May 4–5, 1937 FOMC Minutes

FOMC minutes

more happily with more definite authority than that contained in the mandate incorporated in Mr. Davis' motion, he did not have at the time any specific suggestions to offer, Mr. Davis expressed the opinion that the Committee's action should be treated as nearly as possible as a routine matter and in a way that would attract as little attention as possible. He said he would not be disturbed if the total amount of securities in the ac count dropped below the existing level; that he did not believe the proposed motion would authorize the executive committee to use the authority to bring about a progressive increase in interest rates; and that he favored continuing authority in the executive committee to change the total amount of securities in the account should conditions warrant and to prevent the total from again becoming fixed. He said preferred having the executive committee maintain the status that he he would not want the total of the quo as far as possible and that by an amount that could be regarded as a change in account decreased in a hardening in rates. The account, he policy or that might result disorderly rise as well as a should be operated to prevent a said, in the Government securities market. disorderly fall vote for the resolution in order Mr. Day stated that he would the opportunity, in its discretion, to to give the executive committee the day as such demands to meet the demands of fluctuate the account disorderly market with the policy of preventing arise in connection

conditions. He felt that, should a substantial change in the situation occur which would require a reconsideration of policy, a meeting of the full Committee should be held. He interpreted the resolution not as an authority to influence money rates or security prices but as authority to effect transactions in the System open market account with a view to maintaining orderly conditions in the Government security market which might require sales as well as purchases of Government securities for the account. Mr. McKee said he was ready to vote in favor of the motion pro posed by Mr. Davis, believing it to be a continuation of the authority given to the executive committee by the full Committee at the meeting on April 4, 1957. He expressed the hope, however, that it would not be necessary to further increase the portfolio if the authority were re newed, and that an opportunity would be presented for some decrease in the account through sales or allowing maturities to run off. He ex that in the past the open market portfolio had been pressed the opinion allowed to remain in a static condition for an undesirable length of a condition in the future should be time, that the recurrence of such Committee should take advantage of opportunities avoided, and that the in the portfolio as might be made to make such reasonable reductions He also stated that one of creating disorder in the market. without the portfolio at the time for voting in favor of increasing his reasons was predicated on Federal Open Market Committee action was taken by the would continue its present gold the understanding that the Treasury

sterilization policy, and that, if and when the Treasury saw fit to change such policy, he believed it advisable for the full Committee to meet immediately after notice of such change for the purpose of considering the advisability of decreasing its portfolio so as to counteract any adverse effect on the volume of reserves caused by a reversal of the policy referred to. Mr. Broderick favored Mr. Davis' motion. He said that gen eral open market policy was determined by the Open Market Committee, that the executive Committee, as the operating body, must be given discretionary power to operate within the limits of the general au thority in order to be able to meet changing market and business con ditions, and that this procedure was necessary because of daily uncer tainties as well as psychological reactions. He also said that in this connection he was looking forward with great interest to the re action on Wednesday of this week to the weekly statement of condition of Federal reserve banks which will show no increase in the portfolio over the previous week. He did not think the System could peg the market nor exercise control, but could only influence the trend and check the pace. It was his impression that, in the future, attention would not be focused on the aggregate amount of securities in the port folio but rather on the amount of long term bonds, and that changes in maturities would not be of as great importance as the changes in holdings of long term bonds. As to the Treasury bill market, he ex pressed the opinion that there should be a wider market, of interest

to banks in sections of the country other than New York where the mar ket is now largely concentrated; that it may be that the 9 months maturities are too long to be attractive; that it might be well to try 3 and 6 months maturities; that the banks need short term bills to balance their position; that the System should always be interested in the success of Treasury bill offerings, but should not give, nor be requested to give, a guaranty that it would stand prepared to make such offerings successful; and that a better way of arriving at the desired result would be to increase interest in the bill market through a wider participation by banks and investors throughout the country. Mr. Goldenweiser stated that he felt that the proposed motion was not adequate, that there was clearly a policy issue before the Committee whether the authority to be granted should be used merely to see that no violent fluctuations were permitted to occur or whether the Committee wished to use its influence to maintain easy money con low money rates, and that the full Committee should take ditions and a position on this issue. At this point Mr. Dreibelbis, Assistant General Counsel, joined the meeting. At the conclusion of the ensuing discussion, Mr. Davis' motion, having been duly seconded, was put by the chair and carried unanimously. Thereupon the meeting adjourned. Approved: Chairman.