FOMC Minutes

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. September 12, 1961, at 10:00 a.m. Martin, Chairman Allen Balderston Irons King Mitchell Robertson Shepardson Swan Wayne Treiber, Alternate for Mr. Hayes Messrs. Ellis, Fulton, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Clay, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Baughman, Coldwell, Einzig, Garvy, Noyes, and Ratchford, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Messrs. Holland and Koch, Advisers, Division of Research and Statistics, Board of Governors Mr. Knipe, Consultant to the Chairman, Board of Governors Mr. Yager, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Messrs. Eastburn, Hostetler, Parsons, and Tow, Vice Presidents of the Federal Reserve Banks of Philadelphia, Cleveland, Minneapolis, and Kansas City, respectively -2 9/12/61 Mr. Anderson, Financial Economist, Federal Reserve Mr. Bank of Boston Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Assistant Cashier, Federal Reserve Bank of Atlanta Mr. Bowsher, Economist, Federal Reserve Bank of St. Louis Chairman Martin noted that Mr. George W. Mitchell, who took his oaths of office as a member of the Board of Governors and as a member of the Federal Open Market Committee on August 31, 1961, was today attending his first meeting as a member of the Committee. Chairman Martin also noted that according to his present schedule he would be absent from the next two meetings of the Committee. For one of those two meetings, Vice Chairman Hayes also expected to be absent. Accordingly, in the anticipated absence of both Mr. Hayes and himself, Chairman Martin suggested that it be understood that Mr. Balderston would preside at the Committee meeting in question. it No objection being indicated, was so understood. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on August 22, 1961, were approved. Upon motion duly made and seconded, and by unanimous vote, Mr. Ernest T. Baughman was elected to succeed Mr. Mitchell as an Associate Economist to serve until the election of a successor at the first meeting of the Federal Open Market Committee after February 28, 1962, with the understanding that in the event of the discontinuance of his official connection with the Federal Reserve Bank of Chicago, he would cease to have any official connection with the Federal Open Market Committee. 9/12/61 Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period August 22 through September 6, 1961, and a supplemental report covering the period September 7 through September 11, 1961. Copies of these reports have been placed in the files of the Open Market Committee. In supplementation of the written reports, Mr. Rouse made the following comments: Open market operations supplied a large volume of reserves to the market--$699 million on a delivery basis--since the last meeting of the Committee. These reserves offset heavy drains stemming from changes in currency, float, and gold and foreign accounts. All of these reserves were supplied through outright purchases of securities, and by last Wednesday the System Account portfolio amounted to $27.8 billion--the highest it has ever been. Of the $699 million increase in System holdings since the last meeting, $660 million was in Treasury bills. This brings the bill portfolio to $2,8 billion, $166 million above the level of last February 17, the day prior to the beginning of operations outside the short-term area. Our purchases were partly responsible for bringing bill rates down to about 2.30 per cent in the case of the 91-day issue. However, our bill portfolio will decline by $144 million on Thursday, since we bid in the auction yesterday to run off our holdings of this week's bills. In addition, if reserve projections are borne out we will have a sizable amount of selling to do in the next statement week, but we hope to sell as many coupon issues as we can, while holding our bills. These sales should result in higher bill rates, which might well be helpful in view of our deteriorating international position. However, as a more general matter, I doubt whether such higher bill rates can be maintained if free reserves should remain in the $500-$600 million range. The approach of the Treasury's financing program, and later the program itself, were the center of attention in the market during the recent period. The terms of the advance refunding are regarded as generous by the market and the program as a whole has received generally favorable comment. Although ideas have not yet begun to jell as to how many of the $7.6 billion of the "rights" outstanding might be exchanged, 9/12/61 there is no reason, barring some unforeseen development, why the size of the turn-in should not be satisfactory. I might point out, in this connection, that in the advance refundings held last March and September, about 31 per cent of public holdings of the "rights" were exchanged. The System's holdings of the two "rights" total $700 million--$562 million of the 2-1/2's of 1965-70 and $138 million of the 2-1/2's of 1966-71. We hold $10 million of the 3-1/2's of 1980, $41 million of the 3-1/2's of 1990, and $5 million of the 3-1/2's of 1998. I see no reason for the System to exchange any of its holdings of the "rights", and plan no exchange. We have been informed, incidentally, that Treasury trust accounts, which currently hold somewhat over $1-1/4 billion of the "rights", plan to exchange up to $1 billion of such holdings. The balance of the Treasury's financing program calls for the raising of $5 billion in cash between now and mid-October. This came as no surprise to the market, except perhaps for the size of the June tax anticipation bill, which some had expected would be larger than $2.5 billion. The Treasury indicated to the press that except for the possibility of borrowing small amounts from time to time, the program announced last Thursday may be sufficient to meet the Treasury's cash needs for the remainder of the calendar year. Whether events will turn out this way depends upon a number of factors, including the Treasury's decision as to whether it will handle the $7 billion Even if November 15 maturity on a cash or an exchange basis. additional cash financing this year is avoided, indications are that the Treasury will be in the market shortly after the new year begins. Our own projections, for example, show a need for about $3 billion in new cash by mid-January. The heavy schedule of Treasury financing over the balance of the year thus affords only brief intervals for overt policy action by the System. In response to a question, Mr. Rouse said there should be a period in the latter part of October when the Treasury financing schedule would permit overt policy action if the System so desired. There might also be such a period in the Thanksgiving-Christmas area. Chairman Martin said he thought the only completely clear period might be in late October. November 2, if it The Treasury apparently could delay until wished, the announcement on its November refunding. -5 9/12/61 Mr. King inquired concerning the yields available under the terms of the advance refunding, to which Mr. Rouse replied that the cost of the extension to the Treasury would be in the range of 4-1/4 to 4-3/8 per cent. The yield to the present holders of securities eligible for exchange would be in the area of 4.16 to 4.20. Thereupon, upon motion duly made and seconded, the open market trans actions during the period August 22 through September 11, 1961, were approved, ratified, and confirmed. Mr. Noyes presented the following statement on economic developments: Economic developments, such as current movements in things like retail sales, production, employment, and prices, seem relatively unimportant in the total complex of events of recent weeks. The resumption of bomb testing in Russia, the continued tension in Berlin, the labor negotiations in the automobile industry, and the prospects for a price increase in steel all seem to loom much larger than the fact that unemployment remained at 6.9 per cent of the labor force, department store sales were substantially unchanged from July to August, production was probably up another point on the index, or that wholesale prices have continued their sidewise movement, as consumer prices rose, due largely to an increase in food costs. Even our estimate of GNP for the current quarter, at around $527 billion, seems stale as Government officials and others focus attention in their public statements on such figures as a $54O billion GNP by year end, or $575 billion by the end of next year. The Federal deficit for fiscal 1962 even seems to have become yesterday's news as public discussion focuses more and more on whether we are likely to achieve the balance predicted by the President and the Secretary of the Treasury for fiscal 1963. While it goes without saying that one must avoid being unduly influenced by the dead hand of the past, it is equally important not to lean too heavily on projections and forecastsno matter how carefully contrived--in shaping current policy. It is perfectly proper to speculate on the future course of economic events and to project, either by highly technical mathematical manipulations or long practice, past experience into the future. For some sorts of policy planning, estimates -6 9/12/61 However, it takes or projections of this kind are unavoidable. only a little familiarity with the heroic assumptions involved to make clear that it is futile to speculate now as to whether or not a GNP of $575 billion in the fourth quarter of 1962 is "inflationary", and it certainly would be foolhardy to be influenced in current policy formation one way or the other by such an exercise. All this is by way of a rather lengthy prologue to, and apology for, a very brief and undramatic report on current Frankly, there is nothing in current data, most developments. of which relates to the month of August, which calls for modification of the earlier generalization that the recovery has progressed rapidly, carrying almost all indicators to above their previous peaks but without evidence of excessive exuberance. Some stimulation from added defense expenditures appears to be just about offset by a lower level of consumer spending than might ordinarily be expected at this stage of the cycle. In addition to the facts about production, employment, prices, and retail sales that I have already mentioned, further evidence of this rough balance can be found in the rise of both exports and imports in July, in the Commerce - S.E.C. report, released today, rf a very moderate upward revision of plant and equipment expenditure plans, and in the strong but not atypical behavior of manufacturers sales and orders. The likelihood that labor negotiations in the automobile industry will be settled without a prolonged strike adds to the stability o the current situation, whatever the longer In addition to the run implications of the settlement may be. wholesale and consumer price indexes already mentioned, sensitive industrial material prices have shown little change recently. Consumer credit outstanding, which declined in July, appears likely to decline again in August. At the same time, the Treasury has announced, as was antici pated, a program to borrow over $5 billion of cash in the next month or so. looking further in the financial area for clues, the situation is much the same, with bank credit expansion just about seasonal. Stock prices have been fluctuating in a rela tively narrow range, after their rapid run-up in the spring and early summer, With the money supply remaining almost constant, seasonally adjusted demand deposit turnover has declined a little since May, which is quite unusual for a period of vigorous expansion in GNP. One might argue, on the one hand, that were it not for the increasing stimulus provided by the public sector, the recovery might be less vigorous--perhaps even in jeopardy. On the other hand, it is argued that the vastly increased liquidity of the economy, especially in the hands of consumers, constitutes a 9/12/61 sort of powder keg of potential spending, which could be touched off by a very slight shift in peoples' psychological attitudes. My point, in summary, is that up to the present time there is no evidence to suggest that stimulus from public sector will be withdrawn, or even reduced, nor of a dramatic increase in consumers' spending or expressed intentions to spend. Hence, it appears that the precariously balanced upward movement in the economy, which has prevailed for some months, is being maintained. Mr. Koch presented the following statement on credit developments: Outstanding commercial bank loans and investments This followed a large increase declined somewhat in August. in July, due in the main to Treasury financing operations. The course of bank credit developments over the summer months is always greatly affected by the size and timing of Treasury financing operations, since loan demands normally show little seasonal change on balance. Business borrowing from banks, however, the most volatile element in the loan portfolio, normally begins to pick up in August and early September, and this year's rise has thus far less. been of about seasonal proportions or possibly a little The heavy seasonal borrowers like food processors, commodity dealers, and trade outlets are beginning to come into the banks. One aspect of the business loan picture that has struck me these last few months has been the large amount of gross new borrowing despite the relatively moderate change in the net volume of loans outstanding. Whereas many firms are borrowing from banks, a large number of others are repaying bank debt, to some extent in the case of the larger firms with the proceeds from security financing. This large volume of gross new business borrowing from banks probably reflects in part the larger than seasonal increase in inventories that has occurred since March. Turning to the capital markets, new corporate bond financing fell off sharply in August, more than would have The September calendar has also been expected seasonally. been light so far, but it is expected to pick up later in Stock financing in recent months has been low the month. in dollar volume but high in number of participants, indi cating the increased availability of equity money to smaller, and possibly newer, concerns. New municipal and mortgage financing has continued in fair volume throughout the summer months. 9/12/61 As for the nation's liquidity, the money supply, narrowly defined to include only currency and demand deposits, changed The rise in in August for the fifth straight month. little time and savings deposits at commercial banks, particularly that in time certificate form, slackened slightly in August after having maintained a sharp 15 per cent seasonally adjusted annual rate of increase earlier in the summer. You may also have noted that withdrawals in savings and loan associations were particularly heavy in July, the latest month for which such data are available, and that outstanding shareholdings declined for the first time in several years. Withdrawals are normally heavy in July, however, so on a seasonally adjusted basis the drop merely meant that the rate of growth of savings and loan shareholdings dropped off somewhat. Insofar as the liquidity of financial institutions is concerned, I was struck, on reviewing financing developments again after several weeks away from the data, by the recent sharp increase in the secondary reserves of commercial banks, by which I mean their holdings of Government securities matur ing under a year. The ratio of these holdings to deposits has increased to over 12 per cent, up sharply from earlier in the year and now at the highest level since mid-1954. Entering as we are on a period of at least 18 months of large-scale Treasury financing, a large part of which will of necessity have to be in short-term form, the liquidity of commercial banks would likely increase considerably further in coming months unless bank credit expansion is restrained. In that case, somewhat higher short-term interest rates would no doubt be needed to induce a larger volume of nonbank invest The loan-deposit ment in short-term Government securities. ratio of all commercial banks considered as a group continues only two percentage quite high and at 55 per cent is still points below its recent high reached in the middle of last year. Turning to bank reserve positions, free reserves averaged about $475 million last week after three weeks during which they approximated $550 million. Last week was a week of low float, however, so the lower free reserve average was accompanied by as easy money market conditions as had characterized the earlier weeks. In terms of total reserves, or more precisely seasonally adjusted reserves available for private deposit expansion, the situation has not changed materially over the three weeks since the Committee last met. Such reserves have shown practically no change on balance over this period, averaging about $19.2 billion in both of the weeks ending August 16 and September 6. 9/12/61 Looking ahead, the projections of both the staff of the Federal Reserve Bank of New York and that of the Board suggest free reserves between $550 and $600 million again this week. In the following two weeks, market forces, unless their effect is offset by System action, would tend to increase such reserves markedly, mainly as a result of the mid-month rise in float, Only in the final week of the coming interval between meetings of this Committee will the Desk be likely to have to supply reserves to the banking system. Late in September and early in October, market forces, including payment for purchases of the new tax anticipation bill, could utilize as much as $700 million of bank reserves. In considering what open market operations would be most appropriate for this Committee to adopt for the coming three week period, it is of relevance to note that since mid-June and possibly since even earlier in the spring, we have experienced a rather sustained, if slight, downdrift, or at least sidewise movement, in most broad banking and money measures, that is, in total commercial bank credit outstanding, total deposits, money supply narrowly defined, and total reserves regardless of how defined. This has happened with average weekly free reserves varying in a range of between $400 and $600 million, with the feel of the market being generally quite easy, and with the Federal funds rate below two per cent most of the time. On the face of it, these developments might call for some further easing in policy in the weeks immediately ahead. Two circumstances have to be weighed before reaching such a decision. In the first place, international developments are in a state of crucial flux, domestic economic conditions are on a steady rise, and Government fiscal policy is adding Seasonal private materially to exansionary market forces. loan demands and Government short-term borrowing will be potent factors for bank credit and monetary expansion through out the rest of the year, particularly in the next few weeks. These developments all call for caution in easing credit and monetary policy further at this time. Secondly, the fact that the Treasury will be in the market with new cash and refinancing ventures throughout the entire three-week period prior to the next meeting of the Committee normally calls for maintaining an even keel in monetary policy. Some slight easing action, however, has occasionally been followed in periods of Treasury financing in the past and such action would not likely be either unfair or misleading to market participants or the Treasury if adopted currently. All this adds up in my mind to maintaining the status quo in open market policy over the next three weeks, but being 9/12/61 especially alert to the fact that market developments, particularly on the expansionary side, could develop quite suddenly, thus requiring prompt re-evaluation of the appropriateness of current policy. Mr. Young presented the following statement on the balance of payments and related matters: The disturbingly large transfer of gold and dollars from the United States to foreigners in July, reported to you at the last meeting, now appears to have been mainly accounted for by temporary factors. These include an extra large outward capital movement, a reduced trade surplus, reflecting especially a big, contraseasonal rise in imports, and the seasonal increase in tourist expenditures. It is all too easy to over-emphasize and over-rationalize the temporary causes of any swing in our payments balance from the less adverse to the more adverse, and to conclude that the payments balance is really not so grievous a problem after all. The fact of the matter is, however, that our background is one of a decade of sizable deficits and, in consequence of the cumulation of these deficits, a diminishing margin of monetary reserve protection. Accordingly, any swing from smaller to larger deficit, even if temporary, must be viewed with concern. At the same time, the balance-of-payments situation must not be allowed to get out of focus. According to very prelim inary indications of the New York Reserve Bank's flash report on U. S. transfers of gold and dollars to foreigners for August, the U. S. balance of payments for the latest month must have been in close balance. Projection for September and the remaining months of this year is nothing but guesswork. As of the moment, our best guesses suggest further deficit, but not of alarming size unless aggravated by adverse confidence developments that activate outflows of short-term funds. The reduced trade surplus mentioned above was the result of a rise in imports more than offsetting a marked recovery in exports. Imports on a seasonally adjusted basis rose a full 16 per cent, the largest rise in any single month in the postwar period. It seems doubtful that a rate of increase of this size can be sustained. Exports also rose significantly on a seasonally adjusted basis, and regained a $20 billion annual rate, about $1/2 billion higher than in April and May. The demand situation continues favorable in Europe and elsewhere for U. S. exports, and while the gains ahead may fall well behind those of imports, they should still contribute positively to holding down our balance-of-payments deficit. 9/12/61 -11- It is too early, of course, to evaluate the recent measures taken by the United Kingdom to correct its chronic deficit in its basic balance of payments. The spot pound has strengthened considerably but the forward pound remains at a sizable, though moderately reduced, discount. In July, the trade deficit decreased modestly further, but mainly because of reduced imports. In August, curbs on outward capital flows showed signs of taking effect. In addition, the IMF drawing strengthened U. K. reserves and made evident to those short of sterling the risks in their positions. In August, some inflow of investment funds and reflow of short term funds to London apparently occurred to take advantage of the high levels of British interest rates. The wage pause that the British are endeavoring to enforce is of particular interest. So far, its strict enforcement has been limited to the public sector and to the minimum wage categories of the private sectors which have to have Government approval. A major test looms up later this year when wage claims for railway and mining workers in the public sector and for the engineering trades in the private sector will come to a head. In August, the monetary reserves of Germany continued the decline which had set in in July. Since the basic balance on current and recorded long-term capital account remains in surplus, the main influence appears to be the withdrawal of foreign funds invested in Germany on a short term or on a speculative investment basis. The Bundesbank, despite the outflow of foreign funds, has pressed ahead with an easy, or still easier, monetary policy. Comparable money rates recently have either been as low or only moderately higher than in the U. S. Meanwhile, commodity prices in German wholesale and retail markets have remained fairly stable, but wage costs have been showing marked increase--about twice that of the increase in labor productivity. The French accumulation of gold and foreign exchange reserves has been on an ascending scale--amounting to nearly Since the trade seven months. $900 million for the first account has been in approximate balance or moderate surplus, an exceptional capital inflow and, more recently, better than usual tourist receipts appear to provide the explanation. Because of the large foreign exchange accumulation, the French authorities repaid in August the remaining debt to the European Payments Union creditors amounting to a little over $300 million. 9/12/61 -12- Resurgence of Canadian economic activity and decline in Canadian unemployment is now well confirmed by current economic data. In recent months, the Bank of Canada has aggressively promoted easy credit conditions, including active purchasing Bond yields have been in the long-term sector of the market. held stable at just under 5 per cent and money rates have declined to levels close to those in New York. In the meantime, monetary expansion has attained a pace that appears very rapid by Canadian historical standards--an annual rate of 15 per cent or so. The Canadian dollar has been showing only slight variation around the level of 97 cents. Apparently this level has been holding without official support. At the bargain rate for Canadian dollars, there has apparently been active buying of Canadian securities by Americans. Mr. Treiber presented the following statement of his views on the business outlook and credit policy: Since the last meeting of the Committee the international This development implies political situation has worsened. still further increases in spending for defense. It increases the possibility of a more rapid step-up in business and con sumer spending; it increases the possibility of the emergence So far, however, there is no of a speculative psychology. discernible evidence that the trend of the economy or of public psychology has changed significantly. While the over-all expansion of economic activity is continuing at a healthy rate, there are no clear signs of an lagging and Consumer spending is still acceleration in pace. surveys of consumer buying intentions point to a continued cautious attitude. Business inventory building appears to be moderate and in line with the current stage of the business cycle, and there is nothing in current loan data or in reported inventory plans to suggest a very rapid inventory build-up in operating The economy is still the immediate period ahead. considerably below capacity in terms of both labor force and physical plant. What is the probable trend of prices? The increases in July in the consumer price index and the wholesale price index were dominated by seasonal advances in the prices of food and farm products, and do not seem to reflect a sudden shift in the forces of supply and demand. The expansion in over-all economic activity that now appears in prospect is unlikely to 9/12/61 -13- create any strong and general price pressures from the demand side in the immediate future. Yet we cannot be complacent about prices. There is the highly important question as to whether there will be a strong upward push on prices from the cost side, resulting from wage increases in the steel and auto industries and other wage increases growing out of wage negotiations in other industries. While we do not know the full import of the proposed arrangements between the United Auto Workers and American Motors Corporation and General Motors Corporation, the settlements related to pay seem generous. Increased fringe benefits add importantly to costs as do increases in direct wage rates, The total increases seem to be well above the average improvement in productivity throughout the economy. Increases of such size tend to lead to increases in wage rates in other industries regardless of the extent to which produc tivity in those industries may have increased; this is of special significance for the service industries. It seems to me that the cost of living is bound to rise unless some of the benefits of increased productivity are shared with consumers through some reduction in prices or improvement in quality of manufactured goods. The prospects of such sharing are dim. Public and Government pressures in this direction would be welcome. The bank credit picture has changed little in recent weeks. The large drop in August in loans and investments at the weekly reporting member banks was associated with a large drop in bank holdings of United States Government securities and security loans--a logical aftermath of the upsurge in July in connection with large Treasury borrowing. In contrast, business loans showed only moderate strength. Consumer loans and loans to finance companies increased somewhat in August. Bank liquidity continues to be satisfactory. The recently announced Treasury financing will result in increased bank loans and investments, and in due course the newly created deposits will find their way into the private spending stream. The Treasury's advance refunding has been favorably received; it has been viewed as tangible evidence of the desire of the Treasury to pursue a conservative debt management program. Since the Treasury is now engaged in a large and complex financing program, an "even keel" in the money market is desirable. While international political and military tensions have been increasing, our international financial position has been deteriorating. Our trade surplus has declined greatly compared with the first quarter of 1961. With further economic expansion 9/12/61 at home and less ebullient economic activity abroad, our imports are likely to rise much more quickly than our exports. Our balance-of-payments problem is as serious as ever. We have two major jobs to do and several minor ones. As a country we must strive with all our power to keep our costs down; success in this respect will promote stability at home We must persuade the more developed and strength abroad. countries of the western world to assume a larger portion of expenditures abroad for defense and economic aid. The solution will not come soon; it will not come easily. Meanwhile, we are vulnerable to substantial demands upon us for gold. Since the last meeting of the Committee the price of gold has risen further in the London gold market, attaining about $35.20 per ounce. As international political tensions increase, the demand for gold is likely to rise further. Capital flows between foreign centers may increase the demand upon us for gold if the receiving country follows the practice of keeping a larger portion of its reserves in gold than does the country no great monetary experiencing the outflow. While there is still incentive to move funds from New York to London on a covered interest arbitrage basis, the advantage in such a movement may increase. As the British succeed in their present stabilization program--and we hope they will--there will be increased incentives to move funds from New York to London on an uncovered basis. A year of exploratory negotiations on possible ways to strengthen the international financial system has pointed up the many com Confidence, especially international plexities to be resolved. confidence, is a fragile flower. We must be constantly alert so to conduct our monetary and fiscal affairs that we provide no basis for those abroad to raise questions regarding the ultimate soundness of the dollar. A policy of monetary ease is still called for. At the same time there is an intensification of the need for alertness to developments that may call for a shift in policy. The risk that economic expansion will falter has receded further while the danger of rapid deterioration in the international financial position of the United States has increased. Thus it is even more important now than it was a few weeks ago to pay special attention to international considerations and resolve doubts on the side of less ease. Higher short-term interest rates should be encouraged. The rate on three-month Treasury bills, the bellwether of short term interest rates, is now below 2-3/8 per cent, the midpoint of the 2-1/8-2-5/8 per cent range that has existed over the last year. We think that domestic and international developments make 9/12/61 -15 it desirable that the rate be in the upper part of that range. A rise in the Federal funds rate also seems appropriate. It would seem desirable that the effective rate on Federal funds be a bit below the discount rate, ranging between 2 per cent and 3 per cent, perhaps averaging about 2-1/2 per cent. To achieve these results, less attention should be given to the precise level of free reserves. We believe that the authority to engage in transactions in longer-term securities should be continued and that the discount rate should not be changed. Nor would we suggest a change in the directive, which was revised at the last meeting of the Committee. Mr. Ellis said the few available statistics for August on business conditions in the First District suggested that the recovery was proceeding. However, the trend could not be characterized as vigorous. According to the statistics, there had been an interruption of the recovery trend in July; production figures declined and despite higher electric power output the level was below that of a year earlier. The textile industry appeared to be coming to life, with civilian demand strengthening and military procurement rising, while shoe production was running 5 per cent below 1960. Slower sales had caused some factories to hold back price increases, but it was still hoped that sales would be strong in the fall. A large newsprint producer who had been looking for an opportunity for some time to increase prices so as to catch up with wage increases now found his competitive position affected by the decline in to construction, July is the Canadian dollar. As usually a weak month in New England and this year had been no exception, with the total down 13 per cent from a year ago. Total nonagricultural employment, seasonally adjusted, rose slightly in July and about matched year-ago levels, but most manufacturing industries, 9/12/61 -16 along with transportation and public utilities, were employing fewer people than a year earlier. Consumer spending was fairly good, with auto sales fair and department store sales quite vigorous. The latter had exceeded year-ago levels in all but one week since May. Perhaps the District's recovery movement was showing up best in the financial statistics, Mr. Ellis said. For the year to date, business loans at weekly reporting banks were up about 4 per cent compared with a decline of 2 per cent for the country as a whole. The level of total deposits had held about even during the past four months, with the result that the average loan-deposit ratio was up two points from 64 to 66 per cent, whereas the comparable ratio for the country as a whole showed a drop of two points to 60 per cent. The New England average was influenced somewhat by the fact that one large bank had a ratio of 71 per cent. While the growth of total deposits was disappointing, demand deposits had been doing well. Even since the April peak for the nation, they had continued to grow in New England. The monthly survey of mutual savings banks indicated that 11 out of the 80 banks in the survey reduced their average mortgage lending rate by 1/4 per cent from June to July. Turning to policy, Mr. Ellis said the reports from the Account Manager indicated that the Desk had succeeded in when it weathering a period was necessary to supply large quantities of reserves without upsetting the market or interest rate levels. Staff projections for 9/12/61 -17 the next three weeks suggested that offsetting actions of the kind undertaken in the past period would have to be reversed to avoid developing an excessive degree of ease during the Treasury financing period. He felt that the Committee had established a satisfactory and correct stimulative policy and degree of ease, and that it should endeavor to maintain the status quo during the ensuing three-week period. This would mean preserving the current targets with respect to total reserves, as shown in the staff projections, free reserves at existing levels. and maintaining In his opinion it would be desirable to maintain contact wth the longer-term market, and therefore he would renew the special authorization. He saw no need to change the directive or the discount rate at this time, Mr. Irons noted that, according to current reports, the Eleventh District was sustaining considerable damage from Hurricane Carla. for this developmert, however, along fairly satisfactorily. Except conditions in the District had been moving Various measures, such as industrial production, employment, and petroleum production and refining, were all moving upward on a satisfactory and sound basis. There had been an increase in retail trade recently, perhaps reflecting to some degree anticipation of the Texas sales tax that became effective the first of September. The damage caused by the hurricane seemed certain to run into large figures; the rice crop probably had been wiped out. A good part of the cotton narvest was probably in, but there seemed some -18 9/12/61 likelihood of heavy damage to the citrus crop. However, agricultural conditions in the western part of the State hadbeen good and the cotton situation in the southern plains area was favorable. As to District banking developments, in gross loans, gain in there had been an advance some liquidation of investments, deposits, both demand and time. and a fairly substantial From the standpoint of liquidity, the condition of the banks was about the same as it was virtually no borrowing from the Reserve Bank. had been, and there Federal funds trans actions had been showing an excess of purchases over sales for District banks as a whole, but the situation in Houston was completely different from that in Dallas, the Houston banks being consistent sellers and the Dallas banks consistent buyers. Turning to policy, Mr. Irons expressed himself as satisfied with developments during the past three-week period. In his opinion, neither current or prospective economic developments suggested a need for further easing, and the Treasury was in the market. Therefore, he would recommend continuing about the same degree of ease that had prevailed, with any deviations on the side of mild firmness rather than additional ease. This would suggest a bill rate in the range of 2-3/8 - 2-1/2 per cent, with the Federal funds rate running from about 2-3/4 per cent down to about 2 per cent and free reserves in the area of $450-$500 million. He would favor continuing the special authorization covering operations in longer-term securities, and he would not recommend a change in discount rate or the directive. the 9/12/61 -19 Mr. Swan said that he found few, if any, significant changes in the Twelfth District data that had become available since the previous Committee meeting. Nor did there seem to have been any significant change in business attitudes in the District since that time. On balance, there appeared to be some continuing improvement, but it was not notably vigorous. In brief, there had been little or no intensification of the gradual upward movement. ment moved up a little In August, employ in California, the only State in the District for which August figures were yet available, and based on employer hiring schedules a slightly more than seasonal increase in employment might be expected in September. There was no particular evidence of pressure on the availability of bank credit at the major District banks, Mr. Swan said. The banks seemed to have funds to offer, and borrowing from the Reserve Bank had been negligible. On the other hand, during the past few weeks two large savings and loan associations in San Francisco found themselves much tighter than they had anticipated due to a somewhat lesser flow of funds from their shareholders during the summer and some pickup in the demand for real estate credit. unexpected development, This was indicated to have been a rather and he was not prepared to say whether it was of general significance. As to policy, Mr. Swan said he recognized the various possibilities of some increase in credit demands that might have to be checked. It -20 9/12/61 seemed to him, however, that at the moment these remained only possibilities. One indication of such a development would be a surge in consumer spending, but no such surge had occurred as yet. He recognized also that the effects of fiscal policy in all probability would be expansionary in immediately ahead, the several months ahead. however, As to the period even apart from the fact that the Committee would be circumscribed by the Treasury financing program, he saw no reason for positive action to change monetary policy in of tightening. Instead, it the direction seemed to him that the Committee should continue about the present policy. To him, that would mean a bill rate from 2-1/4 to 2-1/2 per cent and free reserves ranging from $500 to If doubts arose, they might be resolved on the side of $550 million. less rather than more ease. He would recommend no change in the discount rate or the directive, and he would continue the special authorization. Mr. Deming said that a brief statement of recent Ninth District economic developments would be "more of the same." mining, Except for iron general nonagricultural activity was moving about in the nation. line with In July, District nonfarm personal income was 4.1 per cent ahead of July 1960, about the same as the national gain of ,.2 per cent. On the other hand, District agriculture continued to suffer from the effects of drought and net farm income in July was 6.5 per cent below a year earlier. Thus the District gain in total personal income from a year ago had been only 2.8 per cent against the national gain of 4.2 per cent. -21 9/12/61 One indication of somewhat lesser strength in the District than nationally was to be found in the forecast of the Minneapolis employment authorities for employment in the Twin Cities area, which showed an estimated gain of 5,500 jobs from July to November. In the same period last year there was no gain, but in 1958 the gain was 12,000 and in the like period of 1954 the gain was about 18,000. Mr. Deming commented that the District banking situation remained about the same as it had been. During the past three weeks, he said, the Reserve Bank had been doing some intensive work on bank loan prospects over the balance of 1961. Loan officers saw loan demand as being no more than normal during this period, although some of them believed there might be some shift to direct bank loans from commercial paper financing. Thus far, they saw little borrowing for inventory. As to policy, Mr. Deming said that for the next three weeks he felt that quite obviously the Committee should go along on an even-keel basis. Even so, however, he agreed with those who had suggested that any doubts should be resolved more on the side of tightness than additional ease. Also, he would agree that the System must be alert to developments. Particularly during the past three weeks, he had been disturbed by having heard more and more comments from the people with whom he talked about the certainty of price increases. It was being said, for example, that if one was going to build, obviously that could be done more cheaply now than two years hence. Altogether, there seemed to be more signs in the air suggesting some increase in belief in the inevitability of more inflation. -22 9/12/61 While bankers apparently did not foresee any particular increase in loan demand, Mr. Deming commented that he did not see how a GNP figure of $54O billion could be attained by the end of this year without some increase in bank loans. Accordingly, he felt that there would be a strengthening tendency for such loans to increase. At least, it would seem that the rate of bank credit expansion during the latter part of this year, while perhaps not explosive, might be stronger than generally expected. Looking ahead, whatever it position, if therefore, the System should be alert to do could so a; to be in a position to move to a more restrictive necessary, particularly since the periods when there was an opportunity to move would be limited. The quality of alertness that had been mentioned might be even more important in year than it would normally. the latter part of this As he had said, nowever, for the next three weeks there did not seem to be much to do except to proceed along the same pattern as now being followed, easier. although being careful not to be any He would not recommend changing the directive or discount rate, and he would favor continuing the special authorization. Mr. Allen reported that developments the in were for the most part, out not altogether, In the four weeks ended September 2, Seventh District of an encouraging nature. Seventh District department store sales were 3 per cent higher than last year, an improvement over the earlier part of the year. Manufacturers' shipments of virtually all types of appliances rose substantially in June and July, and local 9/12/61 -23 manufacturers advised that this reflected higher consumer sales rather than inventory building. in that trend, however, Furniture manufacturers had not participated new orders having been substantially below a year ago throughout the first seven months. Reports from the vacation areas were that spending had been disappointing. Although total employment in Seventh District centers was about equal to last year in July, employment in manufacturing was lower in Most employers expected a moderate increase in virtually all categories. September. District steel makers expected production to reach an annual rate of 120 million tons in 100 million tons at present. the fourth quarter compared with about The talk had been that selective price increases of 4 to 5 dollars per ton of finished steel would be made effective after the wage boosts in price increase in August of 1958, October. it Since the last general was said that employee costs had risen $8 per ton, or about 10 per cent, and that effective prices had declined slightly. Excellent corn and soybean crops and favorable price trends for cattle and hogs had improved farm income prospects in the District, Mr. Allen said. Turning to automobiles, he commented that the low sales in August were attributed to dealer hesitation because of strike possibilities and to inventory shortages of some models. On August 31 the stock of new cars was 663,000--530,000 1961 models and 133,000 1962 models. It was now 9/12/61 -24 expected that 520,000 cars would be produced in September and 1,800,000 in the fourth quarter, which would mean total 1961 domestic production of 5,651,000 automobiles. The sales forecasts now were 400,000 in September and 1,600,000 in the fourth quarter, and if those figures were realized the year's sales would total 5,581,000--close to the year's expected production. Sales of foreign-made cars were not included in the figures he had quoted, but they were estimated at 375,000 for 1961 compared with 499,000 in 1960. Seventh District weekly reporting banks showed a relatively stronger rise in business loans than all such banks in the country, Over the past three weeks commercial loans at those banks rose $54 million, more than half of the total expansion reported by all leading city banks together. This experience was attributable to an increase in loans to metals firms. However, the figures were not large, and available indicators of bank liquidity suggested that the banks were in position to handle considerable loan expansion. banks, For the money market short-term liquid assets averaged 20 per cent of deposits compared with 10 per cent a year ago. The large Chicago banks had had a basic surplus position of about $30 million for the past two weeks. Continuing, Mr. Allen commented that the rise in business activity was slower in the June-August period than in the previous three months, but that this was not surprising for a summer season and there was much to support the view that activity would continue to rise, and -25 9/12/61 possibly at a faster pace, in the remainder of 1961 and in 1962. the developments which were likely to accompany such an However, increase in activity and which would call for a shift in monetary policy were not yet in and for that reason, evidence, in the Seventh District at least, and also because of the Treasury' s program, he would favor continuing for the next three weeks that degree of ease which had prevailed for some time now. He saw no reason to change the discount rate or directive and he continued to oppose the special authorization. Mr. Clay reported that since midyear, loan volume at Tenth District weekly reporting banks had shown an increasingly strong performance. Loan demand was comparatively weak at District banks, especially city banks, during the first half of the year, although the recession-induced decline in business and consumer loan volume was not as pronounced as in the country as a whole. of weekly reporting banks, During August, total loans other than money market and Commodity Credit Corporation loans, registered the largest increase for the month of any recent year. Real estate loans advanced for the fifth consecutive month. Consumer loans, however, continued to contract moderately. Increased credit requirements of seasonal borrowers appeared to have been the chief factor in the rise in business loans. loans to commodity dealers, While the largest increase was in gains were registered in business loans except trade firms. all classes of 9/12/61 -26 Mr. Clay characterized developments in the domestic national economy as continuing to be very encouraging. weakness in While the cyclical credit demand might be over and substantial credit expansion might appear before the end of the year, bank loans had not yet entered the period of major cyclical advance. This was evident from the fact that the classes of business whose bank indebtedness tends to show the greatest sensitivity to cycles in economic activity decreased their loan volume during August. In view of the desired expansion in economic activity and the needed credit availability for economic expansion, Mr. it would be appropriate, Clay felt that so far as the private economy was concerned, for monetary policy to continue in approximately the same posture as during the period since the previous meeting of the Committee. This policy would provide about the same degree of monetary ease as in the past three weeks. it In view of the international flow-of-funds problem, also would call for the maintenance of the Treasury bill rate within the range of recent weeks. In other words, open market operations that he would consider appropriate would implement clause (b) of the directive, as adopted at the August 22 meeting, by "encouraging credit expansion so as to promote fuller utilization of resources, while giving consideration to international factors." The dominant factor during the period ahead, however, would be the recently announced Treasury financing program. that reason, the maintenance of what had come to be referred to as an "even keel" policy was indicated. This phase of operations need not For 9/12/61 -27 interfere, however, with the pursuit of the Committee's basic policy objective of encouraging credit expansion for the private economy. Mr. Clay expressed the view that no change was called for in the discount rate or in the directive. He felt that the special authorization with respect to operations in longer-term securities should be renewed. Mr. Wayne said that Fifth District business conditions continued to improve, with little deviation from the pattern of recent weeks. Nonfarm employment, recession high. seasonally adjusted, had climbed above the pre Manufacturing man-hours also had moved up, but fell short of last season's high. Textile prices were generally firm, and the demand for bituminous coal appeared to be a little by production and shipments. confidence than previously. considerable optimism, ment and trade, manufacturers' stronger to judge Reports from businessmen revealed more They were appraising the near future with they commented favorably on the trends of employ and they reported substantial recent increases in orders and shipments. by good growing conditions, Farmers had been favored generally and tobacco prices were at record levels. District banks continued in an easy position, and business loan growth was stronger than in the nation as a whole. As to policy, Mr. Wayne expressed the view that the course followed during the past three weeks had been appropriate. In the face of wide swings in market forces, the Desk had done a good job in close to the targets suggested three weeks ago. Personally, holding he was glad 9/12/61 -28 to see the bill rate decline moderately after the previous rise, although he would not care to see it go significantly lower. Mr. Wayne said he felt that during the past year System policy had accomplished about all that could have reasonably been expected. Bank credit had increased something like $13 million during the past year, which apparently was adequate to meet the needs of the economy. Over the same period the money supply also increased, but only a little more than $2 billion. During the past six years, he noted, the increase in demand deposits adjusted was only about one-sixth as much as the increase in bank credit over the same period. had not remained in The fact that more deposits the form of demand deposits seemed to him to indicate that the public did not need more demand deposits. It was illogical to assume that the System could bring about an increase in by forcing more bank credit on the public unless it the money supply was prepared to pay a price that would be unjustified, particularly in relation to the international position of the dollar. The economy was now more liquid than a year ago, and money could be obtained by reversing the process that had been going on and converting liquid assets. In conclusion, Mr. Wayne said that he would not favor changing the discount rate or the substance of the directive, and that he would continue the special authorization. Mr. Robertson said that both prevailing economic conditions and the Treasury financing program seemed to dictate an even-keel policy for the next three weeks. In the circumstances, necessary to comment further at this time. he did not consider it 9/12/61 -29 Mr. Shepardson expressed the view that the general economic situation called for a continuation of present policy. On the other hand, he could not help but be concerned about the present and prospective levels of Government expenditures and about the continuing and possibly increasing international tension. Within the limits imposed by the current Treasury financing program, it should lean somewhat toward a little seemed to him that the Committee less ease. Also, it to changes that could develop on rather short notice. should be alert He would favor no change in the directive at this time. Mr. King noted that the balance-of-payments problem was still could not be solved by monetary policy alone. serious, but that it saying this, however, was not important. In he did not mean to infer that the confidence factor Confidence in some currency was not only a psychological necessity but almost a spiritual necessity to an alliance of countries that believed in free markets. Any such alliance seemed bound to erode unless there was some currency in which the countries involved could have reasonable confidence. As to current policy, Mr. King expressed the view that a continuation of the current degree of ease was in order. of the bill rate in unnecessary. He would visualize maintenance the same area as at present and would consider any rise Even though prospective selling operations out of the Open Market Account might produce some tendency in increase would be as small as possible. in his opinion be maintained in that direction, he hoped any Likewise, free reserves should the same vicinity as at present. He thought

Federal Reserve (1961, September 11). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610912

@misc{wtfs_fomc_minutes_19610912,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {1961},
  month = {Sep},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610912},
  note = {Retrieved via When the Fed Speaks corpus}
}