FOMC Minutes

A meeting of the Federal Open Market: Conmmittee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, PRESENT: January 7, i964,. at 9:30 a.m. Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Mr. Mr. Mr. Mr. Mr. Balderston Bopp Clay Daane Mills Mitchell Mr. Robertson Mr. Scanlon Mr. Shepardson Mr. Shuford, Alternate for Mr. Irons Messrs. Hickman, Wayne, and Swan, Alternate Members of the Federal Open Market Committee Messrs. Ellis, Bryan, and Deming, Presidents of the Federal Reserve Banks of Boston, Atlanta, and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Fr. Noyes, Economist Messrs. Baughmar., Brill, Eastburn, Furth, Garvy, Green, Holland, Koch, and Tow, Associate Economih.ts Mr. Stone, Manager, System Open Market Account Mr. Coombs, Special Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Broida, Assistant Secretary, Board of Governors Mr. Williams, Adviser, Division of Research and Statistics, Board of Governors Mr. Yager, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Miss Eaton, Secretary., Office of the Secretary, Board of Governors -2 1/7/64 Measrs. Mann, Ratchford, Rawlings, Jones, Parsons, and Grove, Vice Presidents of the Federa: Reserve Banks of Cleveland, Richmond, Atlanta, St. Louis, MinneEpolis, and San Francisco, respectively Mr. Willis, Economic Adviser, Federal Reserve Bank of Boston fir. Sternlight, Manager, Securities Department Federal Reserve Bank of New York Upon motion duly made and Seconded, and by unanimous vote, the minutes of the meeting of the Federal Opei Market Com mittee held on December 3, 1963, were approved. Before this meeting there had been distributed to the members of the Committee a report from the Special Manager of the System OFen Market Account on foreign exchange market conditions and on Open Market Account and Treasury operations in foreign currencies for the period December 17, L963 through January L, L964, together with a supplemental report covering the period January 2 through January 6, 1964. Copies of these reports have been placed in the files of the Committee. Supplementing the written reports, Mr. Coombs stated that the Treasury gold stock would remain unchanged this week. The Stabilization Fund had roughly $82 million on hand with prospective sales of at least $45 million in January. The Russians had been pretty much out of the market throughout December but might be back in sizable volume during January and subsequent months. Mr. Coombs reported that since the Last meeting of the Committee the Account had paid off $12Z2 million of the swap drawing of $136 million 1/7/64 -3 on the Bundesbank, Leaving a balance of onL) $14 million. It also had paid off $10 million of the swap drawing on the Netherlands Bank, leaving a balance of $70 million. On the other hand, the swap draw ings of Swiss francs on the Swiss National IBank and the Bank for International Settlements rose from $150 million to $220 million in order to mop up heavy repatriations of dollars banks at the end of the year. In the Light ol Coombs said, the increase of the Swiss franc s million to $300 million on November 22 seemed the right order of magnitude. In recent years, Mr. Coombs continued, tended to bring about some strengthening of the dollar and weakening of the Continental European currencies during the first half of the year. Again this year, the seasonal awing might enable the Account to make good progress in paying off both the Swiss franc and guilder debts, which now amounted to a combined total of $290 million. hand, th4 normal seasonal outflows fror On the other the Netherlands and Switzerland might be frustrated to some extent by a further tightening of credit in both countries. The increase in the Dutch discount rate last week from 3-1/2 to 4 per cent had been immediately reflected in a strengthen ing of the guilder rate. Nevertheless, the basic strength of the guilder had been undermined by the LO per cent wage increase recently granted and Dutch officials continued to express fears of a sizable deterioration in the Dutch balance of payments. Mr. Coombs was not sure how those 1/7/64 -4 two opposing tendencies would net out. But if credit conditions in Amsterdam tighitened so severely as to prevent the Account from paying off the swap debt, he thought that urging the Netherlands Bank to accept a guilder bond issued by the U. S. Treasury would be fully justified. He had, in fact, already discufsed this possibility with President Holtrop and was hopeful that the latter would agree. This would gave the Account the "take-out" it might need. Similarly, Mr. Coomba said, an anti-inflationary program now being put together by the Swiss Government might also make it more difficu t for the Account to buy the Swiss francs it needed to clear up the Swiss franc debt. Here again, however, there were possibilities of further issue of Swiss franc bonds by the U. S. Treasury which could provide a take-out, if necessary. At the next Basle meeting on Friday of this week, Mr. Coombs said, he would discuss with the Bank for Intenational Settlements and the Swiss National Bank such a Treasury issue in the amount of rotgh.y $75 million. the normal seasonal weakening of Continental European currencies during the first half of the year had often been accompanied by a seasonal strengthening of sterling, Mr. Coombs observed. It was conceivable that the Bank of England might take in a very sizable amount of dollars during the first quarter of 1964. The Account might, therefore, find it use ful to draw upon its sterling swap Line during this period with the anticipation that speculative pressures arising out of the British 1/7/64 -5 election later in the year probably would enable such a swap drawing to be paid off without undue delay. In response to a question by Mr. Mitchell, Mr. Coombs said he was hopeful that the recent tightening of money in Switzerland would not produce an actual inflow of fund,;; the more immediate risk was that such tightening would impede the normal seasonal outflow. It was his judgment that the authorities would use various direct controls to immobilize funds, and that they would try to avoid interest rate actions. The Long-term rate was a politically sensitive matter in Switzerland because an increase would be reflected within six months or so in rates paid on outstanding mortgages in the country. Mr. Mills referred to Mr. Coombs' statement that the System's guilder and Swiss franc drawings could be funded by issuance of Treasury bonds denomirated in those currencies if the System had difficulty in repaying the drawings. He asked whether this would not amount to sweeping the matter under the rug temporarily, and whether the System would nt be better off if it had some incettive to live more closely with the problem rather than postponing the day of reckoning. In reply, Mr. Coombs said that his understanding of the rationale of the swap arrangements was that they were intended to meet short-run problems. If a particular drawing took longer to unwind than had been anticipated because of market events or government policies, he thought it desirable to substitute a type of credit appropriate to a longer run -6 1/7/64 situation. Under such circumstances the problem was not the System's, but the Treasury's. Mr. Laane commented that in his apinion this was the appropriate relation between the System's responsibilities and those of the Treasury. Mr. Hayes observed that Mr. Mills ad put his finger on a funda mental issue--to what extent should System swaps be used to reduce gold losses? In his judgment, security issues by the Treasury were appro priate to tiis purpose. Mr. Hickman asked whether the object of the proposed drawing on swap line with England, and the subsequent sale of pounds, was to prevent a possible gold outflow rather than to eliminate the seasonal pattern in exchange rate movements, and Mr. Coombs replied in the affirmative. He added that the British authorities might be changing their thinking about the appropriate size cf their dollar holdings. In any case, a swap drawing and subsequent repayment seemed to be a legitimate way of bridging a short-run improvement in the British interna ional position during the first quarter. British elections in May or June probably would result in an outflow from that country, which would permit repayment of the drawing. In response to a question by Mr. Deming regarding the outlook for further Russian gold sales, Mr. Coombs reported that the Russians had sold slightly over $500 million of gold in 1963, which was about $300 greater than their normal annual sale. It was his understanding -7 1/7/64 that their gold sales in coimection with extraordinary wheat purchases might run to at least $700-$800 million. In 1964 their sales might be $300 million greater than normal, or Ferhapa as much as $400 million greater. He noted, incidentally, that the growth of offical gold reserves in 1963 had been fairly sizable. The Gold Pool had acquired and distributed to members $640 million of gold, while South Africa had also increased its gold reserves. In 1963, the total monetary gold stock h ad probably risen by at least $750 million, or nearly 2 per cent. In re.ponse to other questions, Mr. Coombs said he had no firm basis for evaluating the accuracy of recent conflicting reports of the volume of Russian gold holdings. exchange hold:.ngs could be ascertained, He thought their foreign however. Thereupon, upon notion duly made and seconded, and by unanimous viote, the System Open Market Account transactions in foreign currencies during the period December 17, 1963 through January 6, 196k, were approved, ratified, and confirmed. Mr. Coombs recommended renewal, on a three-month basis, of seven reciprocal currency arrangements maturing on or before February 6, 1964. The arrangements, with their amounts and dates of most recent renewals, were as follows: Bank of Sweden, $50 million, October 17, 1963; Swiss National Bank, $150 million, October 18, 1963; Bank for International Settlements, $150 million, October 18, 1963; 1./7/64 -8 Austrian National Bank, $50 million, October 24, 1963; Bank of Japan, $150 million, October 29, 1963 (date of original agreement); Bank of France, $100 million, November 6, 1963; and German Federal Bank, $250 million, November 6, 1963. Benewal of the seven swap arrangements for a further three-month period each was approved unanimously. Mr. Coombs noted that the System had drawings of $20 million on the Bank for International Settlements and $55 million on the Swiss National Bank, and the Bank of Italy had a drawing on the System of $50 million, all three of which were reaching their first three-month maturity. He recommended renewal in each case for another three months, if that should prove desirable. Mr. Ellis inquired whether the System's desire not to continue renewing the drawings indefinitely was understood by the Italian authorities, and Mr. Coombs said that it was. However, he noted, there was a problem of choosing among several alternative means of repaymet =. l3 his opinion, the most effective and appropriate method might be for the U. S. Treasury to redeem its outstanding lira denominated bands. The proposed renewal of the three drawings for a further three-month period each, if such appeared desirable, was noted without objection. Before this meeting there had been distributed to the members of the Committee a report from the Manager of the System Open Market 1/7/64 -9 Account covering open market operation\s in U. S. Government securities and bankers' January 1, acceptances 1964, for the period December 17, 1963 through together with a supplemental report covering the period January 2 through January 6, have been placed in L964. Copies of these reports the files of the Committee. In supplementation of the written reports, Mr. Stone commented as follows: As we approached operations during the past few weeks we were prepared to encounter the problems that so frequently beret the money and securities markets at this time of year. As matters turned out, however, the recent period was more like sleepy August than turbulent Decetiber, for the market mechanism handled smoothly and with grceat efficiency the seasonal strains and stresses that correrged upon it. This result apparently reflects a considerable degree of advance preparation made by banks and other market participants in an effort to minimize the adverse impact on them of the wide and erratic swings in market condition, that have sometimes occurred in mid- and late December. Furthermore, corpora ticns appear to have been unusually liquid for this time of the year, for they were sizable buyers of bills and suppliers of funds to the market during much of the period. For our part, we stood at the edge of the market, so to speak, injecting reserves at times, and absorting them at other times, while aiming at keeping the machinery working smoothly aga.nst the background of a steadily f-.rm tone and feel in the market. Operating in this way, we were content to let free reserves come out where they might--an approach that was necessary in any case since the reserve figures at times bounced around pretty capriciously. As the written reports have indicated, Federal funds were at 3-1/2 per cent throughout virtually the entire period, while dealer lending rates generally remained in a 3-3/4 - 4 per cent range. Member bank borrowing was generally in the range of recent months except for a rise last week as banks prepared for the year-end statement date. The securities market have generally been steady over the year-end period. In the case of Treasury bills, rates 1/7/64 -10- on three-month maturities have hugged a 3.51-3.54 per cent range while the six-month bills ranged about 12 to 15 basis points higher. Toward the year-end, there was a better-than-seasonal demand for Treasury bills, which produced some rather aggressive dealer bidding in the regular auctions that preceded Christmas and New Year's. So far in the new year, however, there has been little evidence of the net demand that often tends to pull rates lower at this season. In yesterday's auction, the average rates were about 3.53 and 3.67 per cent, or very nearly the same as on December 16. In the Treasury note and bond markets, the downward price trend that persisted through most of December leveled off just around Christmas and there wes some price recovery in the final days of the year. hile most market observers still feel that the major anticipated influences on the market this year--notably a prospective tax cut, good busi ness, and a continuing external payments problem--will tend to produce higher rather than lower rates, there was also a feeling that the market had discounted these prospects to some appreciable extent. Still, the Lnderlying market atmosphere remains a bit cautious as dealers and investors wait to see what balance may emerge bftween private forces of credit demand and supply, and what the Treasury may be offering in the period ahead. The corporate and municipal bone' markets have enjoyed a respite from major new issues during the past few weeks, with prices holding about steady. Starting today, however, somle larger new issues will reach those markets and give a Particular attention more realistic test to current rates. will focus on the $130 million New Yorc Telephone issue, scheduled for competitive biddin,~ today. This is a Triple-A rated issue and yesterday's market talk suggested a reoffer ing rate around 4.50-4.55 per cent. A suecial comment is in order regarding the bankers' acceptance market, which has experienced a larger-than-usual increase in supplies this year-end season. Moreover, since the period of seasonal rise in supplies started with in ventories already at a relatively high level, total dealer holdings of acceptances have risen to new records in recent days. Nevertheless, there has been no apparent concern on the part of most of the acceptance dealers. One dealer limited his participation in the inventory rise by increasing his rates just prior to the last meeting of the Committee, but the others did not follow and by January 2 this dealer 1/7/64 -11- returned to the rate level ciuoted by the other dealers in order to continue effective participation in the mar ke t. To assist the acceptance market through this period of seasonal pressure the System gradually increased its outright holdings of acceptances to a peak of $71 million. System holdings of acceptances under repurchase agreements briefly reached a peak of about $95 million but had re ceded to $79 million by the end of the period. Treasury financing plans recently have been in a state of flux. Unitl a few days ago it was anticipated that the Treasury would follow up this week's auction of $2-1/2 billion June tax bills with a ca.sh offering of $3/4 to $1 billion in a note or short 3ond. Now it appears that the Treasury's cash position may e strong enough without this additional borrowing, but the Treasury is instead giving serious consideration to making an advance refunding offering, possibly with an announcement tomorrow and the books open next week. WE understand that no final decision has yet been made on this financing. The market, incidentally, has no hint of this possibility. The Treasury will meet with its advisory commjttees near the end of this month and will announce on January 30 the terms for refund ing the certificate and bond thar matu-e on February 15, of which a little over $4 billion aie held by the public. The staff projections indicate a very substantial bulge in reserves from market factors in the next few weeks and accordingly I would recommend an increase in leeway for change in System Account holdings between Committee meetings to $1.5 billion. After eliciting information onL currant competitive rate relations in investment markets between bankers' acceptances and negotiable time certificates of deposit, Mr. Mills asked why the acceptance dealers allowed themselves to be saddled with large inventories, rather than reducing them by adjusting their rates to meet competition. Mr. Stone replied that most acceptances were bought by banks as investments. There had continued to be some small buying recently, and the dealers 117/64 -12 seemed confident that they would work their inventories down unless some sharp upvard movement occurred in other market interest rates. He agreed witf, Mr. Mills' suggestion that the dealers might be worrLed about retaliation by their banker clientele to rate increases, but added that such increases probably would be made anyway if inventories were not reduced in the next week or two. Mr. bill Mitchell asked whether in Mr. Stone's judgment Treasury rates would have been as stable as they had been recently if the Desk had formulated its objectives in terms of reserves rather than interest rates. It seemed to him that the advance preparation for seasonal needs by banks and corporaticns, to which Mr. Stone had attributed the recent smooth performance of the market, had been possible becatse market participants believed short-term rates were pegged, and it. might not have occurred if tie Desk had been following a reserve objective not known to the Mr. Stone said that narket, the New York morey market banks had worked their he vy basic reserve deficiencies down close to zero as the mid December tax and dividend date approached in order to have room to take on additional loans. In his judgment, such actions by banks would have made the market machinery work smoothly whether or not the Desk had operated with a reserve objective. In reply to Mr.. Mitchell's question of whether banks had not reduced their reserve deficiencies in December at the cost of further monetary expansion, Mr. Stone said he doubted that there was any 1/7/64 -13 evidence to the effect that creditworthy borrowers who wanted loans in December could not get them. Lf the DIerk had attempted to use a free reserve target, Mr. Stone continued, there would have been wide swings in market conditions because of shifts in the distribution of the given volume of reserves and changes ii utilization. the intensity of reserve On balance, market conditions would have been firmer if the level of free reserves had been hel'. stable. Mr. Mitchell commented that stabil:.ty in market conditions of the recent sort might deprive the Desk of useful signals. Mr. Stone replied that enough changes occurred to peimit judging the market pretty well. For example, he said, figure:, on bank borrowings had fluctuated considerably in Decenber, indicating changes in the degree to which reserve needs were not being met by the existing supply of reserves. In reply to a question by Mr. Hickman, Mr. Stone said that if the Account bad held free reserves at about $100 million recently the 90-day rill rate probably would have been several basis points higher than it was--perhaps around 3.60 per cent. In response to questions about prospective Treasury financing operations, Mr. Stone observed that Federal tax receipts currently were considerably above the estimates of only a few weeks ago. While the Treasury's cash position might run rather low in April, it was possible that additional cash borrowings would not be necessary during the first half of the year except for $1 billion to be raised each 1/7/64 -L4 month in the one-year bill cycle. If the Txeasury decided to carry out the January advance refunding, settlement would come shortly before announcement of the refunding of February 15 maturities. After the February refunding the way probably would be clear for monetary policy action until the announcement of the May refunding around the end of April. Whether a shift in policy about mid-February would be consistent with the tradition of even keel during periods of Tieasury financings would depend partly on the condition of the market then. If the February refunding involved short-term issues only, as seemed probable, there was a reasonable prospect that the new issues would be rapidly distributed and that there would be no serious constraints on policy actions after about mid-February. Thereupon, upon notion duly made and seconded, and by unanimous vote, the open market transactionE in Government securities and bankers' acceptances during the period December 17, 1963 thrcugh January 6, 1964 were approved, ratified, and confirmed. Chairman Martin then called for the staff economic and financial reports, supplementing the written reports that had been distributed prior to the meeting, copies of which have been placed in the files of the Committee. Mr. Brill commented on economic conditions as follows: I assume you are all as surfeited as I am with reviewis of 1963 and prcgnostications for 1964. I had hoped to eschew this seasonaJ occupational hazard and focus instead on the very current economic situation. Unfortunately, at this time 1/7/64 -15- of month current data are sparse. We have, as yet, only fragmentary indications as to the course of industrial production in December. These bits ane pieces suggest that the pace of industrial activity held at about the November level or perhaps edged a bit higher; there is no eviderce of a renewed upsurge in activity. Some industrial commodity prices crept up further last month, particularly metals, but the over-all wholesale price average remaired unchanged at about the levels that have been prevailing over the past six years. More bullish information comes frcm the consumer sector. The resurgence in retail sales after the slight November dip indicates that the December total set a new high, and by a substantial margin. Sales gains were recorded in all categories of durable goods and in most categories of nondurables. Sales of new autos were in record volume for the month, estimated at a rate of over 8 million domestically produced cars. Evioence that consumers are willirg to spend vigorously is most encouraging, indeed vital to the maintenance of optimism, for we are not now getting much thrust f-om most other sectors of the economy. Business men, by and large, are continuing to behave cautiously. There was some perking up in inventory accumulation at the manufacturing level in both October and November, concentrated largely in nondurable goocs industries, but stock/sales ratios at both the durable and nondurable levels remained low and manufacturers have reported plans to reduce the rate of inventory additions in the first quarter of this year. As has been repcrted earlier, business plans for fixed capital spending were for a moderate increase in the fourth quarter of 1963, a leveling off in the current quarter, and another moderate increase in the spring quarter. While corporations are girding themselves with funds--capital market financing in December was large and the corporate calendar for this month continues relatively heavy--the business sector's current contribution to expansion remains modest. State and local spending has continued to rise at a rapid rate, with another large increase in their payrolls and outlays for road construction recorded in the fourth quarter. lagging, Federal Government spending, however, has been Federal purchases of goods and services in the fourth quarter are estimated as not much higher than in the second or third quarters, even though the fourth 1/7/64 -16- quarter figure includes the $1 billion increase in military pay. It is worth emphasizing how much the GNP advance in 1963 has depended on the private econo-my. Since early 1963, Federal spending for goods and services has increased by more than $1 billion, or about 5 per cent of only a little the increase in total GN . In contrast, over the first two years of the cyclical expansion--from the first quarter of quarter of 1963--Federal spending 1961 through the first rose by $10 billion and accounted for almost 15 per cent of It is a t.estimonial to the underlying the increase in GNP. strength of private demands for goods and services that the economy could maintain a 4 per cent rate of expansion in real GNP last year with so little help from Federal spending and with only a shopworn promise of future tax relief. This strength in private denands has depended in no small measure on the availabilit7 of credit. Consumers, for example, financed the record volume of auto and other durables purchases in part through an increase in their instalment indebted-ess of about $5-1/2 billion last year, equal to the previous record expansion in 1959. They financed a rising volume of home purchases--and probably other types of outlays- through a record increase in home mortgage debt, tentatively estimated at about $15 billion or 10 per cent more than in 1962. The other strongly expansive sector last year--State and loca' governments--also tapped the capital markets in record anount; issues for new capital floated by these governments in 1963 totaled $9 billion, 6 per-cent more than in the previous year. Of course, we've had to take the bad with the good, namiely, a record volume of heavily debt-financed apartment house and office construction, not all of which may ultimately prove to have been sound business ventures. This is always a 1a-zard in a market economy subject in the credit area only to general controls; one can hope that credit-induced dis tortions are not widespread and that likely readjustments in this area will be orderly and noncumulative. For the economy as a whole, however, until fiscal policy takes over more of the task of sustaining expansion, it would appear that monetary policy remains saddled with the burden--and the risks. Mr. Koch made the following statement with regard to the financial situation; 1/7/64 -17- The fairly steady position of the money and capital markets that came about early in November has continued in general to date. This development was initiated by market recognition of the fact that the Treasury felt that for international reasons, and for the time being at least, short-term interest rates could be too high as well as too low. It has continued because these earlier psychological and expectational influences have been backed up by some what less expansionary economic and financial developments. In December, for example, the economic news becoming available was not quite up to the bullish business optimism that continues widespread. Secondly, there was a less intense demand for financing. In the capital markets, it was the municipal calendar that was light and, in the case of bank credit, loan demand was less strong. In the money market, the December 10 dividend date and the December 15 tax date both came and went without the usual signs of seasonal stress, and at the month end, too, the churning and pressure that usually characterize the money market was noticeably absent. Bank credit in December rose less than in November, but the rise was about in line with the average increase earlier in the fall. Excluding the erratic security credit, total loan growth in December was also in line with that in earlier months, as was that in business loans. The December rise in Business loans included heavy borrowing around the December 15 tax date, Larger temporary borrowing by public utilities prior to capital marke: financing, and bank acquisitions of acceptances. A :year-end bulge in business loans reElected a large sale of instalient receivables to the banks by General Electric as well as temporary borrowing by oil and other natural resource industries for tax purposes. Another important aspect of recent credit developments has been the fact that banks have again been increasing their U. S. Government security portfolios and have apparently again become more interested in acquiring municipal securities. Banks seam to have been under a little less reserve pressure recently than they were prior to November. This may have been due to the fact that reserves were a bit more readily avail able than earlier, or that loan demands have been more intense, or possibly banks are becoming a bit more complacent about the somewhat larger borrowings from the Reserve Banks of recent months. We have little additional information available on the recent course of the money supply and other forms of liquidity. 1/7/64 -L8- All that can he said is that: the estimates given at the last meeting of the Committee are now firmer. The narrowly defined roney supply through December has changed little since early November, following ts rapid rise earlier. The course of the money supply has been considerably affected by that of Treasury deposits, which haze increased recently. Time and savings deposit growth slackened markedly in December from the sharp November pace, excluding the large year-end rise in certificates of deposit due General Electric as payment for their instalment receivables. An interesting aspect of the recent money supply growth has been the relatively sharper rise in the currency component than in the demand deposit component. Currency outside banks rose almost 7 per cent last year, as compared with a little less than 3-1/2 per cent in the case of demand deposits. This fact, coupled with the sharper growth in the total money supply, suggests rising transactLons requirements for money. Demand deposit turnover has also tended to level off, fluctuating recently around the higher level attained about mid-year. In other words, the rate of use of existing money stocks may be reaching upper resistance points in certain sectors of the economy. Turning to bank reserves, free reserves averaged about $175 million last month, as compared with around $75 million earlier. This rise in free reserves was due entirely to higher excess reserves, for member bank borrowings continued to average a little over $300 million. Nevertheless, money market conditions remained about the same, that is, slightly less taut than prior to November. As to the future, we are now entering the period when we should be able to separate out more satisfactorily the effects of seasonal as contrasted with cyclical influences I feel on xpan:;ion of bank credit, money, and reserves. that the cyclical forces will continue strong and that they, coupled with the expected busy January Treasury financing schedule, will offset, in part at least, the usual seasonal forces that tend toward credit and deposit contraction and In the first place, most money and lower interest rates. capital market participants expect higher interest rates sometime soon and therefore any tendency toward lower rates is resisted. Also, bank lending officers now look for less seasonal loan liquidation than usual. Moreover, both the corporate and new municipal financing calendars for January Finally, even mortgage rates are showing a look large. little more firmness. 1/7/64 -L9- Developments in the first few days of seasonal eas-ing thkit have already occurred are consistent with thia interpretation. Bill rates nave declined little despite substantial corporate demand. The Treasury has announced that it might accomplish its mid-month cash financing through a note or bond issue rather than a bill strip, or that its better than expected current cash position might enable it to skip this financing entirely. In the latter case, however, the financing calendar could still not be clear, for the Treasury might decide to move up its expected advance refunding from March to January. Since the Treasury is anxious to achieve some debt lengthening, January is probably a more appropriate time to accomplish it than later, when the Treasury might have to compete with larger credit demands Irom a more sharply expanding economy. It should be possible for the Treasury to take such action now without putting undue downward pressure on short-term interest rates. However, given the preaailirg interest rate outlook, it might result in some upward pressure on longer term yields. In event of an early advance refunding, an "even keel" monetary policy obviously would be called for, but the question that might be raised for the Committee would be whether it should try to cushion any upward pressure on longer term rates that might thereby result. Mr. Furth gave the following report on the balance of payments: The tentative weekly figures for December indicate a surplus for the month in the neighborhood of $450 million. If these figures could be taken at face value, the payments deficit for the fourth quarter wculd be at a seasonally adj sted annual rate of about $1 billion, little more than half of the third-quarter rate ard less than one-fourth of the rate of the first two quarters. Arid the deficit for the entire ycar 1963 would be less than $3 billion, the lowest deficit in six years. A large part of the December surplus may reflect with drawals by U. S. corporations of funds deposited abroad, either for year-end window-dressing, or for good owing to the recent troubles in the Euro-dollar market. If the former interpretation were to prove correct, the economically meaningful surplus for December might have been as much as $300 million smaller. In that case, the deficit for the fourth quarter would have been somewhat larger than that for 1/7/64 -20 the third quarter, and the deficit for the year 1963 in the neighborhood of $3-1/4 billion, only 10 per cent smaller than the deficit for 1962. Bu in any case, the second half of the year seems to have shown such a decisive improvement over the first half that the deficit for the year as a whole, which until recently had looked much larger than for 1962, actually turned out to have been considerably smaller. Unfortunately, the public-relations impact of that development has been impaired by the statistical adjustments in the official presentation for 1962, which--despite the warnings of the Board's staff--made it appear that the deficit in that year had been only $2.2 billion instead of the economically meaning.=ul figure of $3.6 billion. Consequently, some commentators have already made the mistake of stating that the 1963 results would show a deterioration rather than an improvement over 1962. Trede figures through November suggest that a good part of the recent improvement was due to an encouraging export performance. This year, the wheat exports to the Soviets appear to be materializing, and economic conditions in most foreign countries are expected to remain propitious. Hence, we may expect a continuation and perhaps a further improvenent of that trend during the current quarter. In contrast to the trade accounts, the capital account proved disappointing in the fourth quarter, apart from the puzzling events of the last week of December. In the two months Cctober and November, short-term bank claims on foreigners rose by $315 million, a rate close to the second quarter record. Increased short--term bank lending to comnercial banks in the United Kingdon, Germany, and Japan suggest: that at least part of the loan demand that used to be satisfied in the Euro-dollar market has now, after the apparent shrinkage of that market, been redirected toward U. S. sources of supply. This cevelopment seems to confirm the view that a decline in the Euro-dollar market, while obviously welcome to the large New Yo-k banks, does not necessarily help to improve the U. S. payments balance. Whetever the final figure for the U. S. payments deficit for 1963 may turn out to be, its financing was less painful than had been anticipated. In 1963, U. S. gold reserves declined $460 million, about one-half as much as in 1962. Other nondollar financing (including prepayments of foreign government debts; the issue of bonds denominated in foreign currency; the net increase in U. S. official short positions -21- 1/7/64 in foreign exchange; and the decline in the U. S. position in the IMF) accounted for only $750 million, less than one third of the 1962 figure. And at least $1.7 billion, or about three-fifths of the entire deficit, was financed by an increase in foreign holdings of uncovered dollars--as compared to a trifling $400 million, or one-ninth of the deficit, in the previous year. This welcome development may be attributed to three main reasons. First, the payments position of some traditional dollar holders--especially in Latin Americagreatly improved. Second, the Euro-dollar market absorbed on balance dollar funds that otherwise might have been And third, there seemed to have converted into gold. a lessening of market uncertainty about the dollar in European private financial community. The new market attitude toward the dollar so far had little effect on the monetary authorities of some been the has of our European allies, whose policies still show little understanding of their share in the responsibility for maintaining a working international payments system. The latest incident is the increase in the discount rate of Its distinguished President has the Netherlands Bank. assured us by cable that the action will not lead to a flow of funds from the United States to the Netherlands. But he would have been more He may well be right. cooperative if, instead of raising the Netherlands interest-rate level, he had abolished the severe limitations on foreign access to the Netherlands money and capital market. Such an action would also have restricted domestic availability of liquid funds, and would have helped rather than hampered the reduction in the country's payments surplus--twin sources But international of inflationary pressures in the Netherlands. cooperation is apparently easier to preach than to practice, and good advice easier to give than to take. Chairman Martin then called for the usual go-around of comments and views on economic conditions and monetary policy beginning with Mr. Hayes, who commented as follows: The business situation contines to be good, with incomplete data for December suggesting further advances in steel, a continued high level of auto production, and a sizable gain in retail sales. On the other hand, additional 1/7/64 -22 statistics now available for November are somewhat disappointing; and a relatively sober appraisal of first-quarter figures for 1964 may be warranted by such factors as the leveling tendency of Federil expenditures and housing outlays, and the indications that business fixed investment and auto sales may be no higher in the first quarter than in the quarter just ended. To my mind, hovever, these are merely qualifications in a generally favorable outlook. The expectation is still that economic activity will advance further in 1964, particularly in view of the ircreased likelihood of early action on tax legislation and the rather buoyant state of business sentiment. And we should not lose sight of the fact that in 1963 we have achieved all-time peaks in most over-all measures of the economy. As :or the balance of payments, eery preliminary figures indicate that a very sizable surplus in December may result in a somewhat less adverse fourth-quarter balance of payments figure than seemed likely a month or two ago. Part of the December surplus is attributable to regular year-end amortization and interest payments on outstanding postwar loans and very substantial payments by Germany for military supplies. But it also appears that our request to the New York banks to refrain from foreign window-dressing operatiols met with a favorable response, and, in addition, there may have been a sizable repatriation of United States funds from abroad, particularly from Canada. We shall have to wait and see how much of the appareitly good December figure represents a shift in seasonal "jatterns of money floas rather than a more fundamental inprovement. In any event, we should not allow ourselves to be lulled into a sense of false security )y the results of a single month. Sustained improverient i our balance of paynents remains imperative. Meantime bank loans to foreigners are rising as the large U. S. banks are still aggressively seeking loan outlets abroad. It is well to bear in mind also the growing signs of impatience on the part of foreigr cent-al banks with our failure so far to make more significani progress towards solving our payments problem. They have become increasingly reluctant to take in additional dollars; the French in particular have been expressing their feelings in no un certain terms at the Group of Ten meetings. Also, the Federal Reserve has outstanding gross swap drawings of some $328 million and the Treasury has $120 million in forward 1/7/64 -23- conmitmer.ts--which obligations should be liquidated soon. Tighter rmonetary policy in several European countries, including central bank discount rate increases, must be expected--the latest Dutch discount rate action. being a case in point. The growth of bank credit slowed down in the first four weeks of December, mainly because of weakness in security loans attributable to low levels of dealer inventories and generally cautious feelings about future rate movements. Most other loan compcnents behaved about as they have over comparable periods in the preceding two years. By mid-December money supply proper stowed a twelve-months gain of 3.7 psr cent, and, together with time deposits, of 8.2 per cent, as compared with 7.5 per cent a year earlier. As several members of the Committee suggested at the last meeting, the question may well be railed whether continued expansion of credit and liquidity at recent rates can be consider'ed sustainable or desirable, from a purely domestic standpoint. As George Ellis put it three weeks ago, the burden of proof must shift at some point to those who want to continue inflating the money supply at recent rates--and I would as3ume that George had in mind cver-all liquidity as well as the money supply proper. Certainly there is no jus;tification for keeping it up in orcer to cope with an unemployment problem which is in large part structural and su sceptible to cure only by a concerted attack on a variety of front:,, mostly nonmonetary. Although both international and comestic considerations point to the desirability of a more "neutral" monetary policy than the one currently in force, we aie unfortunately faced with the prospect of a series of Treasury financing operation:s wh:.ch would seem to preclude any appreciable policy change at this time. I should think we might well pursue the same general policy as in the past three weeks, and under the sane directive. This would mean aimiig at a firm money market with the Federal funds rate at the 3-1/2 per cent ceiling and the Treasury bill rate fltctuating around that level and more often above it than below. It would also seem appropriate to counteract any significant tendency toward the development of an easier tone due to seasonal factors. Mr. Ellis said that throughout the year 1963 he seemed to have been reporting substantially the same description of the New England 1/7/64 economy: -24 rising levels of income and spending, and stable or falling manufacturing output. This description was still apt. District manufacturing output lost more ground in November than it had gained in October, and manufacturing employment de-lined more than seasonally in November. In contrast, consumer spending continued strong. In downtown Boston, Christmas sales at department stores showed a gain of 8-1/2 to 11 per cent relative to last year. The principal December financial development in the District was a contra-seasonal rise in commercial ani industrial loans of about 2 per cent. Most loan categories other than soft goods showed gains. A stronger thzn seasonal rise apparently occurred in the nation as a whole. Turning to monetary policy, Mr. Ellis said that the French discount rate increase of 6 weeks ago and yesterday's increase by the Dutch seemed to destroy whatever validity the proposition ever had that interest rate increases should be avoided in meeting domestic economic objectives. His appraisal of the national economy indicat:d considerably more strength than did the staff reports this morning. He felt that there had been no knots in the money market in December because of the volume of reserves supplied by the System. An alternative description of developments, he said, was that the System had supplied sufficient reserves to enable banks to increase their lending abroad. 1/7/64 -25 The paramount question in his mind, Mr. Ellis continued, was whether the Committee should strive to facilitate the Treasury's advance refuncing at present rate Levels when there existed substantial evidence that the System might have to take actions that would influence rates upward about as soon as possible after the February refunding. Quite possibly, in view of the rate changes abroad and the strength of the domestic economy, there might be some willingness on the part of the Treasury to see the air cleared as to impending rate movements in advance of their refunding. This course might also be considered more equitable by dealers and investors. If the Treasury should agree, Mr. Ellis said, he would urge prompt action to raise the dLscount rate. If the Treasury decided not to make an advance refunding in Ja.nuary, it was likely that there would be an advance refunding in March. The choice might then be between acting now or waiting until April. If the Treasury was unwilling to adopt the course he had mentioned, Mr. Ellis said, the Committee presumably should continue to operate within the framework of present policy; but there was room for improvement even within this framework. allowed to fluctuate nearer zero. Free reserves should be The Desk management should move rapidly to absorb the return flow of currency. Also, the Desk could resolve uncertainties on the side of less ease since banks would be experiencing a return flow of currency. He would take 3-1/2 per cent 117/64 -26 as the 90-day bill rate target, and he would he surprised and delighted if the Desk were able to hold the bill rate at this level in of downward seasonal pressures. the face In his judIgment recent rates of increase in reserves were excessive in lighi: of the Last line of the Committee's directive, which called fr "ac~iommodating moderate expansion in aggregate bank reserves.." Mr. Swan reported that the Twelfth District entered 1964 having recorded a faster rate of growth in the past year than the nation both in employment and in the labor force, and also in unemploy ment. While the course of District employment had been quite encouraging, especially sirnce midyear, the major uncertainty at the moment appeared to be the potential impact of any leveling off or cut-back in space and defense-related industries. In all probability this impact would be greater than in the country as a whole. The relatively favorable employment experience in the District presumnably had been accompanied by correspondingly favorable behavior of pecsonal income. Paradoxically, the gain in retail sales, both recently and throughout the year, apparently had not equaled that for the nation. In the financial sector, Mr. Swan said, weekly reporting banks in the District in December reported increases in credit extensions but at a lesser rate than nationally. In the last week of the year District banks were fairly heavy buyers of Federal funds and probably would be so again this week. Borrowings from the Federal Reserve Bank were more 1/7164 -27 than dotble their 1962 Level, in contrast to the decline in member bank borrowings for the entire nation. Mr. Swan said that in view of the Treasury financing program the Committee obviously should not change policy at the present moment. However, the treasury financing apart, Mr. Swan saw nothing in the domestic picture or the international situation that called for immediate actf'on. It seemed to him that the Committee still should see whether the so-called winter slack was going to turn cut to be greater or lets than usual. He was sympathetic with Mr. Koch.'s discussion of the outlook hut did not think that this was a time to move, even withinin the area that might he allowed by the present directive. He preferred to continue the Committee's present policy. He thought it quite reasonable to offset seasonal declines in market rates, but if downward pressures turned out to be somewhat greater than seasonal he thought they should be permitted to affect rates. He would not change the directive or the discount rate at this time. Mr. Dr:ming said that in December credit at District banks expanded about as much as in December 1962, and considerably more than usual for that period. However, Loan Lncreases were about normal and significantly smaller than Last year, except for business loans which showed above normal strength. Investment gains were appreciably larger than in December 1962 and in the average December. Total deposits were up quite strongly in December with growth welL above normal and quite a 1/7/64 -28- lot larger than in the same period last yeac. The gains came, however, in bank deposits and government deposits; growth in both other demand and time deposits was weaker than usual. The deposit gains put District banks on the selling side of the Federal funds market for the first time: in some weeks. As a result of the above-normal deplsit gains and the smaller than usual loan increases, Loan-deposit ratios for both city and country banks farm lerding indicated continued strong farm Loan demand, partly to finance holding operations into the 1964 marketing period. A nmber of country bankers reported an increasing proportion of farm borrowers as carrying maximum debts relative to probable earnings. Mr. DE.ming said that one new item of interest might be noted with respect to the nonfinancial side of the District economy. The Minneapolis Bank's most recent opinion aurvey, taken at year end, indicated a sharp decline in optimism about the near-term outlook. This might be >artly the reflection of the coldest December since 1927, but the change in sentiment seemed to be more than seasonal. Hr. Dening said he would go along with those who felt the Committee should not change policy during tfe next few weeks. He thought there would be enough Treasury financing activity in this period to warrant mentioning such financing in the directive. Mr. Scanlon reported that business trends in the Seventh District continued to be favorable. Retail trade rebounded sharply -29 1/7/64 in December from the depressed level of late November, while employment and production remained at high levels. Christmas sales at District department stares in 1963 were well ahead of the record 1962 level. Growth in personal savings at commercial barks and savings associations lagged the 1962 period in November, and probably in December as well, reflecting strong retail trade. Hr. Scanlon said that employment had been at least stable in the region in recent months. Unemployment compensation claims in the District in Norember and December remained well below the level of recent years and compared favorably with the national picture. Classifizatiors were changed in November for two District labor marKet ar:eas. Because of increased hiring by farm equipment manufacturers, the Quad citie:; area was estimated to have "low unemployment" (less than 3 per cent) along with six other District centers. South Bend,however, was movec into the "substantial unemployment" (more than 6 per cent; group as a result of the Studebaker cutback. No other District centers were in this class. Mr. Scanlon reported a widely held view in the Midwest that a larger increase in plant and equipment spending was in prospect than the 4 per cent rise indicated by the McGraw-Hill survey in November. The motor vehicle and railroad industries in particular had announced in creased expenditure plans in recent weeks. -30 1/7/64 Farm income in the Seventh DLstict was reduced somewhat in 1963 as larger receipts from crops failed to offset lower income from meat animals. However, the smaller number of pigs farrowed since last summer, foreshadowing higher hog prices, together with lower prices paid for feeder cattle in recent months indicated that incomes of District live stock farmers would improve in 1964. As usual, Mr. Scanlon said, December banking developments were difficult to :nterpret because of the demand for funds to meet corporate tax and dividend payments and because of year-end adjustments. District banks had continued to report strong business loan expansion, particularly in the case of loans to metals manufacturing firms. Loans at smaller banks tiat did not report industry breakdowns also rose more than usual. During the second half of 1963 business loans rose 8 per cent, compared rith 7 per cent during the same period of 1962. Changes in other types of loans approximated the usual December pattern. Basic reserve positons of the large banks in Chicago and Detroit remained fairly comfortable, although these banks were unable to cover t'ieir needs in the Federal funds market. With business prospects continuing :avorable, Mr. Scanlon continued, it appeared that the demand for credit would rise further and possibly at an accelerated pace. However, the rapid rise of the money supply (narrowly defined) during the autumn appeared to have halted, at least temporarily, in December. In both 1961 and 1962 the rise 1/7/64 -31 continued through December before leveling off. of interpretir.g Because of the difficulty these data and the proposed Treasury financing, Mr. Scanlon favored continuation of the monetary policy of recent weeks. not change the discount rate. He would He agreed with Mr. Deming that the Committee might refer to the Treasury financing in the directive. Mr. Clay said that an examination of the data for the weekly reporting banks in the Tenth District and in the United States through December 25 showed a similarity in performance during the past yeav several respects. in Loans and investments conbined advanced less than in 1962, while loans increased more. Both business loans and consumer loans showed larger increases than a year earlier. Total time deposits increased somewhat less than in 1962, although the second half increase was larger thr'n the year before. However, Mr. Clay said, there also were some significant ccntrasts in the performance patterns. This was particularly reflected in a greater acceleration in the liquidation of U. S. GoJernment securities in the District than in the United States. It was reflected further in a greater moderation in the acquisition of other-securities in the District. The net effect in the District was a decline in total investments, while in the nation it was a slowdown in the rate of growth. was found in real estate loans. Another contrast For weekly reporting banks in the country as a whole, such loans expanded more than a year earlier, whereas in the Tenth District the increase was distinctly smaller. 1/7/64 -32 The factors that needed to be weighed on the national scene did not indicate any basic change in the economy, Mr. Clay said. The general. pattern of economic developments, including the variations in pace of activity and economic sectors, was essentially in line with the shape of events over past months. At this juncture, it appeared to Mr. Clay to be in order to await further developments and to leave monetary policy unchanged. Whether seasonal forces would put significant down ward pressure on short-term interest rates remained to be seen. Re felt that sore downward movement in rates should be accepted rather than redlcing reserve avail .tent. So long as it wa.i possible, monetary policy should be a positive stimulus and not a deterrent. Mr. Biyan reported that businc3s conditions in the Sixth District appeared excellent. Performance was better than nationally for non. agricultural employment, factory payrolls, personal income, farm receipts, and other series. Insured unemployment claims in the District had been at a low rate since April, and in November reached their lowest rate since the fall of 1953. 1/7/64 -46Nationally, Mr. Bryan said, the economy might have hesitated in November but on the basis of fragmentary evidence he suspected that there had been a strong comeback in December. There was optimism in December and continued strong demand for business loans. Vigor in automobiles, construction, and business investment did not indicate an imminent reversal in the uptrend in the economy. Mr. Bryan saw no clear case for an overt change in policy, which he thought probably was ruled out in any case by the Treasury financing. Therefore, he had no suggestions regarding reserve figures; the Manager o: the Account would have to be guided largely by the performance of market rates during the period of Treasury financing. Mr. Bryan commented that he would like particularly to say, with Mr. Wayne, that by every reserve and mrney supply test the Comittee had been injecting reserves into the banking system at a rate that seemed to him greater than sustainable in the long run without inflation, end greater than was warranted by either domestic or international con siderations. He agreed with the comme tary on the free market given by Mr. Mills;. In a final remark, Mr. Bryan said tiat inflation could occur even when there was substantial unemployment, given the present structural situation in the labor market. He did not believe that monetary policy could do much about this kind of unemployment. 1/7/64 -47 Mr. Shuford reported that there had been no significant changes in the economic situation in the Eighth District since the previous meeting. The District had continued to operate at a high level and the growth over the past year had been good--probably a little better than in the nation as a whole. Mr. Shuford said that he would favor no change in policy. As he had noted at the preceding meeting, Committee policy over the last year seemed to him to have been quite sound. The country had had a sustain able, moderate growth, and at the same time the System had contributed to meeting the international payments problem, although the problem had not been solved. Mr. Shuford observed that he agreed with those who hoped that at some stage there would be less rigidity ,n short-term rates the recent past. than in But he recognized that during the past year the Committee had found it necessary to face up to a difficuLt problemwhich it had h-ped was a short-range problem--and had done so. contributed to the rigidity of market that the expani:ion in ates. This Mr. Shuford also agreed reserves had been large in recent months and should be reduced; he did not think it desirable for reserve growth to continue at its current rate for any extended period of time. On the other hand, it seemed to him that by meeting the two-pronged problem and at the same time providing moderate reserves over most of the year, the Committee had facilitated moderate, sustainable growth iin the economy. On the 1/7/64 -48 whole, he thought that policy had been quite satisfactory. There was much talk of extreme optimism, Mr. Shaford said, and it was possible that inflationary pressures were building up, but it seemed to him from the available statistics that inflation was not a pressing problem now. Mr. Shuford favored a continued moderate supply of reserves at a lower rate than over the last few ronths. change in policy. Otherwise he would make no He did not favor a change in the discount rate. He hoped that the short-term rate would fluctdate around 3-1/2 per cent, but he would rtot be disturbed if seasonal forces pushed it lower. He had no objection to changing the directive to refer to the Treasury financing, but in general he preferred not to change the directive except when a change seemed rather pressing, and he did not think this was such an occasion. Mr. Balderston said he agreed that a change in monetary policy, except to encourage free reserves to return to their early December level, was precluded between now and mid-February by Treasury financing activities. Were it not for the Treasury financing which he thought should be mentionled in the d.rective, he would have favored some tightening now. It was not too early for the Committee to ponder the forces that would be bearing on monetary policy in the months ahead, Mr. Balderston remarked. He thought that the struggle of European countries and Japan to contain inflation would lead toward higher interest rates abroad. This would argue for higher rates domestically to inhibit outflows of 1/7/64 funds. -49 It was his judgment that the discaunt rate change of last July might have been more helpful in slowing outflows than had been generally recognized. If razes moved upward, Mr. Balderston said, the System must consider the loss of time certificates of deposit--especially those with six-mont'h maturities--that banks would experience as market rates approached the Regulation Q ceiling on such certificates. However, he was concerned that lifting the ceiling might result in straining the quality of credit further. Mr. Balderston said that he had been impressed by Mr. Wayne's statement, including his stress on the growing volume of consumer debt. Certainly the growth of home mortgage debt at the recent rate of $1.3 billion per month was something to be watched. Also, the Committee woul be concerned this year with the outcome of wage negotiations, particularly those that wotld get under way in the auto industry in July. He had been gratified that output per manhour had held up as well as it had, a development w ich was not to have beet expected. increased 3 per cent last reflected in prices. year, Even though wage cates wage costs were kept down and this was The U. S. had benefited so far by not inflating so fast as had France, Italy, and some other countries. If the struggle to keep wage costs down were lost this year because of high profits, he feared that the U. S. would join in the inflationary race. 1/7/64 -50 His present thinking, Mr. Balderston continued, was that the Committee should await the position taken by the Congress and the Administration with respect to the budget. curbed, that would be a significant factor. If budget spending was He felt, therefore, that even after mid-February the Committee might want to assess the sentiment of the country, to see whether in fact the Federal Government was curbing spending, and to determine how many countries were joining the effort to curb inflation by raising their disceunt rates. If necessary, however, the Committee should be prepared by late February to move toward some further reduction in the reserves it was pouring into the banking system. It seemed clear to him that the money supply variable to be watched was not the narrowly defined one, which rose only 3.6 per cent last year. Liquidity was abundant everywhere and was flowing into the stock market and abroad. It was clearly beyond tha control of the Committee to mop up that liquidity. might, If the future turned out as Mr. Balderston feared it he thought that forceful, vigorous, overt action by the Committee would be called for sometime after the middle of February. Chairan Martin expressed the view That the Committee did not have any real problem with respect to policy at this meeting. He thought Mr. Balderston had pointed up effectively the fact that while the Committee had some indications with respect to fiscal policy it did not yet know what budgetary policy was going to be. A change in budgetary policy might make quite a difference in its approach, and the Committee was fortunate, -51 1/7/64 in a sense, that Treasury activities preclLded it from taking any action at this moment. He had pointed out at the last meeting that by deciding not to change policy then the Committee was deciding against such action in the immediate future. At least, this wes the case if the Treasury decided to go to the market, and he thought there was every indication that it would. Parenthetically, Chairman Martin emphasized that the fact that the Treasury eras considering an advance refunding was confidential, and should be so considered by all persons in the room. After noting that the Committee members would not favor discount rate action aL this time, the Chairman said that the Committee seemed to be agreed on io change in the directive except for the addition of a reference to Treasury financing. It wa. decided after discussion that this reference should be made by inserting the phrase, "and taking into account prospective Treasury finarcing" after the phrase, "T imnplement this policy," ill the second paragraph of the directive. Thereupon, upon motion duly made and seconded, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Account in accordance with the following economic policy directive: 1/7/64 -52It is the Federal Open Market Committee's current policy to acconrmodate moderate growth in bank credit, while maintain ing conditions in the money market that would contribute to centinued improvement in the capital account of the U. S. balance of payments. This policy takes into consideration the fact that domestic economic activity is expanding further, although with a margin of underutilized resources; and the fact that the balance of payments position is still adverse despite a tendency to reduced deficils. It also recognizes the increases in bank credit, money supply, and the reserve base of recent months. To implement this policy, and taking into account prospec tive Treasury financing, System open market operations shall be conducted with a view to maintaining about the same conditions in the money market as have prevailed in recent weeks, while accommcdating moderate expansion in aggregate bank reserves. Votes for this action: Messrs. Martin, Hayes, Balderston, Bopp, Clay, Daane, Mitchell, Robertson, Scanlon, Shepardson, and Shuford. this action: Vote against Mr. Mills. In dissenting, Mr. Mills commented that, in accordance with his previously stated position against a policy of "no change" and his concern that damage to the economy was implicit in the continuation of that policy, he believed that a somewiat more liberal provision of reserves would yield beneficial economic returns, and without complicating the Treaury's financing prograra. Upon motion duly made and seconded, and by unanimous vote, section 1(a) of the continuing authority directive was amended, in line with the earlier sug gestion of the Account Manager, to authorize the Federal Reserve Bank of New York, to the extent necessary to carry out the current economic policy directive: (a) To hby or sell United States Government securities in the open market, from or to Government securities dealers -53- 1/7/64 and foreign and internationaL accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the Systemn Open Market Account at market prices and, for such Account, to exchange maturing United Scates Government securities wi:h the Treasury or allow them to mature without replaceme-t; provided that the aggregate amount of such securities held in such Account (including forward commitments, but not including such special short term certificates of indebtedness as may be purchased from the Treasury under paragraph 2 hereof) shall not be increased or decreased by more than $1.5 bi.llion during any period between meetings of the Committee. It was agreed that the next meeting of the Committee would be held on January 28, 1964. Thereupon the meeting adjourned. Secr$ry *

Federal Reserve (1964, January 6). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640107

@misc{wtfs_fomc_minutes_19640107,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {1964},
  month = {Jan},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640107},
  note = {Retrieved via When the Fed Speaks corpus}
}