banks to lend to business has been stimulated
and re-inforced by:
The high rate of business investment in fixed facilities
and inventories and the corresponding demand for external
funds.
The strong bonds of customer relationships and the
vigorous competition among banks for customers.
These are among the factors which have made it difficult for
the effects of monetary restraint to be fully registered where it
is most needed. For this reason, many of us have called attention
to the need for greater assistance from fiscal policy to ease the
burden of countering inflation being carried by the monetary instrument
Thus, we welcomed the anti-inflation program announced by the President
last week.




-4*
Business Spending and the External Demand for Funds
Business outlays have been a major source of inflationary
pressures in the U.S. economy during 1966.

These pressures have been

associated primarily with stepped-up spending for plant and equipment,
but the quickened pace of inventory building has also contributed to
the strain.
The latest survey of plant and equipment outlays announced
last week by the Commerce Department and the Securities and Exchange
1

Commission indicates that the Nation s businesses are still planning to
raise such expenditures by 17 per cent this year.

This is the same

rate of growth recorded a year ago when excess manpower and other
resources enabled our capital goods industries to respond to such expanding demand without exerting severe pressure on prices.

The latest

survey (for the first time since 1964) did not indicate an acceleration
in the pace of capital spending through the rest of the year; yet, it
also did not indicate any lessening in a rate of spending that may
have already reached an unsustainable level.
While a 17 per cent increase in fixed outlays is not a record
(the rise was 29 per cent in 1950 and 23 per cent in 1955), the years
1965 - 1966 would be the first time gains of this magnitude have occurred
back-to-back.

Moreover, the share of GNP accounted for by business

fixed investment climbed to 10.7 per cent in the second quarter of this
year*

This proportion was last reached during the capital goods boom

of 1956-57.




-5Signlficantly, a somewhat larger proportion of business capital
outlays this year has gone for equipment —
than was the case in the mid-1950's*

rather than structure

—

It will be recalled that the

7 per cent investment tax credit applies to equipment but not to buildings.
Of course, factors other than the investment tax credit have influenced
the amount spent on equipment, and our appraisal of the effects of the
tax allowance in the present inflationary environment should not rest
too heavily on the higher ratio of equipment outlays to total capital
goods outlays.
Yet, if the mix of plant and equipment had not changed in favor
1

of equipment since the mid-1950 s, total spending by business for fixed
investment this year would be about $2.5 billion below the current
annual rate of $78 billion.
Business inventories, another critical component of business
spending, have also expanded quite sharply.

Such stocks rose by 8.4 per

cent in 1965 compared with 5.1 per cent in 1964.
inventories have continued to expand rapidly.

So far in 1966,

For example, in June and

July, the average increase in manufacturer's inventories was almost
half again as much as the average gain in the previous twelve months.
While inventory holdings relative to sales are now no higher than in
1964 (and they are lower than in the early years of the present decade),
the inventory demand of the business sector still remains large in the
aggregate.




-6Indeed, if one combines fixed capital spending with inventory
expenditures, the sum of these types of business outlays currently
account for almost 12.5 per cent of GNP —
in 15 years.

the largest share of GNP

Moreover, even a slight retardation in sales could

produce an unusually large dollar amount of excess inventory.
The above evidence not only quantifies the very large growth
in business expenditures —

despite Presidential appeals for voluntary

moderation of capital outlays and the reduced availability of credit.
The evidence also helps to explain why business demand for credit has
grown so rapidly.

In 1964, corporations had an excess net cash flow

(or internally generated funds) over capital outlays (including inventories)
of about $1.5 billion.

Even in 1965 such outlays exceeded cash flow

by only about $4.5 billion.

Yet in the first quarter of 1966, corporate

expenditures on plant, equipment, and inventories exceeded internal
cash flow by a seasonally adjusted annual rate of $10.5 billion.

Last

quarter the deficit jumped to $13 billion, despite the continued growth
in corporate savings to about $58.5 billion.

Indications are that this

short-fall of funds will continue in the remainder of the year at about
a $12 to $13 billion rate.

This prospect clearly suggests that capital

outlays during 1960 will exceed cash flow in the corporate sector by
roughly twice the previous 1956 record of $6.1 billion.
These large business demands for external funds were reflected
in both capital market financing and loan expansion at commercial banks.




-7-

In the first eight months of 1966, nonfinaneial business firms raised
$11.5 billion in capital markets, compared to $7 billion in the
similar period of 1965.
At banks, firms raised another $9 billion (seasonally adjusted),
expanding their loans at near a 20 per cent rate, about the same as
last year. But over the combined-June-July period, such loans rose at
a 30 per cent annual rate —

the largest expansion in business loans

at banks for a two-month period in 10 years, despite increased bank
tightness. To some extent, of course, accelerated tax payments influenced the recent pace of loan demand. Moreover, business loans at
banks declined someuhat in August.
external business financing —

Nevertheless, the heavy trend in

including financing at banks —

continues

to be evident. Indeed, our expectations late last month uere that
business demands for credit, in both the capital market and at banks,
:rould continue to expand at rates similar to the ones I have just quoted.
In general, business borrowers have been extremely strong
competitors for commercial bank credit during the present period of
monetary restraint. For example, so far in 1966 monetary policy has
provided bank reserves through open market operations at a rate roughly
40 per cent as fast as during the same period of 1965.

Reflecting this

policy, total bank credit (loans plus investments) expanded at an annual
rate of 0.4 per cent during the first eight months of 1966, compared with




-8So far
10.2 per cent in all of 1965./ this year, total bank loans rose at a
all of
12.5 per cent rate, against 14.7 per cent in/1965.
the banks

1

In sharp contrast,

business loans expanded by almost 20 per cent during the

first eight months of 1966 -- or slightly faster than the rate of
increase registered in all of 1965.
Sources of Bank Funds: Competition for Savings and Portfolio
Adjustments
Banks have relied on a variety of sources of funds to meet
the expanding demand for business and other loans.

The method which

has received the most publicity was their active solicitation of time
deposits.

Over the first 8 months of this year, total time and

savings deposits expanded at a seasonally adjusted annual rate of 6.5
per cent.

This was less than two-thirds of the pace over the same

period in 1965.

While this suggests that banks as a whole were less

successful than last year in attracting deposit, a much more vital
development they reveal is visible behind the aggregate experience.
Banks had very large declines in passbook savings deposits as the
public shifted funds to higher yielding financial assets.

Savings

deposits at large banks for example, declined $4.4 billion in the
first eight months of 1966 after expanding by $3.1 billion in the
same period of last year.

On the other hand, time deposits other

than negotiable CD's -- offered at steadily rising interest rates
more than made up for this decline.

—

The latter type of time deposits

expanded by $7.3 billion so fair this year at large banks, more than




three times the 1965 pace.

The competition from banks for these

deposits, along with rising market yields, has in turn made it more
difficult and expensive for nonbank financial institutions to
attract deposits and shares.

With their inflow reduced, these

institutions have sharply reduced the availability and cost of the
credit they extend.

This reduction has been especially noticeable

in the case of residential mortgage lending.

Over the summer months,

banks have continued to attract consumer type time deposits, thus
contributing -- along with the securities markets -- to the
difficulties of non-bank institutions.

Smaller banks in particular

over the last three months seem to have been doing quite well in
competing for time deposits.
However, large denomination negotiable CD's, even at yields
which rose 100 basis points to 5-1/2 per cent since last December,
have not provided funds as rapidly as in 1965.

Since the ceiling

on time deposit rates has remained at 5-1/2 per cent, banks are
l

finding it increasingly difficult to retain their holdings of CD s
or to attract new funds.

As substitute financial assets, such as

finance company paper, provide yields above that rate, the banks

1

ability to compete for negotiable CD's will be lessened further.
Indeed, from June through August, New York City banks lost almost
$450 million of CD's; in the previous five months, these banks
were able to obtain only one-third as much money from this source
as in the same period last year.

During the month of September,

large commercial banks in the Nation as a whole face $5-1/4 billion
of maturing CD's.




Thus, large denomination negotiable CD's will

-10-

probably decline relatively as a source of bank funds —

and as a means

of financing a greatly expanded volume of business loans.
As the banks search for loanable funds during 1966 has run ahead
of the growth of time deposits, they have turned increasingly to their
own securities portfolios.

By thus adding to the market supply of

securities, banks have contributed significantly to the increase in
special tax bill financing late last month,
market yields.if 0 n e ignores the/banks have liquidated their holdings of
Treasury issues at an annual rate of approximately 11 per cent.

This

pace of liquidation is about twice that recorded in the same period last
year.

Consequently, many banks are now thought to have very few Govern-

ments in excess of the amounts required for pledging purposes.
The banks

1

holdings of other securities — mainly municipals --

have grovm at a seasonally adjusted annual rate of less than 6 per cent
so far this year, or about one-third of the pace of the same period in
1965.

While individual banks have expanded their municipal

holdings in 1966, it is becoming increasingly clear that large banks in
the aggregate have been net sellers since mid-year.

Moreover, in the

last few months, large commercial banks have also been net sellers of
the very attractively priced participation certificates and other
Agency issues.

To me this also is strong evidence of the degree of

portfolio adjustments being made to finance business loans.
Other kinds of loans have also been reduced in order to make
business loans —

mainly securities and finance company loans.

For

example, in the last three months, business loans at weekly reporting
banks rose $2.7 billion, or $1.0 billion more than last year at the
same time.

In the same period, other loans declined by almost $0.5

billion, compared to a $1.1 billion increase last year.




In New York,

•lithe comparison is more striking:

in this money market center which handles

such a large fraction of the Nation's total financial requirements,
business loans rose $1.3 billion over the last three months, compared
to $500 million in 1965; other loans declined by more than $1.0 billion,
compared to a modest expansion a year ago.
But even the considerable protfolio adjustments undertaken in
1966 have nut been sufficient, and banks have turned more and more to
other sources of funds.

Member bank borrowings at Federal Reserve Banks

have generally stayed in the y750-$o0Q million range over this summer -about $200 million more than last summer. The higher and more frequent
level of borrowing at the discount windoitf, 1 might add, reflects not only
the general bank scramble for funds but also the shifting of pressure to
more banks as alternative sources of funds become less available.

Earlier

in the year, country bank borrowing had risen sharply as demand pressures
and reduced time deposit inflows placed them in a tighter position. In
the spring and early summer, however, country banks gained more time
deposits and reduced their borrowing while heavy loan demands forced
reserve city banks to the window. Last month, larger banks reduced some
of their borrowing with proceeds from loan repayments, but country bank
borrowing increased again.

Parallel with the increased leveloof member

bank borrowing, the rates paid for Federal funds have risen to new
peaks, with the volume of transactions renaining at high levels. In
addition, over the summer pressure on large banks became so intense
that some banks borrowed very large sums from their foreign branches,
which in trun were actively seeking deposits in the Euro-dollar market




-12All of these efforts of commercial banks to obtain funds to meet
the huge demands for credit have been reflected in, and have contributed
to, very taut financial markets. Four times since December banks have
raised their prime rate as the cost of time deposits, market borroxzing,
and liquidation of investments has increased their own costs, and as their
own liquidity has become increasingly reduced. These indications of growing
market tightness have also been paralleled by changes in bank lending
standards.
Recent Changes in Commercial Bank Lending Practices
As some of you may know, the Board of Governors periodically surveys
a sample of member banks in order to detect any significant changes in
their lending practices. In the Spring and again about mid-year, our
surveys indicated that banks, in fact, were feeling the bite of monetary
restraint. Uhile the degree of response was obviously varied in this large
and diverse Nation, banks generally across the country apparently stiffened
their standards considerably in 1966. They indicated less willingness to
lend to new customers, customers outside of their local market area, and
finance companies. They suggested that they were looking more closely at
customers

1

long-run value to the bank and were enforcing compensating

balance requirements more strictly.

Loan requests were being scaled down

whenever possible, and the intended purpose of the loan was being given more
xjeight.

Yet, despite this evidence of increasingly tougher lending standards,

business loans continued to grow.
Consequently, last month, we again asked Federal Reserve Bank
Presidents to review the situation with a group of banks in their Districts.
Their conclusions were:




-

The tightness of banks has generally continued or accelerated,
with some exceptions. For example, smaller, less aggressive

-13banks were still in a comfortable position. Agriculturally
centered banks in the South and mid-West, in fact, were
past their seasonal peaks and expected to be quite comfortable this Fall. However, many of these banks expected
demand to be related to special situations — e.g. cotton
purchases in Memphis and grain marketing in the mid-West.
In the far West, the variation among banks was most striking.
In general, only the banks with Eastern customers were very
"tight".
Banks in a comfortable position were the exception, however.
The large aggressive, CD seeking banks were in an especially
tight position. They were concerned about future fund
sources, and they expected heavy loan demands this Fall.
Their Treasury securities were at minimum levels; they were
liquidating municipals and reducing mortgage and sales
finance company commitments. In their business loan markets,
increased selectivity was the rule. Compensating balances
and past customer relationships were more important. Emphasis
on local customers was the rule of the day. Fewer term loans
and shorter maturities were also emphasized.
Large banks in the New England District were cases in point.
They mentioned all of these factors plus refusal of new
business, no solicitation of nex/ clients, special reviews
of large loans, refusal to enter into large participations
with correspondents, and greater attempts to shift customers
to the market.
You would think from this review that the Board v7ould be content.
However, despite the obvious attempts of many banks to reduce loans, the
amount of business credit, as I have indicated, continued to expand
rapidly.

Moreover, a prevalent report received in the August survey was

that banks were under intense competitive pressures to make business
loans —

especially to old, established customers. Indeed, one had the

feeling that banks felt they must accommodate their business customers,
even, it seems, at the expense of virtually all other clients and the
absorption of heavy capital losses through liquidation of marketable
securities.




-14Customer Relations and Bank Response to Monetary Restraint
This reaction of the banking and financial system to the diverse
pressure placed upon it has suggested to some of us that, so far, general
monetary policy has not exerted sufficient restraint on business expenditures or on credit flows to the very sector that has been the dynamic
center of excess demand for resources.

In fact, business outlays and

the ability of corporations to finance these outlays seem to remain relatively exempt from a good share of the general attempts to moderate the
level of aggregate demand.

At the same time, other sectors —

both real

and financial -- have borne a disproportionately large share of the burden
of credit restraint.
There are understandable —
this conjecture of circumstances.

and perhaps obvious —

reasons for

One, of course, is the myriad of

institutional constraints embodied in law, regulation and customary
practices that tend to reduce flows of credit to, say,the municipal
and mortgage markets. But, for the major problem at hand —

inflationary

pressures originating in the business sector, financed in large part
with bank credit -- it is clear that the principal factor is the preferred
position of the business loan customer at a commercial bank. Banks
expend considerable effort in a highly competitive milieu to cultivate
relations with business customers. The credit requests of large, old,
and important clients are, therefore, exceedingly difficult for a banker
to deny.

If denied, such customers are quite likely to be attracted by

future offers of competitor banks. Thus, not only does the bank attempting
to curb business loans run the risk of losing profitable business, it
also risks losing deposits -- its basic raw material.




Consequently, in

banking it appears to be common practice to place business customer
demands on a very high priority. To meet these demands, banks seem
willing to bite ever deeper into other parts of their portfolios.
Such developments are not inconsistent with higher lending
rates or tougher loan standards, or even the scaling down of customer
loan requests or demands that we have learned from our surveys are in
fact going on. But, in the environment of today, the net result remains
a very high rate of increase in loans to just those firms whose expenditures are presenting the most difficulty. In addition, the efforts of
banks to finance the loan demand of businesses by liquidation of
securities and reduction in other loans can produce some of the side
effiect —

e.g., disorganization in financial markets -- that the

Federal Reserve always seeks to neutralize.
In addition to the obviously adverse effects of these kinds of
reactions by the commercial banking system on the health of the economy,
we must also not lose sight of their implications for an individual bank.
The strong efforts of banks to meet business credit demands are increasingly exposing banks to additional risks by continuously erroding
their buffer stock of liquid assets at the very time when their ability
to attract time deposits has been greatly reduced. Therefore, it is
gratifying to note that many banks -- in consideration of both their selfinterest and the public-interest —
their business loans.

have already limited the grox^th of

I am convinced that even more banks would prefer

to curtail their business loan expansion, but the kinds of customer
relationship that I have described have made it extremely difficult for
them to do so.




-16Revision of Federal Reserve Discount Adxninist ration
Despite the strength of bank-customer relationship (and perhaps
precisely because of this bond), the continued health of the total economy
requires that every encouragement be given to banks to moderate their
loans to business. With this in mind, just ten

days ago, the Federal

Reserve System addressed a special letter to all member banks asking for
their support in achieving this objective, TJe fully expect these banks
to give us this support.
In sending this letter, we made it clear that we are convinced
that an orderly expansion of bank credit should occur in our growing
economy.

No one should have any doubts whatsoever about the genuiness

of this position, because no one in the Federal Reserve System takes
exception to it. On the other hand, we also feel that the growth of creditfinanced spending should not exceed that which can be accommodated by
the expansion of our physical resources.
Moreover, the letter also advised the member banks that they will
be expected to consider the reduction of their business loans as one
of the methods to be used in adjusting their position when obtaining
accommodation from the discount window. This, we feel, is very much in
keeping, in the present circumstances, with the Federal Reserve Act's
concern with "sound credit conditions.

11

Indeed, the foreward to the
lf

System's Regulation on member bank borrowing specifies that each Federal
Reserve Bank give due regard to the purpose of the credit and to its
probable effects upon the maintenance of sound credit conditions, both
as to the individual institution and the economy generally."
Federal Reserve System



,!

To the

sound credit conditions" in banking today means

-17a slower growth in business loans and a reduction in the liquidation
of other parts of bank portfolios.
Reserve Banks will keep these circumstances in mind in reviewing
each member bank's request for accommodation at the discount window. The
discount officers at Reserve Banks, in turn, will keep in mind

ff

that

banks adjusting their portfolios through loan curtailment may at times
need a longer period of discount accommodation than would be required for
the disposition of securities/' Of course, seasonal and emergency assistance will remain available -- as always.

Moreover, although a member

bank may not find it necessary to borrow from its Federal Reserve Bank,
it should also keep in mind that a slower growth of business loans is
clearly in the national interest —

including the interest of its banking

system.
In asking banks to pursue this course of action, we are not unmindful of the difficult position in which many institutions will find
themselves in dealing with their long-established customers. At the same
time, if business loans are

to be curtailed, bank managements may x/ell

have to take a new look at its loan commitments. Obviously no one is
asking a bank to default on a formal and legally binding commitment to
provide funds to a borrower. On the other hand, many lines of credit
outstanding at banks are not firm and binding commitments. In these cases,
it seems entirely proper for banks to re-examine with their customers
the latter's credit needs in the light of the necessity to restrict
loans to business. Undoubtedly, opportunities can be uncovered to revise
these credit lines in a downward direction.




I believe the recent revision in the administration of the
Federal Reserve discount window will be quite helpful to banks in dealing
with their business customers.

The market for bank loans is now quite

imperfect, as I attempted to indicate earlier.

In many banks, present

lending policies almost amount to an informal agreement to satisfy
virtually all requests for funds made by business customers.

Indeed,

many banks come very close to saying as much in seeking deposits from
their business clients. The prime rate and compensating balance conventions have not served very well to limit this commitment. Expressed
differently, price and non-price terms used by banks have not, as in
many other markets, served to erode the excess demand for business loans.
A mortgage loan or a loan to a finance company can be denied; securities
can be sold.

But if an increase in the prime rate does not discourage

potential borrowers, banks seem to have developed no ready way to reduce
excessive demands of their large business customers.
In these circumstances, the Federal Reserve actions provide
needed external assistance to supplement the banks

1

own allocative

machinery in the business loan area. At the same time, I thnk that all
concerned look forward to the time when the banking system itself develops
a balancing mechanism which will make out new discount administration
program of much less significance.
In the meantime, however, we are urging, and directing our policies
toward,a reduction in the rate of growth of business loans. Each member
bank will be expected to make the market oriented decision as to which
particular customer loans are curtailed.

The end result, however, should

be a gradual and orderly reduction in the growth of loans to businesses.
This result, as I have attempted to show, will be not only in the national
 interest,


but also in the interest of banks*

-19Orchestration of Monetary and Fiscal Policy
As I mentioned at the outset, we have felt for sometime that a
greater share of the effort to counter inflationary pressures should
be borne by fiscal policy. My personal view was based not on any
reluctance to use monetary policy but on a clear recognition of its
limitations —

including its differential impact on particular sectors

of the economy.
When the President announced last week his determination to
expand further the contribution which fiscal policy can make in the
fight against inflation, the Federal Pveserve Board responded immediately and favorably.

Ue took note of the fact that the proposals

in the program are aimed at moderating the exceptionally strong demands
for goods, services and credit which have generated both higher prices
and higher interest rates.

Our own efforts have been directed at the

same objectives.
There is no need to list the details of the President's program,
because these have been described fully in the press.

However, I would

like to make several observations without attempting to judge the implications of the proposed measures for moentary policy. Clearly all
of us must wait until the Congress has responded to the President's recommendations with respect to:




Holding down non-essential appropriations.
Suspension of the 7 per cent investment tax credit until
January 1, 1968.
Suspension of accelerated depreciation on buildings and
structures until January 1, I960.

But, in the meantime, I personally think these steps are clearly
in the right direction. In fact, just two months ago, in a speech here
in New England, I suggested that —

as a minimum —

the investment tax

credit should be suspended to help ease the inflationary pressures
originating in the unsustainable rate of business spending for fixed
investment. At the time, I also recognized that such a move would entail
a number of technical problems and time lags before its effects could
be registered.

Yet, I felt (and still feel) that suspension is desirable

to avoid providing an extra stimulus in exactly the area in which more
restraint is called for.
In his message, the President called upon the financial community
to give close attention to the allocation of credit among competing users.
As indicated above, the Federal Reserve has been converned with the
differential rates of growth of business loans at member banks, and our
recent letter was designed to help curb the rapid increase. Tie also
registered our concern for the stability of securities markets if banks
chose to adjust their positions primarily through sales of securities -particularly municipal issues. Thus, this earlier move by the Federal
Reserve was entirely in line with this part of the President's request.
In addition, the President*urged that we remain alert to any
easing of inflationary pressures so that the restraint of monetary policy
can be lessened as quickly as possible.

His expression of concern with

the present level and trend of interest rates was particularly strong.
Ue clearly cannot forecast the future

course of interest rates.

But the stimulus to aggregate demand in the economy would be moderated




-21as the program outlined by the President moves into execution.

This

in turn should ease the pressures in the credit and financial markets.
Moreover, the slackening in sales of securities by Federal Agencies,
also announced by the President, should enhance this prospect. If
these circumstances do materialize, the upward pressure on interest
rates should also be moderated.
In the meantime, the Federal Reserve System will continue to be
alert to any easing in inflationary forces in order that monetary policy
can be adjusted accordingly.