fomc minutes · November 21, 1966
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, D. C., on Tuesday, November 22, 1966, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Bopp
Brimmer
Clay
Daane
Hickman
Irons
Maisel
Mitchell
Robertson
Shepardson
Messrs. Wayne, Scanlon, and Swan, Alternate Members
of the Federal Open Market Committee
Messrs. Ellis, Patterson, and Galusha, Presidents
of the Federal Reserve Banks of Boston, Atlanta,
and Minneapolis, respectively
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Molony, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Eastburn, Garvy, Green, Koch, Partee,
Solomon, Tow, and Young, Associate Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Cardon, Legislative Counsel, Board of
Governors
Mr. Fauver, Assistant to the Board of Governors
Mr. O'Connell, Assistant General Counsel, Legal
Division, Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
11/22/66
Mr. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Messrs. MacDonald and Lewis, First Vice
Presidents of the Federal Reserve Banks
of Cleveland and St. Louis, respectively
Messrs. Parthemos, Taylor, Baughman, and
Jones, Vice Presidents of the Federal
Reserve Banks of Richmond, Atlanta, Chicago,
and St. Louis, respectively
Mr. Lynn, Director of Research, Federal Reserve
Bank of San Francisco
Mr. Meek, Assistant Vice President,
Federal Reserve Bank of New York
Mr. Arena, Financial Economist, Federal Reserve
Bank of Boston
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market
Committee held on November 1, 1966,
were approved.
At the invitation of Chairman Martin, Mr. Hackley reviewed
some possible implications for Committee procedures of the "Freedom
of Information Act"
(Public Law 89-487, enacted July 4, 1966, with
an effective date of July 4, 1967), noting that the terms of the
Act were still under study.
Following his remarks, Mr. Hackley
responded to questions.
After this discussion, Chairman Martin suggested that the
members might continue to give consideration to the subject and that
the Committee might plan on pursuing it further at coming meetings.
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Before this meeting there had been distributed to the
members of the Committee a report from the Special Manager of
the System Open Market Account on foreign exchange market conditions
and on Open Market Account and Treasury operations in foreign
currencies for the period November 1 through 16, 1966, and a
supplemental report for November 17 through 21, 1966.
Copies of
these reports have been placed in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
said that the Treasury gold stock would remain unchanged again
this week for the thirteenth consecutive week, but the uncommitted
holdings of the Stabilization Fund were now down to about $32 million.
No French purchases were expected this month; the Bank of France
lost $37 million in October, and their holdings seemed to be down
about another $30 million so far this month.
Unfortunately, however,
there was a new customer in the form of the Bank of Italy, which was
beginning to feel domestic political pressure as a result of a
decline not only in its gold ratio, but also in the absolute amount
of its gold holdings.
Governor Carli estimated that the decline in
Italian gold reserves this year might come to roughly $60 million.
He had approached the U.S. regarding gold purchases of $30 million
this month and $30 million in December to rebuild Italian gold
reserves to their end-of-1965 level.
Unless Governor Carli changed
his mind, or unless the Russians made some massive gold sales during
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December, the Treasury would have to show another major reduction
in the gold stock fairly soon.
More generally, the prospective
Italian purchase would represent in part a compensation for gold
losses resulting from Italian participation in the London gold pool.
If other central banks should decide to follow the Italian example,
the usefulness of the pool to the United States would, of course,
be correspondingly reduced.
On the London gold market, Mr. Coombs continued, conditions
had been fairly quiet in recent weeks, with the pool picking up
about $20 million during October as a result of Egyptian sales plus
a heavier flow of newly-mined gold from South Africa.
As of the
moment, the pool had available $32 million of the $270 million origi
nally committed, plus a supplementary commitment of $50 million
agreed to last September, for a total of $82 million.
Yesterday and
today there were heavy demands in the gold market with the price
moving up to $35.18.
As he had indicated at other recent meetings,
in his view the gold market was likely to prove to be the single most
troublesome source of problems for the dollar in the period ahead.
On the exchange markets, Mr. Coombs said, sterling remained
1/
a problem.
On the other
hand, there had been no sustained inflow into the reserves; in fact,
1/ A sentence has been deleted at this point for one of the
reasons cited in the preface. The sentence reported a comment by
Mr. Coombs on Bank of England operations.
-5
11/22/66
as of Friday, November 18, the Bank of England was down about $40
million so far this month.
The market reception of the excellent
trade figures reported for October was disappointing.
Yesterday
and today the Bank began to execute market swaps of sterling against
dollars, and through this technique should be able to show a net
surplus at the end of the month, but probably not enough to permit
any substantial repayment of debt now outstanding.
In fact, he saw
very little alternative to Britain's rolling over again most of the
overnight credits of $425 million which they received at the end of
Those overnight credits were supplied in the amount of
October.
$200 million by the U.S. Treasury, $175 million by various foreign
central banks, and $50 million by the System.
Looking a bit further ahead, Mr. Coombs remarked, some
troublesome problems could arise in December as a result of possibly
severe pressures on the Euro-dollar market, which might react
against sterling.
As the Committee knew, U.S. banks had attracted
a great deal of money from the Euro-dollar market and, if they tried
to maintain those holdings through the year-end, the result might be
something of a tug-of-war between the U.S. banks and foreign banks
seeking to repatriate funds from the market for year-end window-dressing
purposes.
Such a tug-of-war could produce a very sharp rise in the
Euro-dollar rates, which would in turn exert a strong pull on liquid
funds now held in sterling.
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At the last meeting of the Bank for International Settlements,
Mr. Coombs continued, ways and means had been considered of avoiding
such a sudden vacuum in the Euro-dollar market which could pull in
money from London, and most of the European central banks seemed
agreeable to the U.S. suggestion of a joint effort to cushion the
year-end strains.
The Swiss National Bank and the Netherlands Bank,
for example, would be prepared to funnel back into the Euro-dollar
market via the BIS most of the money that they took in as a result
of year-end window-dressing by their banks.
The Bundesbank had
already announced a reduction in reserve requirements during December
and the Bank of Italy would try to restrain run-offs of Euro-dollar
market placements by the Italian commercial banks.
If those measures did not suffice, Mr. Coombs said, there
were two additional steps that might be worth taking.
As the Committee
knew, the System had a reciprocal line of credit with the BIS of
dollars against European currencies other than Swiss francs in the
amount of $200 million equivalent.
A short-term drawing of dollars
by the BIS of perhaps no more than a week's duration for placement
in the Euro-dollar market might help considerably to relieve any
sudden strains that might develop, at no risk to the System.
Secondly,
if a sharp rise in the Euro-dollar rates should tend to pull liquid
funds out of London, that would probably be reflected in a weakening
of spot sterling and a strengthening of the forward rate, with the
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11/22/66
result that the New York-London arbitrage differential on Treasury
bills might move sharply in favor of London.
In such circumstances,
it might be worthwhile for the System to execute in the market
covered purchases of sterling with the dual objective of preventing
any outflows from New York while simultaneously protecting sterling
against year-end pressures.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
November 1 through 21, 1966, were
approved, ratified, and confirmed.
Mr. Coombs noted that the longer-standing portions of the
swap arrangements with the National Bank of Belgium and the Nether
lands Bank--setting aside for the moment the increases that had
been negotiated in September 1966--would both mature soon.
Specif
ically, the $100 million line with the National Bank of Belgium,
with a 12-month term, would mature on December 22; and the $100
million line with the Netherlands Bank, having a three-month term,
would mature on December 15.
He recommended renewal of the two
standby swap lines for another twelve and three months, respectively.
Renewal of the $100 million standby
swap arrangements with the National Bank
of Belgium and the Netherlands Bank was
approved.
Under the twelve-month line of credit with the National
Bank of Belgium, Mr. Coombs said, it had been the established
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practice for both parties to make a $50 million drawing with a
maturity of six months.
That $50 million drawing, on which
neither party had any disbursements outstanding at the moment,
also reached the end of its term on December 22, 1966, and he
recommended its renewal for another six months.
Renewal of the six-month drawing on
the standby swap arrangement with the
National Bank of Belgium was noted without
objection.
As the Committee knew, Mr. Coombs said, the standby credit
lines with both the National Bank of Belgium and the Netherlands
Bank were increased by $50 million last September, with the proviso
by both the Dutch and the Belgians that they regarded the increases
as temporary, and that a prolongation should be discussed in advance
on a multilateral basis at a meeting of WP-3.
That question had in
fact been on the agenda at a recent WP-3 meeting, but apparently
time did not permit a discussion then; and no further WP-3 meeting
was scheduled before the swap line increases reached their maturities
around the middle of December.
He had been in touch informally with
the Netherlands Bank on the matter, and understood that their present
thinking was to relate the question of prolongation of the September
increase in the swap line to the question of whether the $400 million
of short-term facilities placed at the disposal of the Bank of
England by European countries in September would be renewed when
11/22/66
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they matured after the turn of the year.
In effect, the Dutch
position, as he understood it, was that if the September credits
to the U.K. were renewed they would be prepared to renew the
additional $50 million on their swap line with the System.
An
extension of the September credits to the U.K. would probably be
discussed at the December meeting in Basle, and as far as he could
see the general attitude in Europe now might be reasonably sympa
thetic.
He was not sure of the reasoning underlying the position
of the Netherlands Bank; perhaps their effort to avoid hardening
the $50 million enlargement of the line into a permanent arrangement
reflected a desire to bring it under multilateral surveillance by
representatives of Governments rather than of central banks.
He
suspected, however, that the continental lines to the U.K. would
themselves eventually take on a semi-permanent character, so the
Dutch might well end up having made no more than an empty debating
point.
Second, and more important, he thought they were worried
about the objectives of U.S. policy at the moment--specifically,
about the goals with respect to reforms in the international monetary
system--and were not sure how the U.S. thought the swap network
would fit in.
In any case, Mr. Coombs said, it had already been indicated
to the Dutch on several occasions that the System would prefer not
to have any reluctant partners in the network; and that, if the
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Netherlands Bank should find it inconvenient to prolong the increase
in the swap line, the point certainly would not be pressed.1/
Accordingly, he felt reasonably sure that the September increase in
the credit lines with the Netherlands Bank would ultimately harden
into a permanent increase.
In his judgment, much the same consid
erations applied to the increase of $50 million in the swap line
with the National Bank of Belgium.
Against that background, he would
like to recommend Committee approval for renewal for another three
months of the $50 million increases in the two swap lines in question,
if the other parties were agreeable.
In reply to a question by Mr. Mitchell, Mr. Coombs said it
had already been made clear to the two central banks that the System
would not concur in a renewal if they wanted to incorporate conditions
in the documents exchanged.
Mr. Daane said he thought Mr. Coombs' approach was probably
the right one and he would support it.
As a sidelight, he would
note that despite all the discussion at the previous WP-3 meeting of
the desirability of initiating multilateral surveillance of the swap
network in that forum, at the most recent meeting--presided over by
the Netherlands delegate--no time had been allowed for the planned
discussion and that fact did not seem to disturb anyone.
Since the
1/ A sentence has been deleted at this point for one of the
reasons cited in the preface. The sentence reported a further
comment by Mr. Coombs on possible Dutch thinking on the subject
under discussion.
11/22/66
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next meeting was scheduled for January, it was obvious then that
no discussion could be held before the September 1966 enlargements
of the network came up for renewal.
Renewal of the $50 million enlarge
ments of the standby swap arrangements
with National Bank of Belgium and the
Netherlands Bank was approved.
Mr. Coombs said his next recommendation related to the
Committee's authorization of November 1965 to assume commitments
for forward sales of lire up to $500 million equivalent.
When the
Committee authorized such operations there were several suggestions
by Committee members that the subject should be re-examined if
those commitments were still on the books after a year had passed.
During the last few months, he had given a fair amount of thought
to the matter and had discussed it with the Treasury, which also
had outstanding commitments in forward lire, totaling $1 billion.
If the Committee so desired, it could pull out of those operations
right now without disturbance to the international financial markets
or to the Bank of Italy; the U.S. Treasury would be prepared to take
over the System's $500 million.
As he had thought about the question,
however, it had seemed increasingly desirable to him to make a
distinction between the time element involved in such forward
operations on the one hand and in the swap operations on the other.
In the case of swap operations, it seemed to him absolutely essential
to keep such credits short-term, preferably no more than six months.
11/22/66
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Very fundamental questions of discipline in the entire international
payments mechanism were involved; swap drawings were made by a deficit
country in the expectation, or at least the hope, that it was dealing
with a short-term situation which might be reversed either through
natural forces or by corrective policy moves.
Such swap drawings
constituted the short end of the credit spectrum, with drawings upon
the IMF and inter-governmental loans constituting the medium- and
long-term segments of the spectrum.
No central bank in the swap net
work, he was sure, wanted to see the maturities of the swaps lengthened
out, regardless of whether the central bank concerned was doing the
borrowing or the lending.
However, Mr. Coombs continued, forward operations did not
represent debt of one central bank to another; rather, they were
contracts with the market which had been executed in order to relieve
market tensions.
Large-scale forward operations such as the Bank of
Italy had undertaken were essentially a means of lubricating the
international financial machinery and, in particular, insuring that
no serious disruptions occurred in the Euro-dollar market--which,
as the Committee knew, had become a major source of financing for
a wide variety of international trade and investment.
No central
bank had any direct responsibility for the Euro-dollar market, but
he thought it would be highly dangerous for the central banks to
treat that market as something of a free planet whose movements
11/22/66
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could be disregarded.
By shunting Italian commercial bank money
into the Euro-dollar market through those forward lire contracts,
the Bank of Italy had acted to relieve a stringency in that market
in the same sense that the Federal Reserve or any other central
bank would buy Treasury bills to relieve pressures in its domestic
market.
If that analogy had any validity, Mr. Coombs said, he was
inclined to think that the Committee should not be rigid insofar
as the time element in such forward operations were concerned.
To
him, the essential issue rather seemed to be whether the operation
in question was performing a useful function; if so, it should not
be abruptly terminated because it reached some arbitrary maturity
date.
In that connection, he might also note that none of the
European central banks which had engaged in such forward operationsand that included the Germans, Swiss, Dutch, and British as well as
the Italians--had applied to such forward operations the same time
limits they would attach to central bank swap operations.
He would,
therefore, like to recommend to the Committee that the System's
present commitments in forward lire be continued on the books, subject
to further review in three or six months.
He would hope that the
progressive reduction of the Italian balance of payments surplus
which had been going on this year would continue and that in the new
year opportunities would arise for liquidation of a substantial
11/22/66
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portion, if not all, of those commitments.
In that connection,
he might mention that he had secured the agreement of the U.S.
Treasury to allow the System priority over the Treasury in liqui
dating its commitments insofar as market opportunities permitted.
There was, of course, no risk to the System in the forward lire
operations.
Mr. Daane expressed the view that the Committee should
continue the present authorization for forward lire commitments
and plan on reviewing those operations in three months.
Mr. Mitchell noted that Mr, Coombs had suggested the
possibility of some reduction in the outstanding commitments, and
asked whether the latter would spell out his expectations in that
regard.
Mr. Coombs replied that growth in the commitments had slowed
almost to zero.
The real key to the outlook for them lay in the
Italian balance of payments situation.
1965.
They had a heavy surplus in
This year, however, their surplus had been at hardly more
than half last year's rate, and their recent disastrous floods
might accentuate the trend toward balance.
Secondly, the Italian
payments position tended in general to be highly volatile.
Accord
ingly, he would not be surprised to find them in heavy deficit in
1967 or 1968.
In reply to a question by Mr. Hickman, Mr. Coombs said that
the swing in the Italian balance of payments could easily be large
11/22/66
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enough to permit liquidating all of the forward lire commitments
of the Treasury and the System.
Mr. Maisel said he had no specific objections to the course
Mr. Coombs recommended.
However, he still felt as he had when the
subject was originally discussed in November 1965; the Committee was
making a major decision on an ad hoc basis.
Along with the Treasury,
the System was underwriting $1-1/2 billion of the $9 billion Euro
dollar market.
Why that particular part of the market?
What should
the reaction be if it were proposed to underwrite the whole market?
It seemed to him that a basic study of the System's role with respect
to the Euro-dollar market was needed.
Mr. Coombs agreed that a staff study of the type Mr. Maisel
mentioned was desirable.
On the substantive question, he would
repeat that no central bank had specific responsibility for coping
with the problems that arose in the Euro-dollar market, and one
could only hope that central banks would attempt to cooperate infor
mally to minimize the dangers.
As he had indicated, he was inclined
to think that to a large extent such forward operations should be
viewed as the international equivalent to central bank operations
in domestic markets.
The record seemed to suggest that this was
a painless way for the System to join with other central banks in
dealing with the problem of restoring liquidity to the Euro-dollar
market.
In addition, the operations of the Bank of Italy were a
11/22/66
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good object lesson to other central banks on desirable international
behavior under conditions of payments surpluses.
Mr. Daane said that similar questions had arisen in the
meetings in Paris last week.
He thought a review of the System's
role in the Euro-dollar market was justified.
Chairman Martin noted that no objections had been raised
to continuing the System's forward commitments in Italian lire at
present.
He suggested that the Committee plan on reviewing the
matter again in three months, and that the staff proceed with a
study along the lines of that Mr. Maisel had suggested.
Mr. Coombs then said he would like to mention that during
the past few months there had been suggestions from the National
Bank of Denmark and the Bank of Norway that they would welcome
an opportunity to join the Federal Reserve swap network.
One
reason those countries had not been included earlier was the fact
that neither had so far qualified for Article VIII status under
the IMF regulations.
He was informed, however, that it was probable
that both countries would meet the Article VIII requirements early
next year.
In that connection, he thought it was also worth pointing
out that in September both central banks joined for the first time
in the credits to the Bank of England.
It would be useful, in his
opinion, to have staff studies of the possible desirability of
including both central banks in the network, probably with relatively
11/22/66
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small lines of credit in each case--possibly $50 million.
It would
be desirable, he thought, for the Committee to reach a decision in
the matter fairly soon.
Chairman Martin suggested the staff prepare such studies.
He added that it would be worthwhile to have corresponding studies
with respect to Mexico and Venezuela, since both of those countries
also were interested in joining the System swap network.
Mr. Brimmer referred to the two steps that Mr. Coombs had
said might be taken if further measures were needed to deal with
year-end problems in the Euro-dollar market, and asked which approach
Mr. Coombs thought would be most likely.
The choice might have
important implications for the Committee's domestic operations, since
the Euro-dollar market had been an important source of funds to U.S.
banks recently.
Mr. Coombs replied that the decision between the two coursesas well as the timing of the operations and their scale--would depend
largely on the market situation.
If, however, the strains were
serious it might be useful to follow both courses; the two types of
operations together might well be more effective than either alone.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U.S. Government securities
and bankers' acceptances for the period November 1 through 16, 1966,
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and a supplemental report for November 17 through 21, 1966.
Copies
of both reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
The money market was subjected to some moderate
pressure during the period since the Committee last met.
As the written reports have indicated, this was mainly a
reflection of increased pressure on money center banks
which, for reasons we do not fully understand, appears to
have been somewhat greater than has been typical in early
November in other recent years. On the day following the
last meeting of the Committee the effective Federal funds
rate reached 6-1/4 per cent despite the injection of
nearly $1/2 billion of reserves on the day and a net
borrowed reserve position for the week of about $300 million.
With the credit proxy showing no signs of strength, net
borrowed reserves were permitted to fall still lower in
the subsequent two weeks. Nonetheless, with excess reserves
at a high level at country banks, the Federal funds rate
remained within a 5-1/2 to 6 per cent range. Three- and
six-month Treasury bill rates moved up about 20 basis points
from the relatively low 5-1/4 and 5-1/2 per cent rates
prevailing at the time of the last meeting, but declined
sharply last Friday and yesterday as strong demand for
bills developed and the temporary stresses receded from
the money market. By the close of business yesterday the
key three- and six-month rates were back where they were
at the time of the last meeting. In yesterday's regular
weekly auction the three-month rate was set at 5.25 per cent
and the six-month rate at 5.50 per cent.
Dealer financing rates at New York City banks touched
a new high of 6-7/8 per cent for new money before receding
again prior to last weekend. Dealers were able to find
financing out of town at lower rates, however, and were not
under pressure to liquidate inventories which had been built
up as dealers took on issues involved in the Treasury's
November cash refunding and increased their holdings of
longer bills. Despite the fact that prices of the new notes
offered by the Treasury had fallen below par before the
November 15 payment date, dealers tended to view their
still substantial holdings as a good investment for the
11/22/66
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longer pull. They were not anxious, however, to build up
their holdings further and backed away from modest selling
by some speculative holders. Both new issues moved above
par bid in yesterday's strong bond market. As far as bill
holdings are concerned, the dealers are expecting heavy
seasonal buying by the System over the next few weeks.
While dealers had no major financing problems over the
period, the high cost of money remains a serious concern
to them and has, of course, made them unwilling to hold
short-term bills, thus aggravating market shortages.
Perhaps the most significant development since the
Committee last met has been the resurgence of demand in
the capital markets. As you will recall, a considerable
feeling of confidence had built up in the bond markets at
the time of the last Committee meeting. There was no
rush of borrowers into the market and corporate and
municipal dealers had willingly increased their portfolios.
Since then a steady stream of announcements of additions
to the new financing calendar--headed by the A.T.&T. issue
set for early January--has introduced a new note of caution
and long-term interest rates have moved higher. The long
markets were also affected by rumors that the Federal
National Mortgage Association might come to the market
with participation certificates before year-end, and by
the continuing uncertainty about the likelihood of fiscal
policy action. At the moment the market is rather delicately
poised and much will depend on the stream of economic news
and on Administration tax and spending decisions that could
be forthcoming before the next meeting of the Committee.
The Treasury has about completed its 1966 financing
program. The November refunding is now just about out of
the way, although final distribution of the new issues is
by no means complete, and $1.2 billion of new money was
raised in a highly successful bill strip auction last week.
All that remains is an auction of $1 billion or so tax
anticipation bills set for early December.
Looking ahead to the rest of the year there are a
number of problem areas--the buildup of demand in the capital
market, the Treasury's tenuous cash position which seems
likely to result in direct borrowing from the System, un
certainties regarding the international flow of funds as
the year-end window dressing period for European banks
approaches, and the continued pressure that CD attrition has
been putting on money center banks. The movement of short
term interest rates is of course of crucial importance in
11/22/66
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determining the likely CD runoff between now and the end
of the year. At the current level of Treasury bill rates
the banks might well be able to handle their very large CD
maturities without undue problems. Given the large banks'
heavy dependence on the Euro-dollar market, and the possibil
ities they have of switching from that market to the Federal
funds market, it could be difficult to bring the Federal
funds rate much lower on a consistent basis than it has been
lately without a massive injection of reserves. While a
loss of Euro-dollar deposits does not necessarily mean a
loss of deposits in our banking system as a whole there is
apt to be considerable churning if banks with large basic
deficits have to make up Euro-dollar deposit losses.
Mr. Coombs has already noted the international complications
of this situation.
The uncertainties about the Treasury cash position
and the international flow of funds make the forecasting
of likely interest rate movements in the weeks ahead a
highly risky proposition. The blue book 1/ notes that
current estimates of a need to supply about $1 billion
reserves by early December could be substantially reducedor the position could even be reversed--if direct Treasury
borrowing from the System reaches substantial proportions.
Open market operations will, of course, have to be adapted
to meet the situation as it develops day by day, but it
may be difficult to achieve pinpoint control of the reserve
situation. In addition, a frustration of dealer expectations
of heavy System bill purchases could lead to upward pressure
on bill rates. Some offsetting demand may result from
sustained private buying and foreign central bank purchases,
but such demand might well be concentrated on shorter bill
maturities where there are already acute market shortages.
If such a situation should develop, it might be useful for
the System to engage in Treasury bill swaps--selling short
bills that are in demand and taking longer bills from dealer
positions. I would be prepared, if the Committee agrees,
to undertake such swaps over the coming weeks if unsettled
market conditions in the longer bill maturities appear to
warrant them and provided that the market wants shorter bills
at about current rates.
Returning to the likelihood that the Treasury will borrow
from the System, there are some technical problems that
require the Committee's attention. As you know, direct
borrowing by the Treasury from the System is limited by
law to $5 billion. The continuing authority directive
1/
The report, "Money Market and Reserve Relationships,"
prepared for the Committee by the Board's staff.
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11/22/66
authorizes and directs the Federal Reserve Bank of New York
to purchase for its account directly from the Treasury,
with discretion to issue participations to other Reserve
Banks, special short-term certificates of indebtedness only
up to $500 million. We have been working with the Treasury
to try to determine what their needs might be; current
guestimates--which are far from precise--range from about
$100 million to around $600 million--with the maximum need
beginning in early December. While these estimates may be
too high, I believe--to be on the safe side--that the
Committee should increase the maximum amount of short-term
certificates that may be held at any one time by the Federal
Reserve Banks from $500 million to $1.0 billion.
Mr. Daane said it was his impression that some of the recent
pressures in money markets were due to maldistribution of reserves
toward country banks.
He asked whether that situation was in process
of being corrected.
Mr. Holmes replied that the maldistribution already had been
largely corrected.
A flow of reserves from city to country banks
seemed to be a phenomenon characteristic of early November, although
it was larger this year than in past years.
Mr. Daane then asked whether the Manager expected Treasury
bill rates in coming weeks to reflect the upward pressures that were
usually experienced near the end of the year.
Mr. Holmes replied it was particularly difficult now to say
what would happen to bill rates because there were forces working in
both directions.
As he had indicated, there would be upward pressures
if reserves were supplied by means other than the System purchases of
bills the market expected.
On the other hand, rates had declined
sharply in the past few days as a result of strong demands.
11/22/66
-22
Mr. Daane asked whether Mr. Holmes would characterize present
money market conditions as somewhat easier than they had been recently,
and Mr. Holmes replied affirmatively.
He would anticipate that the
money market would turn very easy today unless pressures developed
from some unexpected source.
While it was too early to say what the
level of net borrowed reserves would be for the current statement
week the Desk was now looking at a figure well below $200 million.
Mr. Mitchell asked what level of bill rates would be required
to permit banks to expand their outstanding CD's to offset a reflow
of funds to the Euro-dollar market in a volume of, say, $400 million.
Mr. Holmes replied that while such judgments were difficult
to make he thought the bill rate probably would have to be somewhat
lower than it was now.
Mr. Brimmer asked whether the bill rate might have to drop
as low as 5 per cent, and Mr. Holmes replied that he could not be
sure.
Mr. Ellis asked Mr. Holmes if there would be any rate objec
tives in the proposed market swaps of short bills for long.
Mr. Holmes said that pressures had begun to build up in longer
term bills recently.
The expected demands from foreign central banks,
and perhaps other sources, probably would be concentrated in the
shorter-term area where supplies were limited.
If that occurred he
thought it would be useful for the Desk to feed short bills into the
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11/22/66
market and take out longer bills.
There would be no particular rate
objectives to the operation; the purpose would be to relieve pressures.
Chairman Martin asked whether the Manager was proposing a
balanced operation.
Mr. Holmes replied in the affirmative.
He added that if
Treasury actions and perhaps also the System's foreign currency
operations supplied reserves over the rest of the year there would
be much less to be done through domestic open market operations than
the projections implied.
That might well affect expectations and
produce a turnaround in bill rate movements.
That would not be
particularly desirable at a time of seasonal churning in the market.
Mr. Hickman remarked that one aspect of the proposal he found
puzzling was that dealers did not have many longer-term bills avail
able for sale at present.
Mr. Holmes agreed that that was the case at the moment, but
noted that such bills would be coming back to dealers as outstanding
long-term repurchase agreements matured.
Such RP's would be running
off all through December, but particularly around the middle of the
month.
They had been scheduled in that way precisely because dealers
had expected seasonal buying by the System in December.
Mr. Hickman then commented that the one-month bill was closely
competitive with negotiable CD's of banks, and he did not think the
System would want to operate in a manner that would put rates on those
11/22/66
-24-
bills under upward pressure.
It would be desirable, he thought, to
give the banks ample room to retain their outstanding CD's, and he
would be dubious about selling too many bills in the short-term area.
Mr. Holmes agreed, and indicated that he would propose to
engage in the operation only if it could be carried out without too
much effect on short bill rates.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period November 1 through 21,
1966, 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. Koch made the following statement on economic conditions:
In my view, domestic nonfinancial developments now
confirm more clearly developments discernible earlier in
the financial area in suggesting an appreciable slowing
down in the rate of expansion in total economic activity.
The average annual rate of real growth in the GNP for the
past two quarters combined, for example, is now estimated
at less than 3 per cent. Moreover, the pattern of GNP
revisions seems now to be becoming one of downward adjust
ments in contrast to the upward revisions typical when
the economy is in a vigorously expanding phase. Right
now, for example, recent weakening in housing starts and
auto output suggest our current fourth-quarter GNP
estimate, made before these developments were reported,
may prove too high.
11/22/66
-25-
Growth in industrial production has also slackened
markedly since August, with the 0.3 per cent rise in
October being due largely to a sharp spurt in auto
production to a level from which it has already been
cut back. Employment growth continues to be sizable,
but the rise since mid-year has been less than earlier.
Turning to the recent spending proclivities of the
major sectors of the economy, consumer outlays have been
sluggish for some months now. When one makes allowance
for larger tax payments and higher prices, real consumer
disposable income and spending have both only increased
at around a 2 per cent annual rate thus far this year.
Although earnings of factory workers are rising by more
than 4 per cent, and recent wage settlements are averaging
around 5 per cent a year and have resulted in higher labor
costs, from the wage earners' point of view the lion's
share of these wage increases has been absorbed by higher
consumer prices and has not been available for purchases
of additional real goods and services.
One of the sharpest and earliest drops in consumer
spending, of course, was that for new housing. As a
result, housing starts fell to a 1.1 million annual rate
level in the third quarter and then plummeted to around
the 850,000 level last month. New permits for future
starts declined only slightly further in October, but
they were already very low.
Consumer outlays on furniture and major appliances
have also weakened, reflecting in part the decline in
housing expenditures. Moreover, public reception of the
1967 model autos to date has not been overly enthusiastic.
Only consumer spending on nondurable goods and services is
continuing apace, and for both categories higher prices
have been accounting for a significant part of the increase
in dollar purchases.
The course of future consumer spending will depend in
large part on the spending decisions of business
enterprises and governments which help generate additional
consumer income. Turning to business spending first, it,
too, now has undoubtedly passed the point of maximum rate
of increase. The rate of inventory accumulation dropped
substantially in September at manufacturers and outstanding
stocks actually declined at wholesalers. Total retail
inventories were up in September, but the rise was due
entirely to an increase in auto stocks. Auto stocks rose
again in October to a point sparking the production cut-back
11/22/66
-26-
I noted earlier.
Surveys of business firms and purchasing
agents suggest over-all inventory accumulation is likely
to taper off further in the coming months.
New orders for durable goods declined rather sharply
in October following the brisk run-up the month before.
New orders have shown no increase on balance since spring.
Several private surveys now also suggest a sharp retardation
in business spending on new plant and equipment some time
in 1967. If one takes into account the level such spending
is already reaching in the current quarter, real business
spending on plant and equipment may already be near its
peak for the current investment boom.
Unfortunately, I can add little today to your know
ledge about the likely course of defense spending. All I
can say is that it seems to me unlikely that the increase
in such spending in coming quarters will exceed on average
the large $4.2 billion rise of the third quarter, partly
because $0.5 billion of the third-quarter rise was due to
the one-time effect of the military pay increase. Our
staff guess of the increase in defense spending in the
current quarter is $3.5 billion. When one assesses the
likely effects of future defense spending on total economic
activity, he should note that effects start when orders
are placed and that the large third-quarter rise in defense
spending was at a time when the increase in total activity
in the economy was moderate and when inflationary pressures
were becoming less obvious. It is likely to take a goodly
increase in aggregate Government spending next year just
to offset the smaller likely rise in spending by the
private sectors of the economy.
As for the significance of these demand developments
for resource use and prices, the rate of utilization of
manufacturing capacity no doubt dropped off a little in
September and October as new capacity continued to be put
in place at the earlier pace and as growth in output
slowed markedly. You will have noted from the green
book 1/ that revised data on capacity utilization have been
developed. These data show that a high rate of utilization
has prevailed in recent quarters but the level of
utilization has been revised down a little for many years
back.
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
-27-
11/22/66
The unemployment rate has remained just under 4 per
cent in recent months due to the fact that a reduced
labor force growth has approximately matched the reduced
rise in employment. Average weekly hours of work have
dropped off a little, too, but remain high.
Over-all industrial prices have been little changed
now for several months. A drop in sensitive prices has
concealed a rise in prices of other industrial goods in
the total index since May whereas earlier a sharp rise in
sensitive prices had hidden the relative stability of
prices of other commodities in the total. In any case,
over the past year as a whole, industrial prices have
risen about 2 per cent, an accomplishment that most other
industrial countries would no doubt have been happy to
have emulated.
There will be some further upward pressure on over-all
industrial prices in the months to come if wage increases
continue in the 5 per cent annual-rate area, and if the
decline in sensitive material prices ceases. Incidentally,
the Census Bureau has recently revised its data on labor
costs in manufacturing to show a sharper recent increase
than had been indicated by the earlier data. But some
further wage, labor cost, and price inflation may be an
unavoidable result of past excesses. They probably
cannot be averted without a degree of over-all restraint
on the economy that would produce a recession.
Three weeks ago I said that domestic financial develop
ments suggested to me that the time had come for a further
relaxation of monetary restraint. Today, I feel that
nonfinancial developments suggest the same course of action.
Monetary policy has achieved the moderation in the upward
thrust of aggregate demand it has been seeking. Policy
should now be adjusted in a timely manner lest we be
saddled with the blame for overstaying the boom.
Mr. Hickman commented that he thought Mr. Koch's presentation
was an excellent one.
He then asked about the specific statistical
calculation Mr. Koch had used in arriving at the conclusion that both
real disposable income and spending of consumers had risen at an
annual rate of 2 per cent thus far this year.
11/22/66
-28-
Mr. Koch replied that his statement was based on the calculated
percentage increases in the variables in question from the fourth
quarter of 1965 to the third quarter of 1966, expressed at annual rates.
Mr. Brill made the following statement concerning financial
developments:
In assessing the economic situation for the Committee
three weeks ago, I expressed some skepticism about the
validity of the softening signals financial statistics had
been giving us in October. While some of the preliminary
nonfinancial figures available on November 1 suggested a
change occurring in the underlying economic situation, I
was reluctant then to accept all of the figures at full
value, or to recommend more than a shading of policy in an
easing direction.
But as better and later figures have come in, I've had
to swallow some of my skepticism and, to use a phrase
hallowed in FOMC deliberation, "resolve doubts on the side
of ease." The financial figures were right in signaling a
major shift in activity this fall, albeit they seem to
have overstated the extent of the change. While neither
industrial output nor total GNP has actually contracted, as
have financial flows, the production, price, and spending
developments reviewed by Mr. Koch this morning all confirm
that expansion of economic activity has slowed markedly.
Under the circumstances, one might have expected
financial indicators in November to continue to signal
slackening trends in activity. Some of the financial
measures have. Bank credit has continued to contract (at
least on the proxy basis), and business loan growth has
proceeded at only a sluggish pace. But other financial
indicators have hinted at renewed pressures. After
declining in late October, member bank borrowing increased
through mid-November; the Federal funds rate also bounced
back, reaching, at one point, a new high; and there was
a surge in bank borrowing from abroad through foreign
branches. These indicators of intensified pressure on
the banking system were reflected throughout most money and
capital markets, with both short- and long-term rates
advancing by up to a quarter of a per cent. Could this be
taken as a signal of resurgence in economic activity in
11/22/66
-29-
November? Was the late summer-early fall lull in economic
activity over?
I doubt it. Nothing in the fragments we have on a
current weekly basis suggests a revival in business or
consumer spending such as to lead to a sharp expansion
in private credit demands. Indeed, the fragments suggest
further economic dampening, at best, and the behavior of
financial markets in the past few days suggests that
investors are coming around to this view.
Frankly, I'm not satisfied with any of the explana
tions as to why there was a turnaround from an easing to
a tightening trend in financial figures and expectations
between late October and mid-November. Analysts have
attributed it variously to the build-up in the corporate
calendar, the aftermath of the Treasury's November
refunding, rumors of a revival of participation certificate
issues, and the Administration's backing and filling on
tax policy. Undoubtedly, all of these factors have
contributed to uncertainty in financial markets; market
participants have reacted in a predictable manner, with
investors holding back a bit and borrowers pressing
harder.
But let's not put all of the blame--and I use the
word "blame" deliberately--on recent and prospective
Treasury financings, or Administration indecision, or the
usual vagaries of investor sentiment. Let's recognize
that the Fed has contributed importantly to market
uncertainties, in failing to give the banking system and
financial markets a clearer signal of the current objectives
of monetary policy. Not that we're free of uncertainty
ourselves; we know precious little more than any banker
or bond buyer as to what defense spending or tax policies
will be. But we have observed that expansion in economic
activity was slowing, and even earlier that bank credit
was not expanding at a rate appropriate to the needs of
the economy. We've wanted to correct this, as the
continued inclusion of the proviso clause in the directive
would indicate. Why haven't we succeeded?
I would argue that the failure stems in part from
misplaced devotion by this Committee to the marginal
reserve measure, under conditions that were bound to make
it an inadequate indicator of tightness or ease in either
money market conditions or bank reserve availability.
Today, more than ever, the key to banking developments is
the spread in interest rates between those on CD's and
those on alternative investments. With rate pressures this
fall forcing a shortening in CD maturities such that about
11/22/66
-30-
half the volume of large CD's outstanding at the end of
October mature before year-end, with the rollback in
ceiling rates on consumer CD's forcing a slowing in these
inflows to banks, with use of the discount window made
uncomfortable, and with bank liquidity already reduced,
how could we expect bank management to loosen the leash
on lending officers, or even refrain from security sales
to finance loan commitments? Why should we be surprised
at a build-up in the capital market calendar, when
monetary restraint has already forced a wring-out of
corporate liquidity, and tax payments are expected to
accelerate significantly in the first half of 1967, and
bank loans are difficult to obtain or renew? At least
one large borrower is tapping the capital market soon
to repay bank loans, and some of the other issues scheduled
for coming months undoubtedly are to rebuild liquidity
drawn down as a result of the unavailability of bank loans,
rather than as precursors to a burst of capital spending.
Results such as these were legitimate objectives of
policy earlier. But there's no need to carry a good
thing as far or as long as we seem to be doing. By
permitting a variety of forces to press bill rates back
closer to CD ceilings, by limiting the possibility of
banks tapping the consumer saving stream, by keeping the
borrowing of reserves unattractive through retention
of the September 1 letter philosophy, and--at least
until recently--by providing nonborrowed reserves
niggardly, we have closed off almost all of the domestic
sources of bank credit expansion. There is not much
logic, then, in bemoaning the failure of credit to
expand. So long as there's a price at which the public
will demand credit, we can achieve bank credit expansion
by moderating one or more of the constraints we ourselves
have imposed.
Undoubtedly, it would be advisable to wait for
clarification of the fiscal situation before undertaking
a major loosening of constraints. And there are balance
of-payments consequences to consider, as Mr. Solomon will
be discussing in a moment. But if it is the appraisal
of this Committee that the current domestic situation
affords the possibility of some moderate easing in bank
credit availability, I would suggest that policy and its
implementation be directed toward sufficient provision
of reserves so as to permit market rates to sink well
below CD ceilings, overriding even the seasonal rate
pressures customary in the weeks ahead. The objective
11/22/66
-31-
would be a pattern of rate relationships such as to
eliminate the drain of funds from financial intermediariessavings and loan associations as well as banks--without
permitting the whole rate structure to fall so far as to
induce massive resurgence in credit extensions.
Our knowledge of money market and bank credit
interrelationships is not as well developed as yet to
permit much confidence in quantifying the level of
marginal reserves that would be associated with desired
developments in interest rates and in the reserve and
The estimates advanced in the blue
credit aggregates.
book--with justifiable diffidence--suggest that one
consistent complex of variables might be:
net reserves
fluctuating around zero, 5 per cent rates on 3-month
bills, and bank credit expansion in the 2-4 per cent
annual rate range. This is probably as good a guess as
any, although with the very recent change in financial
market sentiment, these rate and aggregate objectives
might possibly be reached with a milder change in net
borrowed reserves than going all the way to zero. Never
theless, there are seasonal and other pressure points
ahead, as Mr. Holmes has indicated, and it would seem
to me important to insure that the six-month bill rate
moved down along with shorter-bill rates. Given our
recent frustrations in using marginal reserve targets
to achieve bank credit expansion and interest rate
moderation, I would suggest putting greater emphasis on
the latter variables directly as guides to the System's
intervention in money markets in coming weeks.
Mr. Ellis remarked that in times past suggestions had been
made at Committee meetings regarding appropriate fiscal policy in
relation to monetary policy.
He asked what prescription for fiscal
policy Mr. Brill would have in view of his projection of a slower
economic growth rate.
Mr. Brill said he could not be certain that economic growth
would continue to slow until he knew more than at present about the
probable course of defense spending next year.
If defense spending
11/22/66
-32-
continued to rise at the rate the staff had guessed for the fourth
quarter--and he would not be surprised if the fourth-quarter guess
turned out to be on the high side--he would still favor an increase
in taxes given what was known about other trends.
He would add,
however, that he now was less certain than he had been three weeks
ago about the desirability of a tax increase,
Mr. Solomon then presented the following statement on the
balance of payments:
I propose to concentrate this morning on the links
between monetary policy and the balance of payments,
focusing on the possible repercussions on capital flows
of an easing of monetary conditions in the United States.
The impact of an easing here would depend importantly
on what happens to monetary conditions in Europe, a
subject that was discussed intensively at last week's
meetings of Working Party 3 and the Economic Policy
Committee of the OECD.
The Committee is well aware that over the past year
the deterioration of the trade balance has been more
than offset by inflows of capital in response to tight
credit conditions in the United States. Both the
increase in imports and the inflows of capital are
extraordinary and temporary--reflecting the surge of
domestic spending and policy responses to it.
The major
forms of capital inflow have been the net repayment of
U.S. bank loans by foreigners--amounting to $500 million
in the first nine months of this year (partly seasonal)and Euro-dollar borrowings by U.S. banks through their
foreign branches--amounting to more than $2-1/2 billion
thus far this year (part of which is also seasonal).
Although these Euro-dollar borrowings are often
disparaged as being "hot money" and as not affecting the
balance of payments on the liquidity basis, there is no
question that in a real sense these flows have relieved
the U.S. balance of payments this year. Surely our
balance of payments problem is mainly a problem involving
official acquisition of additional dollars by Europe.
11/22/66
-33-
What the Euro-dollar borrowings have done is to sweep
up dollars that would otherwise have gone to European
central banks; to some extent these borrowings may
also have diverted dollars from the U.K. Without
these Euro-dollar borrowings, larger reserve gains by
continental Europe would have required the United
States either to draw on the IMF or sell gold, after
possibly first using the swaps more actively.
If indeed the reduction in the trade balance is
temporary--reflecting an income surge at home rather
than a deterioration in our competitive position in
world markets--it is difficult to find fault with a
temporary capital inflow offsetting it.
The question to be faced now is: what will happen
to these capital inflows if monetary policy eases in
the United States? In this connection, one can
visualize either a move toward monetary ease by itself
or such a move as part of a shift in the policy mix,
in which tax rates are increased. A shift in the mix
that led to more housing expenditures and less business
and consumer spending would provide a modest benefit
to imports, in view of the smaller import content of
housing. But, whether the mix is shifted or not, the
major questions have to do with the response of capital
flows to a change in monetary policy. What can be said
on this matter?
(1) It should be noted that if banks
merely stop adding to their debt to the
foreign branches--without any repaymentsthe balance on official settlements next
year will tend to worsen--from this factor
taken by itself--by over $2 billion.
Ideally, this cessation of capital inflow
would be offset by a slackening of imports,
while exports continue to increase at the
recent rate. The green book suggests that
we should be seeing some slowdown in import
growth beginning this quarter. A reduction
in import growth from close to 20 per cent
annual rate to 10 per cent would help the
trade balance by more than $2 billion per
year, other things including export expansion
remaining the same. Even this ideal outcome
might involve lags such that the capital
account deteriorated before the trade
11/22/66
-34balance improved. Much more serious would
be a failure of exports to increase at a
healthy rate. But that is a problem about
which monetary policy can do little aside
from its efforts to maintain domestic price
stability.
(2) It is also reasonable to assume
that U.S. banks, having developed this
source of funds in Europe and being
anxious to rebuild their liquidity, will
not rush to reduce their Euro-dollar indebt
edness. What goes up does not automatically
come down. We may find that this source of
funds to banks remains more important than
in the past.
(3) The level of interest rates in the
Euro-dollar market will have an important
bearing on the attitude of U.S. banks toward
Euro-dollar indebtedness. It is the
differential between rates here and in the
Euro-dollar market that counts rather than
the absolute level of rates here. From the
viewpoint of our balance of payments, it is
desirable that Euro-dollar rates come down
with short-term rates in the United States.
But it matters greatly how the Euro-dollar
rates are pushed down. If they fall only
because U.S. banks are pouring dollars back
into the Euro-dollar market, our balance of
payments will suffer. On the other hand, if
Euro-dollar rates decline because Europeans
are demanding fewer, or supplying more,
dollars to that market, U.S. banks will feel
less of an incentive to reduce their Euro
dollar indebtedness.
(4) There is now some reason to think
that European interest rates may decline,
as the green book indicates. Two major
countries, Germany and the U.K., are experi
encing a distinct slowdown in economic
activity. The U.K. is ready to relax its
monetary policy as soon as it can do so
without losing funds through interest
induced capital outflows. Much of the WP-3
and EPC meetings last week were devoted to
11/22/66
-35persuading the German authorities that, on
the basis of their own reports regarding
the outlook for the German economy--slowdown
and possibly recession ahead--and the German
balance of payments--rapidly increasing surplusGerman monetary policy should be eased
significantly. Such an easing of monetary
policy in Germany, combined with declining
credit demands there, should put downward
pressure on Euro-dollar rates.
(5) As for bank credits to foreigners,
it seems likely that these would respond to
an easing of credit conditions in the United
States with a lag and by small amounts.
The
desire of banks to rebuild liquidity and to
meet the needs of domestic borrowers should
make for a gradual resumption of new loan
extensions and therefore for a gradual
reversal of the present tendency toward net
repayments.
(6) Thus there are reasons to expect
that an easing of monetary policy here will
not lead to a symmetrical reversal of this
But suppose this
year's capital inflows.
turns out to be wrong and that next year U.S.
banks do not increase their Euro-dollar
This is an extreme
indebtedness at all.
assumption--even in 1964 and 1965, U.S. banks
borrowed net from their branches, though
in much smaller amounts than this year. Such
a cessation of Euro-dollar borrowing would
by itself bring a deterioration of some
$2-1/2 billion in the official settlements
balance. Following this year's surplus of
about $500 million, we would have an
official settlements deficit next year of
$2 billion. While this year's balance of
payments has looked better than we had any
reason to expect, next year's balance would
look worse than we have reason to expect.
But taking the two years together, the
average deficit on official settlements
would be $750 million--better than in 1965
or any previous year of this decade. We
would still have a balance of payments
11/22/66
-36
problem, but that is not surprising. We
had no reason to think that the long-run
balance of payments problem would solve
itself. It must still be faced as a long
run problem. But meanwhile, it need not
freeze the present posture of monetary
policy if it appears appropriate to change
that policy for domestic reasons.
Mr. Maisel asked whether the Euro-dollar transactions of
U.S. banks were really of great significance to the U.S. balance
of payments if a large part of the flows was to and from Britain.
Mr. Solomon replied that the impact on the British balance
of payments of the Euro-dollar funds drawn in by U.S. banks this
year was a point of contention between some officials of the U.S.
and the U.K.
There was no question but that a large volume of
funds left the U.K. this summer.
He suspected, however, that that
outflow reflected factors of confidence, and that the funds would
have gone elsewhere if they had not come to the U.S.
Thus, the
dollars were absorbed by U.S. banks rather than flowing to foreign
central banks.
More recently British reserves had been rising-
although, as Mr. Coombs had indicated, not at a rapid rate--and
U.S. banks might have been attracting some dollars that might
otherwise have gone to Britain.
But some dollars also were being
drawn from the continent, and there was no way of assessing the
relative importance of the two sources.
Accordingly, he did not
think it was safe to say that most of the funds were coming from
Britain.
11/22/66
-37
Chairman Martin then asked Mr. Solomon to report to the
Committee on the recent meetings of the Economic Policy Committee
and Working Party 3 which he had attended.
Mr. Solomon said that in general, the attitude toward the
U.S. at those meetings was gentle.
There was a strong awareness of
both domestic and balance of payments effects of tight monetary
policy.
The most conspicuous cases were Germany and the United
States.
Mr. Ackley reported to EPC that monetary policy had restrained
demand expansion by $8-$10 billion, before multiplier effects, in 1966.
A general desire was expressed to end and reverse the escalation of
interest rates in major countries, but in a manner that contributed to
better balance in international payments.
Hence the stress on monetary
policy in Germany, where both domestic and balance of payments
considerations pointed to the desirability of a relaxation of credit
restraint.
The German central bank representative resisted the
suggestion that one country could swing world interest rates, but did
indicate that a relaxation of policy was likely.
As for the prospects for economic activity and payments
balances in 1967, Mr. Solomon continued, it was expected that both
Germany and the U.K. would experience slower expansion.
countries recession was possible next year.
For both
On the other hand,
Italy, France, and Japan were likely to experience faster expansion.
The French representative stated that the recent fall-off in the
11/22/66
-38
French balance of payments surplus was more than a transitory
development.
What seemed to be happening was that French imports
were accelerating with domestic expansion, while exports had fallen
off as a result of the slowdown in Germany and the U.K.
Thus, part
of the French surplus had been absorbed by domestic expansion and
part was being shifted to other countries.
Also, there had apparently
been some capital outflow in response to short-term rates abroad.
Mr. Solomon said that WP-3 had held a frank discussion in a
restricted session in which the Europeans let their hair down
regarding the future of the international payments system.
They
reiterated a well-known continental view that European official dollar
holdings should not increase in total, although the dollar holdings of
individual countries could swing up and down with shifting payments
balances.
In fact, European dollar holdings had declined by $1-1/2
billion in the past two years.
Thus, the Europeans recognized that
the U.S. had been financing its deficit not as a reserve currency
country but no differently from non-reserve currency countries--by
using its reserve assets.
The second major point in that discussion, Mr. Solomon
observed, was a recognition of what was called the "collective
responsibility' of the gold-holding countries to avoid destabilizing
the system by converting existing dollar holdings into gold.
Although the means of implementing that responsibility were not
11/22/66
-39
clearly at hand, it was recognized in a constructive way.
The entire
discussion was clearly a condemnation of French policy and of
"Rueffism."
Finally, Mr. Solomon said, the discussion of swap arrange
ments that had been initiated at the September meeting of WP-3 was put
off until January of 1967, as Mr. Coombs had indicated.
Chairman Martin then invited Mr. Daane to comment on the
developments at the recent meeting of the Group of Ten Deputies.
Mr. Daane said he would first add one or two observations to
Mr. Solomon's report.
Some of those around the table at the EPC
meeting--including Mr. Ackley of the U.S. delegation--urged that the
Germans consider fiscal as well as monetary policy actions in moving
to relax economic constraints.
Secondly, the Italians thought their
balance of payments surplus this year might be on the order of $450
million, but that estimate did not allow for the impact of the recent
floods.
Turning to the Group of Ten Deputies' meeting, held in Paris
on November 16, 1966, Mr. Daane said that it was concerned largely, if
not entirely, with procedural questions, including the physical and
other arrangements for the first joint meeting with the Directors of
the IMF.
That meeting would be held at the Fund in Washington on
November 28 and 29, 1966.
Formally, the meetings would be chaired
jointly by the Managing Director of the Fund and the Chairman of the
11/22/66
-40
Deputies, but in practice it was expected that Mr. Schweitzer would
preside over the meetings held in the U.S. and Mr. Emminger would
preside over the alternate meetings held elsewhere.
Those attending
would be the Executive Directors of the Fund and their alternates; the
Deputies of the Ministers and Governors of countries participating in
the General Arrangements to Borrow (two persons per country) and their
alternates; the Managing Director and Deputy Managing Director of the
Fund and members of the IMF staff designated by the Managing Director;
and, finally, observers from Switzerland, the BIS, and the OECD.
As to the agenda for the first joint meeting, Mr. Daane
continued, the Deputies developed a draft which was later amended in
discussions between Messrs. Schweitzer and Emminger.
It was now
generally agreed that the agenda should include five items, as follows:
the aims and objectives of reserve creation, including the need for
reserves and its relationship to adjustment policies and the supply of
conditional liquidity; the nature and form of deliberately created
reserves, including their financing; distribution of deliberately
created reserves; utilization of new reserve assets, including condi
tions for the transfer of new reserve assets and for assuring the
acceptance of these assets; and conditions and circumstances of
activation of a contingency plan.
With respect to each topic, one or
more Deputies would take the lead in setting forth the views of the
Deputies within the framework of the report they issued in August 1966.
11/22/66
-41
Mr. Perouse of France offered to take the lead on the first item,
but it was agreed that he would be joined by Mr. Deming of the U.S.
Mr. Daane went on to say that the Deputies agreed to hold
a meeting of their own immediately following the joint meeting in
Washington to consider their work program.
One possibility discussed
was that of appointing small task forces from among the Deputies,
alternates, and members of the secretariat to do advance work on
those problems the Deputies regarded as being within their orbit,
including the problems of lessening possible strains on the
international monetary system and the question of the future role
of gold.
Mr. Daane concluded by noting that the second joint meeting
with the IMF probably would be held in London in the latter part
of January 1967.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Hayes, who made the following statement:
There is no doubt that in recent weeks the state of
the economy has become more complex and subject to more
uncertainties than was true a few months ago. After many
months of almost uninterrupted exuberance, we now find
clear signs that the pace of the expansion has become
less rapid. Perhaps it is only natural that this change
should give rise to doubts whether the uptrend can be
sustained at all, or whether we are close to an actual
business recession; but on careful analysis, I find
no basis at all for such a pessimistic conclusion, at
least short of a major turn-around in Vietnam developments,
11/22/66
-42-
of which we have no convincing evidence whatever.
And,
after all, a basic objective of our policy in the past
year or more has been precisely to slow an excessively
rapid growth in aggregate demand.
Economic activity continues to expand. Given the
probability that defense spending will be moving up
strongly through next year, inflation--both demand-pull
and cost-push--remains a serious threat. It is
interesting to observe that even the more pessimistic
forecasters of 1967 GNP seem to assume without question
a continuing price rise on the order of 3 to 3-1/2 per
cent per annum. Certainly there is no reason to accept
such a rise with complacence.
A good deal of stress is being placed by the
pessimists on the likelihood that plant and equipment
spending will rise only very moderately in 1967, after
a 17 per cent increase in 1966. In our Bank we believe
that, as in many recent years, the McGraw-Hill figure of
5 per cent will probably turn out to be too low. We
would expect an actual increase closer to 10 per cent,
even after taking full account of the dampening effects
of the suspension of the tax credit and accelerated
depreciation, and of the significant impact of tight
money on capital spending plans. As for consumer
spending, this does seem to be losing some of the extra
buoyancy it had shown earlier in the year. For one
thing, the rate of private saving has been lower than
the long-term average in the first three quarters of
this year, and it appears that a rise may now be taking
place. Nevertheless, as long as personal income is
increasing at a substantial pace, as it is, I believe
that reasonably well-sustained consumer spending will
no doubt provide a strong underpinning for the economy.
According to our estimates of fiscal impact of the
Federal budget, the latter is providing a sizable
stimulus to the economy in the current half-year, and
the stimulus will still be large in the first half of
calendar 1967. With the prospect of a Federal budget
deficit in the current fiscal year of about $8 billion
or more, whether figured on a cash or on an adminis
trative basis, I find it hard to understand, on any
economic grounds, the Administration's reluctance to
request a general tax increase in the very near future.
Such an increase could easily be rescinded if economic
developments should take a serious turn for the worse
some time in the coming year.
11/22/66
-43-
While the wholesale price indices have been
behaving quite well in the last few months, the outlook
for labor costs is anything but encouraging. The 5 per
cent pattern set in several recent major settlements
now seems to be regarded as a probable minimum for next
year's important negotiations, and much more ambitious
demands seem to be in the making in many industries.
I
was shocked, in a recent talk with Governor Rasminsky,
to learn of the extreme magnitude of recent labor demands
beyond our northern border.
Turning to the balance of payments, we find a
disturbingly large underlying deficit temporarily ob
scured by special transactions, including large
placements of foreign short-term funds in longer-term
time deposits and U.S. agency obligations--many of
these being in the nature of "window-dressing" trans
actions. And the reduced liquidity deficit that remains
has been more than adequately financed by the massive
inflow of Euro-dollars through the foreign branches of
American banks--a flow which is bound to slacken and
may well be reversed in the coming months. Meanwhile
the trade surplus, which is the major hope for ultimate
payments equilibrium, has been deteriorating substantially.
Under such conditions, even though the rate of import
expansion may decline with the slowdown in domestic
business growth, the prospect of considerable cost
inflation is ominous indeed.
In the credit area, we do see further evidence that
the System's restrictive policies have significantly
Indeed, the actual
slowed the expansion of bank credit.
decline in bank credit, as measured by the credit proxy,
in the past 3-1/2 months might even suggest that we
have gone too far in this direction. But in view of
the fallibility of all of our seasonal adjustments,
especially in the light of the altered tax payment
schedules in effect this year, I think it would be unwise
to lay too much stress on the statistical showing of
three or four months. In somewhat longer perspective,
the reduction in the annual rate of bank credit growth
to 5.6 per cent in the first ten months of 1966 from
somewhere around 10 per cent in 1965 seems to me a
gratifying achievement. And it is well to bear in mind
that total credit flows through the economy have not
been reduced nearly as sharply as the bank figures might
suggest. Furthermore, the heavy calendar of corporate
11/22/66
-44-
bond offerings suggests that credit demands remain
very high.
Under all these circumstances, both domestic and
international, I can see no basis for making an explicit
change at this time in our basic policy of credit
restraint. While there is always a risk of overstaying
a policy of tightness, I believe we would face an even
greater risk if we were to relax policy too much too
soon, There is still no assurance that fiscal policy
will be moving soon to support our efforts to contain
inflationary pressures, and it would seem to me unwise
to consider easing monetary policy significantly before
vital fiscal decisions have been made by the Adminis
tration. Since none of us has wanted to achieve an
absolute cessation of bank credit expansion, I would
be willing to see doubts continue to be resolved on the
side of ease, if staff expectations of further declines
in bank credit and related aggregate measures over the
rest of the year actually materialize.
Given the stresses and strains that can come to
bear on financial markets between now and the year-end
I believe that a great deal of flexibility will be
needed in the conduct of System open market operations.
The Manager will have to work in terms of the feel of
the market, with due attention to the Federal funds
rate, the bill rate, and dealer lending rates.
Our
experience of the last two weeks demonstrates pretty
clearly that net borrowed reserves are a rather
unreliable indicator of credit conditions, especially
under present circumstances. Nevertheless, the net
borrowed reserve statistics receive so much public
attention that we run some danger of a misinterpretation
of our policy, i.e., an impression that we have moved
Thus, I would hope
to a significantly easier policy.
that net borrowed reserves would tend to be closer to
$300 or $400 million than to $200 million, provided
that those net borrowed reserve figures turned out to
be consistent with a comfortable money market. I think
the Manager should continue to pay close attention to
the various measures of bank credit and liquidity. And
I would be quite happy to see some weakening of interest
rates attributable to further cooling of demand pressures.
But I am fearful that we are not likely to see a
sufficient slackening of demand pressures if a tax
increase is not forthcoming. Hopefully we will know
more about this by the time we next meet.
11/22/66
-45
As far as the directive is concerned I would prefer
alternative A as presented by the staff.1/ If aggregate
measures prove to be as weak as the staff now projects,
this would, as I interpret it, mean some modification of
operations to permit somewhat more confortable conditions
in the money market. The net results would probably not
be far different from the thrust of alternative B, but
I think it unwise to commit ourselves to an overt policy
of less restraint until some decisions have been made
on fiscal policy.
Mr. Lewis reported that the boom had apparently lost some
of its strength in the Eighth District.
Spending might be slowing;
the volume of check payments changed little from July to October
after going up 12 per cent in the previous year; business loans at
large banks had also been about unchanged since July.
Real output
might be expanding less rapidly in the District as many sectors
had reached capacity.
Payroll employment had risen at a 2 per cent
rate since June after growing 4 per cent in the previous twelve
months.
There had been little change in nonmanufacturing employment
since mid-year.
Nationally, Mr. Lewis said, it could now be seen from the
recent revisions of the national accounts figures that total spending
on goods and services rose about 7 per cent from the first to the
third quarter.
By comparison, outlays had gone up at a 9.5 per
cent rate from late 1964 to early 1966.
He thought that that
1/ Alternative draft directives proposed by the staff for
consideration by the Committee are appended to these minutes
as Attachment A.
11/22/66
-46
apparent slowing in the growth rate of total spending had been
desirable, with the economy operating at capacity and inflationary
pressures building up.
The abrupt change from rapid expansion
in bank reserves and money to contraction beginning last spring
had probably contributed to the slower growth in total demand
in recent months in spite of a stimulative budget situation.
Despite that apparent slackening in the rate of growth of
total demand, Mr. Lewis remarked, price increases this year had
accelerated.
The general price index went up at a 3.8 per cent
rate from the first to the third quarter as against a 2.1 per cent
rate from late 1964 to early 1966.
He was fearful that the basic
price trends were still strongly upward.
Real output, which had risen at a clearly unsustainable
7 per cent rate from late 1964 to early 1966, had since increased
at a 3 per cent rate, Mr. Lewis continued.
The 3 per cent rate of
gain in real output was probably less than the long-run potential
of the economy; yet, during the period of acceleration of production
for defense at the expense of civilian goods that might be the
necessary growth rate.
Furthermore, acceptance of a 3 per cent
growth rate might be desirable in the short-run in order to bring
under control the strong inflationary pressures.
As to policy, Mr. Lewis believed the marked change from
rapid monetary expansion to some monetary contraction beginning
11/22/66
-47
last spring had been desirable and had probably been a significant
factor in moderating total demand.
Total member bank reserves
and the money supply had both declined at a 2 per cent rate since
last April.
He thought it would be a mistake to permit such
declines in bank reserves and money to continue at this time.
In
the past two or three months it appeared that the monetary contraction
had not been the Committee's intent.
Initial projections had
repeatedly been that the stock of reserves and money would rise;
yet, after the fact, declines had occurred.
As a result of some
recent weakness in loan demand, net sales of Governments were
required to prevent greater declines in interest rates.
Monetary
contraction acted as a drag on both spending and credit demand,
and lessening of credit demand in turn tended to cause further
unplanned monetary contraction.
For the near future, Mr. Lewis suggested that the System
take the action needed to avoid a further decline in bank reserves
and money.
On the other hand, since inflationary pressures were
present, he thought that any rapid expansion of those magnitudes
should also be avoided.
Interest rates and net borrowed reserves
might properly be allowed a relatively wide range of movement in
response to changing credit demand.
preferred alternative B.
As to the directive, Mr. Lewis
11/22/66
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Mr. Patterson reported that the economic data that had
become available for the Sixth District since the last meeting of
the Committee confirmed the previous appraisal that the economy
of the area was proceeding at a slower pace than earlier in the
year.
In some sectors of the District the behavior was better
than nationally, but even in such cases the performance exhibited
no great exuberance.
Contrary to national developments, total
construction contract volume continued to run slightly ahead of
last year, but the volume of residential construction was now
feeling the pinch of the money shortage and rates to a much greater
extent, and construction employment continued to trend downward.
Early November reports on automobile sales suggested that sales
continued below last year's, and the behavior of consumer credit
statistics reflected that development.
Continuing, Mr. Patterson commented that the latest loan
statistics for the Sixth District gave additional evidence of a
changing pattern of lending.
Loans at large weekly reporting
banks declined sharply during the final week of October and had
shown only slight increases during the first two weeks of November.
In most years the loan increase was fairly large in November.
No
major type of loan showed any expansionary strength at those banks.
At all Sixth District member banks seasonally adjusted loans in
October changed little from September, and total loans and invest
ments declined slightly.
He found no clear-cut answer from bankers
11/22/66
-49
as to whether or not current loan trends resulted from a deliberate
tightening of lending by the banks or changes in the demand for
loans stemming from changed economic conditions.
Apparently some
of both were occurring, from what bankers told him.
Bankers
reported not only more restrictive practices but also a less
frantic demand for bank loans.
Certainly, he concluded that, so
far as his own District was concerned, the demand for bank loans
was no longer accelerating, as it had been earlier this year, even
though credit demands might still be high.
Turning to the national scene, it seemed clear to
Mr. Patterson that total credit demands were still high.
It also
seemed clear that there was considerable difference between condi
tions now and those prevailing only a short time ago.
Then credit
demands were accelerating, and the nonbanking economic data helped
explain the cause of that acceleration.
Now credit demands were
apparently not accelerating, and the economic data such as statis
tics on industrial production, retail sales, employment, and prices
did not provide evidence that credit demands were growing faster
than productive capacity.
On the other hand, the behavior of the
aggregate reserve and the money supply figures suggested that
System policy had had a major influence on maintaining the high
level of rates, for rates were still extremely high although they
might be lower than two months ago.
11/22/66
-50
Under those conditions, Mr. Patterson said, a policy posture
that was appropriate during the period of accelerating demands for
bank credit was no longer appropriate.
On the contrary, a less
restrictive policy seemed to be in order.
If policy were to be
measured solely by net borrowed reserve figures of the past two
weeks, it could be concluded that policy had indeed eased.
Never
theless, banks continued under extremely strong pressures, as
evidenced by the continued high level of borrowing and the con
straints imposed by recent trends in time deposits.
He believed
that the Committee should try to prevent a further drift downward
in the seasonally adjusted reserve figures and the money supply.
He would also like to have the Committee place itself in a position
that might be quickly reversed if the same sort of conditions that
prevailed a few months ago reappeared.
A move toward greater ease
at the present time should be in the nature of a probing operation
and might be accomplished by aiming toward a net borrowed reserve
figure below $200 million.
Mr. Bopp said evidence was growing that inflationary
pressures might be subsiding somewhat.
impressed by these facts:
One could not fail to be
the decline in total construction
expenditures, in physical volume to the extent of about 5 per cent
below a year ago; the slowdown in accumulation of inventories and
a rise in the inventory-sales ratio; the slower increase in
industrial production; the small increase in capital expenditures
11/22/66
-51
now planned for 1967; and the stability of wholesale prices in
October.
It appeared that the upward pull of demand on prices
was weakening.
But even though business expansion might be losing some
of its steam, Mr. Bopp continued, upward pressures remained.
The
backlog of manufacturers' new orders for durables continued to
grow.
Both defense spending and capital expenditures were expected
to rise at about current rates for the remainder of this year.
Growth in personal after-tax income should provide strong support
for consumer demand.
Wage settlements continued to show increases
well above the guideline.
Thus, the cost-push effect on prices
could offset any weakening in demand-pull.
Financial markets also reflected mixed trends, Mr. Bopp said.
One that should be watched carefully was the slow downward movement
of total bank credit and the money supply.
Liquidation of invest
ments had exceeded loan expansion; however, total loans and business
loans had been rising at a slower rate.
He had been unable to
determine to what extent slower loan expansion reflected more restric
tive bank lending policies or weaker demand resulting from earlier
anticipatory borrowing and a slower rate of inventory accumulation.
Looking ahead, however, the demand for funds in the capital
market seemed to Mr. Bopp likely to be strong during the remainder
of the year.
Perhaps some of the larger volume of offerings for
December reflected a spill-over from restrictive bank lending
11/22/66
-52-
policies; but regardless of the reasons, the likelihood was good
that private demand, possibly augmented by some agency offerings
and participations, would tend to force yields higher.
As he summarized those various developments, Mr. Bopp
observed, the situation appeared more encouraging than alarming.
The economy seemed to be moving toward a more sustainable rate of
growth instead of either runaway inflation or recession.
As for
policy, he would favor supplying sufficient funds to meet the large
anticipated demands in the capital market and CD runoffs and would
put more emphasis on preventing a rise in rates and arresting the
decline in nonborrowed reserves and bank credit than he would on
net reserve positions.
Alternative B of the draft directives, as
interpreted in the notes attached, would be appropriate.1 /
1/
The note to which Mr. Bopp referred read as follows: "The
reference to 'somewhat easier conditions in the money market'
might be interpreted to call for the money market conditions
described in the second full paragraph on page 5 of the blue
book. As indicated in the following paragraph on that page,
these money market conditions cannot be counted on to result in
an appreciable expansion of bank credit before year-end. The
proviso clause is worded, however, to guard against unforeseen
expansion at a 'rapid' rate. Recent Committee commentary might
suggest about a 10 per cent growth rate as an upper limit."
The blue book paragraph (second full paragraph on page 5)
mentioned in the note read as follows: "It might well be
necessary, however, to move net borrowed reserves to a shallower
level than has prevailed in the past two weeks in order to keep
bill rates from rising much above current levels. Under such
conditions, the Federal funds rate would be likely to drop to a
level averaging closer to 5 per cent, dealer financing costs should
decline further, and dealers would find it more comfortable to
finance their inventories--not only of bills but also of coupon
issues. These developments would also tend to moderate rate pressures
in long-term markets, as expectations of monetary easing took hold."
11/22/66
-53
Mr. Hickman commented that there was now little doubt that
the pace of economic expansion moderated in the third quarter and
through October.
Confirming evidence included the downward revision
in GNP, the slight decline in corporate profits, the further drop in
construction outlays, the reduced rate of increase of business
inventories and employment, some leveling tendencies in retail sales,
and four months of stability in the index of wholesale industrial
prices.
The theme of moderation had permeated the discussion at
the November meeting of the Cleveland Reserve Bank's Board of
Directors.
It was then pointed out that machine tool buying seemed
to have passed its peak, and that delivery schedules in that key
industry were shortening.
Less optimism in the auto industry was
reported, and steel companies were lowering their estimates of
fourth-quarter shipments.
The evidence did not suggest to Mr. Hickman that a recession
was approaching but, coinciding with the widely-discussed surveys
of plans for new plant and equipment spending in 1967, signs of
moderation could not be ignored.
Moreover, the Committee should
recognize that a large part of the gain in real product that had
taken place in recent months had been due to defense spending, and
that the behavior of the private sector had been weak.
Analysis of
the industrial production index, for example, suggested that the
weights of those components that had been posting successive new
11/22/66
-54
highs during recent months accounted for only about one-third of
the total.
Most of the steady risers were defense-connected.
Financial developments bore out the change in the business
climate, Mr. Hickman said.
An informal survey last week of important
Fourth District banks revealed a recent general softening in the
demand for business loans.
Applications for new loans were fewer,
and some earlier commitments were not being taken down.
Opinion
was divided as to whether those commitments would be activated
later this year.
Before turning to policy, Mr. Hickman said, he would like
to remind the Committee once again of the lack of adequate informa
tion for the design of appropriate policy.
Inventories were an
obvious gap in the Committee's knowledge, as indicated by the fact
that two-thirds of the revision in third-quarter GNP was in the
inventory component.
Such information as was available on defense
spending was almost useless until well after the fact; a significant
part of the $1.7 billion difference between the estimated and actual
national income budget for the third quarter was due to larger
than-anticipated defense expenditures.
Against the background of past moderation and future
uncertainty, Mr. Hickman remarked, the Committee should continue
to shade monetary policy on the side of ease.
He was increasingly
disturbed by the recent behavior of the bank credit proxy, which
11/22/66
-55
was expected to decline in November and December, with the latter
being the fifth month in a row.
A stiff price could be paid in
the real sector next year if the reduced flow of funds through the
financial intermediaries continued much longer.
In the period
immediately ahead he would again let the behavior of the credit
proxy and the money supply determine policy, but would seek to
obtain an annual rate of growth in the credit proxy on the order
of 3 or 4 per cent, even if that meant substantially shallower net
borrowed reserves.
The mounting calendar of corporate and tax
free bonds reduced the risk that such a tactic would touch off a
speculative wave in the bond market.
Hopefully, by the time of
the Committee's next meeting, fiscal policy for 1967 would be
revealed, and the Committee would be able to determine the future
course of monetary policy more easily.
Mr. Hickman favored
alternative B of the staff's current economic policy directive
drafts.
Mr. Brimmer said there was no need for him to review again
the evidence on domestic economic conditions presented by the staff
and also discussed in the preceding comments of members.
He shared
the doubts and uncertainties about the underlying strength of the
private economy.
He would even go further to say that in the
absence of defense and related expenditures the Committee probably
would be on the verge of describing the outlook for the U.S. economy
11/22/66
-56
in the manner Mr. Solomon reported the German economic outlook
had been described at the recent Paris meetings:
possibly recession ahead.
slowdown and
The Committee had gone quite far in
restraining domestic activity in recent months and it should be
concerned about the desirability of continuing that restraint in
the months ahead.
Mr. Brimmer noted that some of the discussion today related
to the question of the appropriate means for formulating national
economic policy.
He had not been a member of the Board last fall
when the discount rate was raised, but after reviewing the record
he felt that that step toward restraint was a proper one.
Although
the problem of the appropriate mix of monetary and fiscal policy
had not been resolved at that time, the System had not failed to
move ahead.
Now, as then, it was highly desirable to have a proper
fiscal-monetary policy mix.
Specifically, if it was necessary to
maintain the existing degree of over-all restraint, it would be
dangerous to rely on monetary policy to provide it; a tax increase
would be required.
But he did not think the Committee should wait
for assurance of fiscal action before easing monetary policy at
present, just as the System had not waited for fiscal action last
December before moving toward restraint.
It was necessary, of
course, to remain sensitive to the issue and to continue to urge
a tax increase--hopefully one large enough to do the job but not
so large as to damage the economy.
11/22/66
-57Secondly, Mr. Brimmer said, he thought the Committee should
remain alert to the possibility that capital market flotations were
now substituting for bank credit.
He was impressed by the recent
cessation of growth--and decline--in bank credit.
The Committee
obviously had wanted to provide sufficient reserves in recent months
to permit some expansion in bank credit; and, on the assumption that
much of the impending increase in capital market flotations reflected
substitutions for bank credit, he thought the reserve supply should
be increased.
Also, the attrition in CD's had gone far enough, and
the Committee should be especially careful to prevent further run
offs.
It was not easy to say how far the Desk should go in that
connection--it would be undesirable to overdo the action--but hope
fully a proper course could be found.
Mr. Brimmer then referred to the Manager's comment that the
volume of his operations in the coming period would depend on the
actions of the Treasury and the operations of the Special Manager,
and that domestic open market operations might not have to supply
as much in reserves as was usual at this time of the year.
While
he (Mr. Brimmer) was not sure of the precise mechanism that should
be employed, he hoped that care would be taken to insure that the
System's operations in foreign currencies did not interfere with
the goals of its domestic operations.
11/22/66
-58
As far as the balance of payments was concerned, Mr. Brimmer
was particularly pleased to hear Mr. Solomon's conclusion that there
was no necessary incompatibility in the short run between the policy
requirements in that area and in the domestic economy.
He hoped
that it would continue to be possible to take that position, and to
rely primarily on the voluntary restraint program to deal with the
problem of capital outflows.
In concluding, Mr. Brimmer said he would lay stress on his
view that it would be inappropriate for the Committee to postpone
the kind of policy change indicated as necessary by the evidence
on the domestic economy until there was assurance that fiscal
action would be taken.
Of the two draft directives, he favored
alternative B; indeed, he leaned toward a "B minus" directive--one
that called for going somewhat further toward easing than did
alternative B.
Mr. Maisel said that in preparing for today's meeting he
had reviewed his statements at previous meetings of this year,
and had to admit that he was beginning to feel like a broken record.
At most meetings he had called attention to the fact that the
Committee seemed to be following an erratic path.
The failure to
move directly to where it wanted to be was not due to uncertainty
as to its goals.
Rather, it was because the Committee had not been
11/22/66
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willing to specify its true goals, and the method by which it
hoped to achieve them, in its directive.
The Committee had failed to develop clear-cut policies
and procedures to alter the factors actually under its controltotal reserves or bank credit, Mr. Maiselcontinued.
It had paid
too much attention to changes in money market conditions and net
borrowed reserves.
policy.
As a result it had introduced a major lag in
All during the winter and spring the Committee was moving
in the wrong direction, in one opposite to that necessary to reach
its agreed-upon goals of restraint.
That had again been true since
August but in the opposite direction.
Mr. Maisel commented that the proviso clause in the direc
tive was a major step forward in attempting to reduce that lag
and to get the Committee on its desired path more rapidly.
Unfortunately, the Committee had not really been willing to live
with the proviso.
Those general comments were illustrated
particularly by the actions of the past six weeks.
In that period
there seemed to be agreement that bank credit ought to stop
declining and probably should expand.
been consistent with that goal.
Action, however, had not
Other constraints to policy had
been followed in the Desk's operations.
Initially they were those
of the Federal funds rate and more recently that of net borrowed
reserves.
As a result, policy had followed paths set by the market
11/22/66
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instead of letting the market react against a policy the Committee
adopted in order to reach its goals.
Mr. Brill's discussion this
morning was very pertinent.
It was true, Mr. Maisel remarked, that for the past three
months there had been great uncertainties in the production and
output situation.
not likely.
A rapid resolution of those uncertainties was
On the other hand, it had also been clear that it was
not necessary to arrive at a basic decision as to the future course
of the real economy in order to stake out a logical path for monetary
policy.
No matter what happened to output and production, the
economy would be harmed if the Committee continued a policy creating
great distortions in the field of money and credit.
In the present situation it seemed quite clear to Mr. Maisel
that further harm to the productive sphere, through a failure to
allow credit to expand at a normal rate, could only defeat the
Committee's basic goals.
Depending upon which index was used, the
monetary variables had failed to expand for from three to six months.
The distortions in the economy and related supply imbalances grew
greater day by day.
That meant inflationary pushes on the cost side.
Those supply imbalances might well be at a point where they were
exceeding any unfavorable price effects threatened through increasing
demand.
In any case, an actual weighing of possible relative courses
was not necessary because in the current situation putting the monetary
11/22/66
-61
house in balance was unlikely to raise aggregate demand above
supply.
As a result of the past three months' experience, when
bank credit declined instead of increasing, the total was probably
$6 billion or so below a desirable level.
There had been a short
fall in the furnishing of total reserves of somewhere between $300
and $500 million.
What the Committee had to do now was avoid further delay,
Mr. Maisel said.
It should recognize that its lags in implementing
its goals were extremely dangerous.
It had to be concerned with
the future costs of failing now to expand the reserve base at a
normal rate.
The Committee also had heard that it could get into
a major Euro-dollar market problem.
The Committee's directives should pick a desirable level
of expansion in required reserves and then instruct the Desk to
attempt to insure that such a level of reserves was furnished the
market, Mr. Maisel continued.
The Committee should be concerned
with the amount of credit being furnished and allow the market to
determine the interest rate that went along with it.
It seemed
clear to him that for the past three months the Committee had
been far too concerned with attempting to control interest rates
rather than the amount of money and credit.
The estimates of
reserves had been good in terms of rates of expansion or decline.
11/22/66
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However, even though the Committee's goal was an expansion of
reserves it absorbed reserves on a day-by-day basis in order to
meet the market constraints.
Mr. Maisel said he would support alternative B of the
draft directives, but he would like to see it changed to make
clear that the amount of ease called for was simply that required
to achieve a normal reserve expansion of approximately 1 per cent
a quarter on a seasonally adjusted basis.
Sufficient reserves
should be furnished for the credit proxy to grow at a rate of
approximately 6 per cent.
Actually, the rate could be slightly
higher if deposits in other institutions continued to expand at
a slower rate than the credit proxy.
It should be clear that
any given concept of a net borrowed figure was rejected.
Although
he did not feel strongly, if the Committee agreed, he would like
to attempt again a more direct statement of the goal.
Specifically,
he would revise the second paragraph of alternative B to call for
operations "with a view to attaining moderate expansion in bank
reserves, money, and credit," and would delete the final clause
of the staff's draft.
Mr. Daane remarked that in talking about the question of a
possible tax increase last week Walter Heller had described himself
as a "cautious hawk."
As far as monetary policy was concerned
today, Mr. Daane said, he personally was no hawk at all; but he
11/22/66
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would describe himself as a "reluctant dove," at least with respect
to an overt move.
The balance of payments continued to pose a
major problem, and the trade balance was a crucial element in that
situation.
Thus, while Mr. Solomon had said today that monetary
policy could do little to encourage exports except for its efforts
to maintain price stability, he (Mr. Daane) regarded such efforts
as an extremely important contribution which the Committee should
continue to make.
Nor was he confident that one could look for
other than adverse effects on capital flows of an overt move toward
ease.
For those reasons, and with the additional uncertainty in
the fiscal policy area, he concluded that the position of a reluc
tant dove was the better position.
Mr. Daane felt that there was a significant difference
between a policy action taken by the Committee as part of a change
in the mix of over-all national economic policies and a Committee
action taken independently.
He agreed with Mr. Brimmer that timing
was of the essence, but he reached a somewhat different conclusion
on what timing was appropriate.
He would much prefer a monetary
policy posture of initial non-resistance to an easing in interest
rates, and subsequent validation as desired, if and when fiscal
policy action came into view.
He was impressed by Mr. Koch's
review of the indications of weakness in the economy, but he was
also impressed by Mr. Brill's unwillingness to predict slower
11/22/66
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economic growth until he knew more about the Federal budget.
While
the projections of defense spending seemed reasonable, the Committee
did not in fact know what was likely to happen in that area.
He
thought too much emphasis was being placed on developments in the
private sector in the discussion today and too little on public
sector developments.
Unlike Mr. Brimmer, Mr. Daane thought there was not a close
analogy between the present situation with respect to the economic
policy mix and that of last December.
A year ago the question was
whether monetary and fiscal policies should be coordinated in a
general move toward restraint.
The question now was whether mon
etary policy should be eased in advance of a fiscal policy move
toward restraint--and against a background of existing fiscal
stimulus.
Operationally, Mr. Daane said, for a long time he had
lectured against the use of free reserves as a guide to monetary
policy, and he had been unhappy with both the Committee's and the
market's emphasis on that variable.
Nevertheless, he felt that
there would be risks in deciding simply to ignore it and to try
to break away from that emphasis in the current uncertain market.
Despite this, he would give the Manager full flexibility and would
suggest that there be a much greater emphasis in operations on
interest rates.
From this viewpoint the Manager should be directed
11/22/66
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to maintain the current comfortable tone in the market, resolving
doubts on the side of ease.
As to the directive, Mr. Daane said the wording of the
first-paragraph statement of the Committee's general policy con
tained in alternative B was more felicitous than that in alternative
A;
it appropriately reflected the realities of the situation in the
private economy.
For the second paragraph he would also favor
alternative B, but with a significant amendment.
He would say
"To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to
maintaining the somewhat easier conditions presently prevailing
in the money market, unless bank credit appears to be resuming a
rapid rate of expansion."
As the Manager had indicated, market
conditions at the moment were easier than they had been earlier
in the recent period.
If those conditions were maintained in the
face of the expected seasonal pressures, the Committee would have
achieved the desired shading of policy without making an overt
move toward easing, which in his judgment would be undesirable.
Mr. Mitchell said he agreed with Mr. Brill's analysis today.
As far as the general posture of policy was concerned, he did not
think the kind of signal reflected in a change in the discount rate
would be appropriate at this time--even if the discount rate was at
a level at which it could be used for such a purpose--but he would
11/22/66
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be willing to take a step just short of that.
He felt that the
Committee should be pushing hard now, up to a certain point.
That
view presumably aligned him with Mr. Brimmer's "B minus" and perhaps
with Mr. Maisel's position.
One thing that appeared to be disturbing to the Committee,
Mr. Mitchell remarked, was that the banking system was not respond
ing to the System's moderate blandishments toward easing.
the System had not blandished banks enough.
Perhaps
In his judgment the
banks were so concerned about their liquidity positions that a
successful effort to attain renewed growth in bank credit probably
would require much more drastic open market operations than most
of the speakers around the table had implied.
He was convinced
that net borrowed reserves in the $300-$400 million range suggested
by Mr. Hayes would not do the job, and he was not sure that a zero
level would do it; net reserves might well have to be positive.
Having gotten banks to do what it wanted them to do, the System
might find it hard to get them to change, but it was important
that they should do so.
With respect to the question of the relation between mon
etary and fiscal policy, Mr. Mitchell said he was inclined to agree
with Mr. Daane rather than with Mr. Brimmer.
But he would not like
to see the System led struggling and resisting toward ease.
He
would prefer making a policy change that would be recognized as
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such--not necessarily widely, but by market technicians--and that
would be the probable result if net reserves became positive.
The
Committee itself had something to gain from recognizing the recent
developments in the economy; developments which, he would remind
the members, were occurring despite escalating defense expenditures.
He also would remind the Committee of another fact that should not
be overlooked--that net funds raised in the nonfinancial sectors
dropped in the third quarter to an annual rate of $63 billion,
from $84 billion in the second quarter.
It was quite important, Mr. Mitchell thought, for the
Committee to make a change in policy significant enough for the
banks to recognize.
Hopefully, they would then start rebuilding
their liquidity positions even though they were experiencing an
outflow of funds resulting from European window-dressing operations;
and at least some small growth in bank credit and the money supply
would be achieved.
Mr. Shepardson said he would not undertake to present another
review of economic conditions, since they had already been extensively
discussed.
On the matter of timing, he would note that his view was
similar to those of Messrs. Daane and Mitchell, rather than to that
of Mr. Brimmer.
It was clear, Mr. Shepardson continued, that bank credit had
not been expanding recently.
Whether or not that was inadvertent,
11/22/66
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he did not think it was the Committee's intention now to press
further in the direction of restraint.
But he would not consider
an overt change toward ease to be appropriate at this time, in
view of the large existing uncertainties--and also of the near
certainty of cost-push pressures on prices, which would have both
domestic and balance of payments consequences.
In his view it
would be better to adopt alternative A, which provided for
maintaining money market conditions in their recent ranges, for
the directive.
By adopting A, the Committee would be accepting
the slight easing that had occurred in money markets and the
shallower level of net borrowed reserves that had come about.
He
was not disturbed by the fact that the net borrowed reserve figure
had not been as deep recently as some members had suggested at
previous meetings.
Finally, he thought that the situation that
might develop around the year-end in connection with international
flows of funds should be dealt with, and in his judgment it would
be possible to do so under the proviso clause of alternative A.
Mr. Wayne reported that over-all activity in the Fifth
District continued at a high level, although it now seemed rather
definite that the pace of advance had slowed considerably in the
past month or two.
Reports of manufacturers in the latest survey
indicated some further slowdown in new orders, backlogs, and ship
ments, with most of the easing in durable goods lines.
Respondents
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also reported further weakness in residential construction, a
reduced pace of automobile sales, and smaller gains in retail
trade.
Confidence among both bankers and businessmen continued
considerably less buoyant than earlier in the year, although perhaps
a little stronger than three weeks ago.
While textilemen remained
concerned over growing imports and rising labor costs, they now
seemed to view the future with cautious optimism.
He continued
to receive reports of large cutbacks in construction spending, but
the building permits series showed only a relatively small over-all
decline from last year.
Mr. Wayne commented that no purpose would be served in
repeating analyses of the national economy that had already been
heard.
appear.
In the country as a whole, signs of easing continued to
On balance, it would seem that for the present the growth
of aggregate demand had been reduced to a rate which was not con
tributing significantly to inflation.
In the matter of policy, Mr. Wayne concurred in both the
analysis and conclusion expressed by Mr. Koch.
The developments
in the capital markets noted by Mr. Brill were not surprising;
they were more or less following an anticipated course.
They did
serve to reinforce his support of the policy posture indicated by
Mr. Koch.
Mr. Solomon's concluding comment encouraged the Committee
to give priority to the domestic situation.
11/22/66
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There was considerable lag between cause and effect,
Mr. Wayne continued.
The Committee's restraint continued to be
quite firm and its effects would be felt for several weeks or
months into the future; and the Committee should consider whether
it wanted to see the current easing trends in economic activity
intensified over such a period.
The reduction in bank credit had
brought a substantial reduction in required reserves which, in
turn, had brought into play the proviso clause of the directive.
Measured by marginal reserve levels, the Committee had moved into
a somewhat easier policy by that back door.
Historically, October
and November 1966 might mark that point in time when restrictive
monetary policy once again proved its painful but salutory effec
tiveness.
To overstay that posture would be regrettable.
Certainly
the proviso clause should be retained, but he believed the time had
come when the Committee should recognize positively the desirability
of some easing.
He would favor a policy of increasing slowly the
availability of reserves, the amount of easing to depend on the
behavior of required reserves.
Alternative B, along with the
explanatory notes, represented what he believed to be a proper
course of action for the Committee to adopt today.
Mr. Clay observed that recent measures of economic activity
gave further evidence of slackening in the pace of activity in some
sectors of the national economy.
It was becoming increasingly a
11/22/66
-71
mixed picture, with a widening disparity from one sector to another.
The situation was further complicated by the fact that the most
important source of expanding activity was military spending and
that the magnitude and course of that spending remained very
unclear.
Some of the most striking behavior continued to be found
in the financial variables, notably the decreases in bank reserves,
bank credit, and the money supply.
The recent record of economic activity indicated to Mr. Clay
that some relaxation of monetary policy would be appropriate.
The
monetary data particularly underscored the need for some shift in
monetary policy.
Decreases such as had been taking place in bank
reserves, bank credit, and the money supply were not suitable for
the current economic situation and, despite the increase in net
reserve availability, were not in keeping with what the Committee
presumably had desired to accomplish in recent weeks.
Some
positive growth in bank reserves that would provide the basis for
moderate growth in bank credit was rather what was desired.
In
consideration of recent developments in interest rates in the
money and capital markets, some relaxation in monetary policy prob
ably would have a salutary effect on the money and capital markets
too.
In view of the prevailing military program and the accom
panying tight resource utilization situation in many sectors of
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the economy, Mr. Clay continued, any shift in monetary policy should
be less aggressive than it might be under other circumstances.
That
view was further underscored by the uncertainty as to the volume of
military spending and as to the Government's fiscal program.
As he had already indicated, Mr. Clay said, the objective
was to provide reserves so that both bank reserves and bank credit
could show moderate growth.
What targets might be consistent with
that goal was difficult to know, but tentative targets might include
a Treasury bill rate ranging down toward 5 per cent, and net borrowed
reserves ranging substantially below recent levels, if necessary.
It should be indicated, however, that a dramatic move on the part
of the Federal Reserve, with accompanying sharp movements in credit
markets, was not the goal sought; rather, a more gradual approach
was desired.
Allowance would need to be made in conducting opera
tions for any direct Treasury borrowing from the Federal Reserve.
Moreover, the program would need to adjust for any tendency toward
money market tightness as the December tax date approached.
Alternative B of the economic policy directive drafts was
satisfactory to Mr. Clay.
Mr. Scanlon said that in the interest of time he would
summarize the remarks he had prepared and ask that his complete
statement be included in the record.
the following statement:
He then briefly summarized
11/22/66
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Although there is widespread agreement in the
Seventh District that the economy has entered a period
of slower growth, there is an equally widespread view
that general price inflation will continue into 1967.
Opinion varies as to the impact of the suspension
of the investment tax credit. Some marginal expenditures
are being sliced from 1967 capital expenditure budgets
now being formulated. But it does not appear that the
effect of the suspension of the credit, in itself, will
be a major factor depressing capital outlays. The chief
executive of a large petroleum firm finds profitable
investment opportunities outrunning availability of
funds, in contrast to experience of earlier years. A
steel firm's management recently reviewed all capital
expenditure programs to pinpoint possible deferments.
Although little was accomplished, it was noted that clear
signs of the development of a business recession in 1967
would slow capital projects through the abolition of
overtime, extra crews, and other costly methods dictated
by urgent need.
A sharp decline in orders for construction equipment
has occurred in recent weeks. This is not simply a
reflection of the drop in home building because heavy
excavating equipment has been affected. Demand for other
types of machinery and equipment remains strong and back
logs continue to rise.
Steel orders have slowed as steel users have been
cutting inventories as delivery times have been reduced.
Shipments of finished steel have not kept pace with
ingot production, indicating a further reduction in the
ingot production rate.
Ingot production for all of 1966
is expected to be 135 million tons, compared with last
Shipments, however, are
year's record 131 million tons.
expected to total slightly less this year than last.
Production and shipments in 1967 are expected to equal
this year's, despite an estimated drop in auto assemblies
of about 300,000 units.
There are continued complaints of the poorer quality
of available labor, high turnover, and wildcat strikes.
Profit margins are likely to shrink.
Some manufacturers who have announced price increases
recently have waited anxiously for the reaction from
Washington. A farm machinery producer has encountered
strong pressures from Governments in other countries,
e.g., Canada, against increasing prices on its products.
11/22/66
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In the past three weeks, our major banks have shown
a contra-seasonal reduction in business loans although
some bankers have indicated that they are expecting
demands for business credit to increase substantially in
the weeks ahead.
Meanwhile, bank acquisition of mortgages has slowed
markedly, outstanding loans to finance companies have
been reduced, and sizable holdings of municipal and U.S.
agency securities have been liquidated.
Despite over-all credit contraction, the large
Chicago banks continued to show a substantial basic
deficit position as both demand and time deposits declined
somewhat further. However, pressures appear to be less
than a month ago, and a much smaller portion of funds to
cover the position was acquired at the discount window.
Country bank borrowings are also significantly below the
August experience both in amount and number of banks.
Current financial data do not indicate a substantial
reversal in the slow downward drift of aggregate monetary
and credit measures, although slight increases in total
reserves, money supply, and time deposits may still occur
for November as a whole. It is not clear whether the
recent firming of interest rates reflects monetary
restraint or stronger credit demands. The same amount
of non-bank credit growth may entail higher interest rates.
On the other hand, the recent tendency toward stabilization
of CD's may indicate a slowing or halting in the process
of disintermediation.
Given the increasing signs of hesitancy in the private
sector, some portion of which I trust we can attribute to
our own actions, I think it unwise to continue to permit
reserves, money supply and bank credit to decline. I
would favor a policy posture designed to achieve moderate
growth in total bank credit and related aggregate measures.
I support alternative B for the directive, although
the 10 per cent growth rate suggested as the upper limit
for the proviso clause in the staff notes seems too high
to me. I do not foresee a problem in this regard but I
would hope that if bank credit resumes a rapid rate of
expansion we don't wait until we reach a 10 per cent rate
to reverse our position.
Mr. Galusha said that, by all appearances, the rate of economic
growth had declined so the Committee had, in a way, succeeded in its
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stabilization objective.
The Committee might find, come mid-1967,
that the rate of growth had declined still more--too much, in fact.
His impression--based admittedly on a relatively brief experience
as a member of the Committee--was that monetary policy actions had
an effect not immediately but after a rather appreciable length
of time.
No immediate vanishing of inflation was in prospect,
Mr. Galusha continued.
The outlook was, however, for less infla
tion than there had been.
If history was any guide, price increases
would continue for some time, possibly through much of 1967.
But
historians would have to trace the price increases of 1967 to already
past changes in the unemployment rate and the level of corporate
profits, not to a present and continuing excess demand.
There was,
then, little chance at the moment that price increases were going
to accelerate, or that an inflationary psychology of major dimensions
was going to be created.
Even if the present unemployment rate held,
price increases from here on in would get smaller and smaller.
Undeniably, Mr. Galusha remarked, the more pressure the
Committee put on the economy, the smaller future price increases
would be.
Even cost-push inflation, so-called, could be checked by
monetary policy--but, as compared with demand-pull inflation, only
at the cost of a relatively great amount of unemployment.
Thus, to
persist in trying to check further price increases--which in prospect
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seemed quite modest--would be to recreate the very economic situation
that was barely escaped a few years ago.
And in getting back again
to something like full employment, the Committee would almost
inevitably produce the kind of changes, particularly in corporate
profits, that were conducive of relatively large increases in money
wages.
What the Committee had to avoid, therefore, was a stop-go
type of monetary policy, Mr. Galusha said.
It was necessary to
avoid moving away again from near-full employment.
And in the
interest, he would stress, of the country's long-run international
competitive position.
It was better to hold steadily to a satisfac
tory unemployment rate than to attain the same rate only on average.
What all that suggested to Mr. Galusha was that the Committee
even now should be giving its attention to increasing the supply of
bank loans.
Perhaps it was not too soon to begin thinking about
ironing out the wrinkle that had been put in discount policy a few
months ago, which would probably require some form of concerted
action to avoid inter-District unevenness.
Or about money market
conditions which would facilitate, not hinder, the rolling-over of
maturing CD's.
Even an increase in the average maturity of CD's
might be desirable.
The Committee perhaps would be well-advised to
go to some lengths to convince banks, particularly the large ones,
that they were not badly over-extended, and that they could get back
11/22/66
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to where they wanted to be without having to persist in the stringent
rationing of loans.
Having said all of that, Mr. Galusha continued, he would be
uneasy with any obvious move of major dimensions.
Rather, he would
prefer to encourage the Desk to continue a cautious groping along
the cliff to easier footing--plus joint efforts to correct the
aberrations in discount window administration.
Mr. Swan remarked that he could summarize economic develop
ments in the Twelfth District with the statement that there had
been no major changes in the last few weeks.
some moderate move toward easing.
He also would favor
In light of the general economic
situation he thought the Committee certainly should be looking
toward some expansion in bank credit and the money supply.
In the
immediate short-run, the Manager was confronted with a need to try
to smooth out the special stresses in the money market that were
anticipated between now and mid-December, and to prevent the current
pressures in capital markets from having some backlash effects in
the money markets.
To him that implied a comfortable money market.
While he again hesitated to quantify objectives, it did seem that
the bill rate should be 5-1/4 per cent or somewhat less, and the
Federal funds rate certainly should be below 6 per cent.
He did
not think that that could be accomplished with net borrowed reserves
of $300 million, but he hoped it would not be necessary to go to
11/22/66
zero.
less
-78
In any case, he thought the net reserve figure was somewhat
important at this
juncture.
The policy change should be moderate, Mr. Swan continued.
At
the same time, he would strongly urge the adoption of alternative
B; the action, even though modest, should be a positive one, and it
should be explicit in the directive.
As to the interpretation of
the proviso clause in that alternative, he shared Mr. Scanlon's
question about the appropriateness of a 10 per cent upper limit on
bank credit expansion.
And he questioned, as he had three weeks
ago, the use of the word "sharply" in the first paragraph to describe
rising defense expenditures.
The description probably was correct,
but definitive evidence was not available to the Committee.
Mr. Swan's concluding observation related to Mr. Mitchell's
comments about the difficulty of getting banks to develop a more
positive attitude toward credit expansion.
be due,
That difficulty might
in part, to strong feelings at banks about their liquidity
positions.
In his judgment, however, the attitudes of banks were
still conditioned by the System's September 1 letter to member
banks.
While the letter had been appropriate at the time it was
issued, he thought the System should now give serious consideration
to the possibility of taking steps soon to dispel
least if the present attitudes of banks persisted.
its effects, at
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Mr. Irons said there had been no significant new develop
ments in economic conditions in the Eleventh District over the past
three weeks.
The District economy had been following the national
pattern, with evidences of moderation in some sectors and of strength
or expansion in others.
On balance, the District economy was expand
ing a bit, in a manner not greatly different from the national economy.
About the same statement would hold in the financial area,
Mr. Irons observed.
Total bank loans and investments had declined
in the recent period, although loans changed relatively little.
Deposits were down, and the CD situation was posing difficulties for
some banks.
Borrowings from the Reserve Bank had not been large
except for borrowings under the special program.
With regard to credit policy, Mr. Irons remarked that it
might be well for the Committee to avoid any overt action at this
time, or any action that might appear to represent a change in
policy.
He did not question the signs of a slower growth rate or
of lessened inflationary pressures in the economy, but he was
skeptical about the desirability of moving in an abrupt or overt
manner on the basis of the evidence available at this time.
It had
been suggested that the Committee should avoid overstaying a posture
of restraint; but the Committee should also avoid over-eagerness to
change its position on the basis of the information it now had.
11/22/66
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For the directive, Mr. Irons favored either alternative A
or the version of alternative B Mr. Daane had suggested, which was
fairly close to A.
He was not overly concerned about the specific
level of net borrowed reserves, but he did not think the Committee
could completely ignore net borrowed reserves at this time; market
participants still gave them attention, and there was little the
Committee could do about that.
He favored a Treasury bill rate
in the 5 - 5-1/4 per cent range, and a Federal funds rate in the
area of 5-1/2 per cent.
He would not be disturbed if net borrowed
reserves were at $200 million or less.
He thought the Manager had
to be given a great deal of leeway to be guided by market develop
ments, but that he should not operate in a manner that would make
the market conclude the Committee had moved to a different policy
posture.
Mr. Irons agreed with Mr. Swan's comments about the
September 1 letter, and thought the System was running the risk
of inconsistency in policy by leaving the letter outstanding.
Regardless of the System's intentions, many banks--in the Eleventh
District at least--were interpreting the letter to mean that they
should not come to the discount window except under conditions of
a degree of restraint which they associated with the September 1
letter.
A number of the larger District banks now had large built
in deficits and found it necessary to borrow from some source every
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day.
-81
That situation probably was not limited to the Eleventh
District.
The System probably would not make the same statements
today that were considered appropriate on September 1; there
appeared to be no desire now, for example, to call for a slower
rate of growth in business loans.
The problem now was not one
of strong demands for credit and a strong desire by banks to
make loans, but rather one of illiquid positions and built-in
deficits at banks.
But the letter remained outstanding and con
tinued to affect the attitudes of banks.
The conflict was not
one that could be brushed aside, and a re-examination of the
September 1 letter was clearly needed.
Mr. Ellis said that in the interest of time he would omit
the remarks he had prepared on recent developments in the New
England economy.
The Boston Reserve Bank had now had visits by
officers from four of the District's largest insurance companies
and from the farm credit banks of the District, each wishing to
review any special avenues of borrowing should their liquidity
needs worsen further.
The Reserve Bank had initiated an informal
tally of New England insurance company policy loan trends on a
monthly basis.
So far it revealed that (1) prepayments of out
standing loans had virtually ceased, lessening their cash inflows;
(2) policy lending spurted abruptly in the summer and early fall
to rates 10 times or more above year-ago rates; (3) 1967 cash
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flows were virtually committed so that in general they were not
making new commitments for 1967 funds; and (4) October and early
November had seen some slackening in the squeeze and the better
condition in municipal markets had allowed them to sell off enough
assets to rebuild liquidity somewhat.
They now felt they might
get through this year without calling on their bank lines.
Of course, Mr. Ellis said, the System's most direct concern
was with commercial banks.
In appraising their activities since
September 1--a date he thought was meaningful for the purpose--he
found no substantial evidence of change in pattern in New England.
As of November 9, their total loans were 10.5 per cent above a year
earlier.
The comparable figure on August 31 was 10.3 per cent.
Business loans on November 9 showed a 17.5 per cent year-to-year
gain, compared with 17.2 per cent on August 31.
Of the four Boston reserve city banks, only one had a
business loan volume below its August 31 level.
The other three
had expanded their business loans as much as--and in one case,
substantially more than--in the same periods of the past two years.
Just about the same observation might be applied to the patterns
of their total loans.
Each of those four banks had been relying
heavily on borrowed funds in the forms of negotiable CD's, Federal
funds, or discounts at the Reserve Bank.
But each had also been
able to reduce quite substantially the ratio of borrowed funds to
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required reserves.
It seemed that the strengthening in the
municipal securities market had enabled them to use their sec
ondary reserves as originally intended.
Turning to monetary policy, Mr. Ellis agreed with the
staff's analysis but disagreed with their prescription, and he
suspected that a question of timing was involved.
briefly on two points.
He would focus
First, there was an important difference
between an inflection point--the point of maximum rate of increase
in a growth trend--and a recession downturn in such series as
GNP, employment, and so forth.
He emphasized the difference
because he thought there might well be a tendency to over-react
to an inflection point.
Last spring and winter the Committee was
seeking to slow down an unsustainable rate of economic upsurge.
The first paragraph of the green book stated that that had tran
spired.
An inflection point in the rate of growth, not a
recession downturn in real terms, had been achieved.
Current
projections of acceptable growth rates were being made in the
context of existing policy, not of an eased policy; the latter
would require upward revisions in the projections.
The evidences
of pause in the financial area, such as the recent pattern of
change in business loans at banks, might be interpreted in the
same manner as price developments were being interpreted--namely,
as reactions to earlier excesses.
In that connection he would
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endorse the comments that had been made today regarding the contin
uing impact of the System's September 1 letter.
It would be
desirable to seek some graceful way of withdrawing that letter.
Secondly, Mr. Ellis said, the proper policy mix to maintain
growth at the desired slowed rate probably should be a somewhat
tighter fiscal policy and a somewhat easier monetary policy.
But
his own judgment was that the political process was such that the
proper policy mix could not be achieved if the Committee moved first
to ease monetary policy.
The Committee had been alerted via the
press to the possibility, perhaps by early December, of a decision
and an announcement by the President concerning the outlook for
the budget, including tax considerations.
Certainly the prospects
for Presidential support and legislative approval of any tax increase
could be severely worsened if monetary policy were to be substan
tially eased in advance.
That act would be taken as evidence that
the economy had weakened to a point that obviously ruled out tighter
fiscal policy.
Thus, an overt move toward ease in the next three
weeks would substantially reduce the chances of a tax increase.
That suggested to Mr. Ellis the essentiality for the next
three weeks of avoiding an overt move and the appearance of numbers
that would allow the interpretation that such a move had been made.
To be quite specific, while the Committee might decry as antedeluvian
continuing analyst attention to net borrowed reserves as an indicator
of policy, there seemed little chance that re-education could be
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accomplished this year.
To him, that meant the Committee should
continue as a target of operations a net borrowed reserve figure
within the $300-$400 million range and not move overtly lower to
a zero-$ 2 0 0 million range.
He would agree with Mr. Hayes' descrip
tion of desirable operations under that objective.
Concerning the directive, Mr. Ellis said that alternative B
was seriously defective in providing no directions for operations if
bank credit were to resume a rapid rate of expansion.
As a minimum
an additional clause was necessary; following the words, "unless
bank credit appears to be resuming a rapid rate of expansion,"
should be added--to borrow language from alternative A--a clause
reading, "in which case, operations shall be conducted with a view
to maintaining about the same range of money market conditions as
have prevailed since the previous meeting of the Committee."
To
be consistent, he should observe that the alternative A proviso
clause was silent as to what modification might be undertaken in
the light of bank credit developments.
His own view was that the
clause should provide for modification toward both tightening and
easing, as expressed in the relevant staff note of those attached
to the draft directives.1/
He would prefer a proviso clause that
1/ The staff note to which Mr, Ellis referred read as follows:
"One possible interpretation (of the proviso clause in alternative
A) is that operations shall be modified toward ease if the bank
credit proxy appears to be weaker than the fractional declines
projected by the staff for November and December...; and modified
toward firmness if the proxy resumes expansion at an annual rate
in excess of that for the year to date (4.6 per cent)."
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read, "provided, however, that operations shall be modified to
counter sharp and sustained movements in total bank credit."
Obviously, of the two draft directives he favored alternative A.
Mr. Robertson asked that the statement he had prepared for
today's meeting, reading as follows, be included in the record:
I think it is quite clear that both the facts and
the analysis before us this morning argue for some
easing of monetary policy, with the chief question for
debate being how much.
Without doubt, a number of key measures of business
activity are softening. Much of this slackening is
probably the direct or indirect consequence of restrictive
public policies, rather than the independent sprouting
of the seeds of recession; but nontheless we need to be
very careful not to let money become any tighter than
necessary to do its job.
Insofar as the financial side is concerned, all avail
able indicators are consistent with a real and pervasive
slowdown in credit expansion. Thus, as has. already been
indicated, we have had no net growth in bank credit or
money supply for three and six months, respectively.
Interest rates, particularly in the long-term area, have
moved back up near their historic peaks. This, I submit,
is too tight a financial restraint to hold for very long
on a growing economy, once inflationary pressures seem to
have passed their peak.
Yet, while some monetary easing may be called for,
my preference continues to be, as I said last time, for a
"tentative but gradual and progressive kind of let-up of
monetary pressures." In particular, with a new Administra
tion position on taxes promised to be close at hand--perhaps
even before our next meeting--I think we should make our
move gradually at this time so that it will not importantly
reduce our options, depending upon the outcome of the
supposed December tax decision.
To accomplish this, I would favor gradually working
net borrowed reserves lower, perhaps down into a range
around $100 million, over the next three weeks, thereby
countering some of the build-up of seasonal pressures that
ordinarily takes place during this interval. I refer
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primarily to net borrowed reserves for the reasons that
I gave at some length at our last meeting. I would expect
the most closely associated money market interest rates to
show no increase, and perhaps even some decline in this
new reserve climate; and also I would expect CD attrition
to slow down--outcomes that I would regard as desirable.
I know some observers feel that the degree of restraint
exercised by net borrowed reserves is quite variable, and
hence is a poor policy guide. But such a view mistakes the
best policy role for net borrowed reserves, in my judgment.
Certainly the influence of a given net borrowed reserve
figure does not stay the same over time, with differences
stemming from differences in loan demands, banker attitudes,
liquidity positions, et cetera. Proper policy prescription
calls for taking all such considerations into account in
judging what level or range of net borrowed reserves might
best tide us over the days ahead. It is with such an
arrangement of thoughts in mind that I advocate dropping
net borrowed reserves back to a range around $100 million.
Some consideration for such a target might, I suppose,
be squeezed in as part of attention to a general "money
market conditions" target in the directive. I, myself,
however, would prefer to recognize our concern with
reserves more directly by calling for open market opera
tions that would, in directive language, "attain somewhat
easier net reserve availability and related money market
conditions."
For the proviso clause, this time I have no objection
to the kind of one-way proviso drafted by the staff in its
alternative B, although as a general matter I prefer the
two-way kind that we have recently used. Having called
for a moderate easing in the first part of the second
paragraph, I would not want a proviso that might lead the
Manager to ease still further, because I think too marked
an easing could be bad policy at this time. On the other
hand, I would be willing to see any easing action stopped
in the unlikely event that bank credit started to expand
rapidly once again.
With these exceptions and interpretive remarks, I
favor alternative B of the draft directives supplied by
the staff.
Mr. Robertson then said that, as indicated in his statement,
he also was in favor of some easing.
The only question was how much;
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no one would want to ease so far as to damage the chances of fiscal
policy action.
After hearing the discussion today, he would now
propose a new version of the second paragraph of alternative B,
reading as follows:
"To implement this policy, System open market
operations until the next meeting of the Committee shall be conducted
with a view to encouraging moderate expansion in aggregate reserves
and bank credit, provided that money market conditions do not ease
sharply."
Such language, in his judgment, would avoid the risks
of an overt move toward ease that had been noted by some members.
Mr. Hayes commented that the phrase Mr. Robertson had
suggested embodied aggregate variables similar to the language
the Committee had recently dropped from the first paragraph of the
directive.
He felt that such language was not feasible as an
operating instruction.
Mr. Daane said he felt that the instruction Mr. Robertson
proposed would be difficult to implement, since it placed main
emphasis on variables that the Manager could not control precisely.
Mr. Hayes noted that Mr. Daane's suggested revision to
alternative B had received some support, and indicated that he also
would be prepared to vote for it.
Chairman Martin said that before turning to policy he wanted
to note that he thought the System had performed well during 1966,
all things considered.
The performance had not been perfect--the
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timing of actions had not necessarily been right in all respectsbut the record as a whole held up quite well.
It was important to keep in mind, the Chairman continued,
that monetary policy could not achieve results as precise as some
people apparently desired.
In retrospect, he thought that by May
or June of this year monetary policy probably had done about all
that could have been expected of it toward slowing down excessive
expansion of demand in the economy, short of risking disastrous
developments in the money market of a kind that no member of the
Committee would want to see.
was not set up well.
In his judgment the thrift industry
Since the beginning of the year the savings
of individuals and businesses had been totally inadequate to meet
demands for credit but, with full employment and high plant
utilization rates, any further monetary expansion earlier in the
year would only have added to inflationary pressures.
Later,
cost-push pressures on prices began to be added to the demand-pull
variety, and he doubted whether monetary policy could cope
effectively with cost-push pressures.
He was hopeful that the
Administration would come forward with a fiscal policy program
that would supplement monetary policy, but it was necessary to
recognize that such fiscal action would be at least six to nine
months late, just as the step toward monetary restraint taken a
year ago appeared, by hindsight, to have been late.
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Many recent developments in the economy were encouraging,
the Chairman said.
Automobile manufacturers had been prudent in
reducing output rather than relying on credit and other forces to
propel their industry forward.
The shift of borrowers from banks
to capital markets noted in the discussion today should have
occurred some time ago.
That such developments were occurring
now was highly encouraging for the longer-run outlook.
The Committee faced a fine judgment now on whether to make
an overt change in policy, Chairman Martin observed.
Before the
meeting he had considered the draft directives suggested by the
staff and had concluded that the difference between the policies
called for by alternatives A and B was not great.
After the go
around today he was inclined toward alternative B--not because a
majority seemed to favor it but because it indicated that the
Committee was abreast of economic developments.
Whether or not
any fiscal policy action was likely to be taken should be known
in the next three or six weeks, and in the meantime the Committee
would be indicating that it was aware of a change in basic elements
of the economy.
He would consider the policy change as a probing
movement, to be reversed if events went the other way.
Monetary
policy had to be flexible.
The Chairman repeated his view that by early summer the
Committee probably had done about all that it could do.
Devel
opments had gotten ahead of the Committee, and some adjustments
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in the economy were inevitable; if expansion were not slowing now
the situation would be serious.
He thought the Committee should
try to make a moderate change in its policy in line with the
statistical analyses that had been presented although, he would
add, he had grave reservations about the scientific aspects of
analyses in this area.
He intended no criticism of the staff;
his point was that he doubted whether the Committee could reach
firm conclusions solely on the basis of statistical analyses of
periods as short as two or three months.
Monetary policy remained
as much an art as a science.
The Chairman then said he did not think the Committee should
attempt to attain the kind of precision implied by some comments
today, including the references to a "B minus" directive.
The
staff's alternative B roughly reflected the policy course a majority
appeared to favor.
He would suggest adopting that alternative for
the directive and leaving to the Manager the task of operating
within its framework.
He did not believe the appropriate level of
net borrowed reserves could be spelled out precisely, but to him
that was not of great importance.
Several suggestions for amending
the staff's draft had been offered but, while they might be workable,
in his opinion the staff's alternative B implied everything necessary
at this juncture.
change.
He would interpret it to call for a modest overt
Mr. Hayes had made a good case against any overt change at
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this time, but an equally good case could be made for a modest
change.
The Committee should not be overly reluctant to change
policy in either direction.
The objective now, he thought, should
be to move in a gradual way without trying to be too precise about
it.
Mr. Brimmer observed that in light of the Chairman's remarks
he would withdraw his suggestion that the Committee adopt a "B minus"
alternative for the directive.
He had used that expression to
indicate the strength of his preference for the general type of
policy called for in alternative B, and was prepared to vote for
the staff's draft without amendment.
Chairman Martin remarked that there obviously were some
differences of degree in the views of members.
He then suggested
that the Committee vote on the staff's alternative B.
Mr. Shepardson said that he would like to hear the language
Mr. Daane had proposed again before the vote was taken.
Mr. Daane
then repeated the version of the second paragraph he had suggested
earlier, calling for the maintenance "of the somewhat easier condi
tions presently prevailing in the money market, unless bank credit
appears to be resuming a rapid rate of expansion."
Chairman Martin remarked that one objection to Mr. Daane's
proposal was that it implied that the Manager had brought about
conditions that the Committee was forced to accept.
Such an
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implication would be wrong, he thought; the Manager had been
trying to carry out the Committee's instructions all along.
Mr. Daane replied the market often moved independently
to some degree, and it did not necessarily respond precisely to
the Committee's actions.
Market conditions had eased recently
as a result of the ebb and flow of funds and that change was not
inconsistent with the Committee's previous directive.
In his
judgment the language he had proposed spelled out the objective
a majority of the Committee sought.
He would be willing to accept
alternative B if it was interpreted in a manner consistent with
his own proposal.
But he would have to vote against it if it was
interpreted to call for a degree of ease he considered excessive,
such as zero net borrowed reserves and a bill rate down to 5 per
cent.
Chairman Martin observed that Mr. Daane's comment reflected
the divergence of views he had mentioned.
In his opinion a majority
favored moving further toward ease rather than accepting existing
market conditions.
Mr. Hayes agreed with Mr. Daane that natural factors were
capable of influencing money market conditions apart from the
Committee's operations, and that that, in fact, had happened
recently.
Moreover, it was quite conceivable that there would be
some deliberate moderate easing of conditions under directives
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of the type the Committee had issued recently, given the proviso
clause they contained; otherwise there would have been no point
in including the proviso.
In the recent period there had been a
tendency for the Desk to lean toward ease, in view of the behavior
of the bank credit proxy.
Under those circumstances he saw no
reason against Committee acceptance of prevailing market condi
tions.
Chairman Martin commented that there also was another view
on the appropriate policy course at present--that the Committee
should move a little further toward ease.
A number of members concurred in the Chairman's statement.
Mr. Mitchell said he would be prepared to vote for either
Mr. Robertson's proposed language or the staff's alternative B,
although with respect to the latter he shared the view that the
10 per cent rate mentioned in the staff notes as an upper limit
on bank credit expansion was too high.
Mr. Maisel remarked that a 10 per cent limit would not
strike him as excessive because it applied to a short period and
followed several months of decline in the bank credit proxy.
Chairman Martin said he had no objection to Mr. Robertson's
proposed language if a majority preferred it, but he still leaned
toward alternative B as drafted by the staff.
11/22/66
-95Mr. Wayne said he favored alternative B because he thought
it was important for the record to indicate that the Committee had
recognized at this meeting that the time had arrived for some
change in policy.
Mr. Daane asked whether the Committee would consider adop
tion of alternative B to be an overt change in System policy.
Chairman Martin replied that the answer, in his judgment,
was yes, although the change would be a modest one--about as modest
as an overt move could be.
Mr. Shepardson said it was his understanding that adoption
of alternative B would not imply that the Committee found a 10 per
cent growth in bank credit acceptable, and the Chairman agreed.
Thereupon, upon motion duly made
and seconded, and with Messrs. Hayes
and Daane dissenting, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed
by the Committee, to execute trans
actions in the System Account in
accordance with the following current
economic policy directive:
The economic and financial developments reviewed
at this meeting indicate that over-all domestic economic
activity is continuing to expand, with sharply rising
defense expenditures but with evidences of moderating
tendencies in various sectors of the private economy.
While there has been some slowing in the pace of advance
of broad price measures, upward price pressures persist
for many finished goods and services. Bank credit and
money have shown no expansion in recent months. Long
term interest rates have again risen somewhat after
declining from their late summer peaks. The balance
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of payments remains a serious problem. In this situa
tion, it is the Federal Open Market Committee's policy
to maintain money and credit conditions conducive to
noninflationary economic expansion and progress toward
reasonable equilibrium in the country's balance of
payments.
To implement this policy, System open market
operations until the next meeting of the Committee shall
be conducted with a view to attaining somewhat easier
conditions in the money market, unless bank credit
appears to be resuming a rapid rate of expansion.
Mr. Hayes said that he had cast a negative vote with reluc
tance; he found it necessary to dissent because of the interpretation
of the action as an overt change in policy.
Mr. Hayes' statement.
Mr. Daane concurred in
Mr. Shepardson indicated that his affirmative
vote was cast with reluctance.
Chairman Martin then noted that the Manager had recommended
an amendment to the Committee's continuing authority directive to
increase from $500 million to $1 billion the limit on holdings of
short-term certificates of indebtedness purchased directly from the
Treasury.
In his judgment such action would be appropriate.
There was general agreement with the Chairman's statement.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
paragraph 2 of the continuing authority
directive was amended to read as follows:
The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York to purchase
directly from the Treasury for the account of the Federal
Reserve Bank of New York (with discretion, in cases where
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it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special
short-term certificates of indebtedness as may be
necessary from time to time for the temporary accom
modation of the Treasury; provided that the rate charged
on such certificates shall be a rate 1/4 of 1 per cent
below the discount rate of the Federal Reserve Bank of
New York at the time of such purchases, and provided
further that the total amount of such certificates held
at any one time by the Federal Reserve Banks shall not
exceed $1 billion.
In reply to a question by Mr. Daane, Mr. Holmes said that
no formal action by the Committee to amend its directives was
required to authorize the offsetting purchases of longer-term bills
and sales of short-term bills that he had indicated earlier might
be desirable under certain circumstances.
He had brought the
matter to the Committee's attention because the Desk had not
customarily engaged in operations of that type.
Mr. Daane then observed that he would favor such operations
if the circumstances Mr. Holmes had described eventuated.
Other
members concurred.
It was agreed the next meeting of the Committee would be
held on Tuesday, December 13, 1966, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
CONFIDENTIAL (FR)
ATTACHMENT A
November 21, 1966.
Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on November 22, 1966
Alternative A
The economic and financial developments reviewed at this
meeting indicate that over-all domestic economic activity is con
tinuing to expand, with sharply rising defense expenditures but with
evidences of moderating tendencies in various sectors of the private
economy. While there has been some slowing in the pace of advance
of broad price measures, upward price pressures persist for many
finished goods and services. Bank credit and money have shown no
expansion in recent months. Long-term interest rates have again
risen somewhat after declining from their late summer peaks. The
balance of payments remains a serious problem. In this situation,
it is the Federal Open Market Committee's policy to maintain money
and credit conditions conducive to the restraint of inflationary
pressures and progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, System open market operations until
the next meeting of the Committee shall be conducted with a view to
maintaining about the same range of money market conditions as have
prevailed since the previous meeting of the Committee; provided,
however, that operations shall be modified in the light of bank credit
developments.
Alternative B
The economic and financial developments reviewed at this
meeting indicate that over-all domestic economic activity is con
tinuing to expand, with sharply rising defense expenditures but
with evidences of moderating tendencies in various sectors of the
private economy. While there has been some slowing in the pace of
advance of broad price measures, upward price pressures persist for
many finished goods and services. Bank credit and money have shown
no expansion in recent months. Long-term interest rates have again
risen somewhat after declining from their late summer peaks. The
balance of payments remains a serious problem. In this situation,
it is the Federal Open Market Committee's policy to maintain money
and credit conditions conducive to noninflationary economic
expansion and progress toward reasonable equilibrium in the country's
balance of payments.
-2
To implement this policy, System open market operations
until the next meeting of the Committee shall be conducted with
a view to attaining somewhat easier conditions in the money market,
unless bank credit appears to be resuming a rapid rate of expansion.
Cite this document
APA
Federal Reserve (1966, November 21). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19661122
BibTeX
@misc{wtfs_fomc_minutes_19661122,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1966},
month = {Nov},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19661122},
note = {Retrieved via When the Fed Speaks corpus}
}